Implementing the New Form CRS: Don’t Overlook the Details

In June 2019, the SEC announced Regulation Best Interest (Reg BI), the long-awaited standard that was meant to be the industry’s answer to the now-vacated Department of Labor Fiduciary Rule.  Though Reg BI impacts broker-dealers most heavily, it does have some implications for RIAs as well. In addition, Reg BI is part of a rulemaking package that adopted other new rules, including one that requires both broker-dealers AND investment advisers to provide a relationship summary document, called Form CRS, to all retail investors.

Hardworking businesswoman concentrating on her work as she sits paging through a binder of paperwork at her desk in the office

For RIAs, Form CRS is filed as the new Part 3 to Form ADV. With the June 30, 2020 deadline to file Form CRS approaching, RIAs and BDs alike are looking for guidance on what is expected with this new form and how to put it into practice. At a recent seminar in Washington, DC, it was apparent that many firms are facing implementation questions for which there is no detailed guidance.

Take for instance the delivery requirement of Form CRS.  Though straight forward in wording, most firms, at least from the panel discussions and subsequent questions from attendees, are finding it problematic to implement.

  • What mechanism does the firm use to send the Form CRS? US Mail or email?
  • Are the customers’ communication preferences being adhered to?
  • If you rely on your clearing firm to send the document to your clients, many of those firms cannot guarantee that the Form CRS will meet the regulation’s “prominence” requirement. What is the best way to handle this?
  • Once the form is sent, what types of records will be created and maintained to evidence delivery?
  • How can the firm ensure that the timing is right for this (and other) disclosure transmittals (which must be provided to the customer at the time of the recommendation or before)?

The clock is ticking quickly towards the June 30, 2020 deadline for initial filing with FINRA/SEC yet these questions remain unanswered.

On the bright side, the SEC and FINRA have repeatedly assured firms that initial examinations, both before and after the June filing deadline, will not be looking for “foot faults” or “gotcha” deficiencies. Instead, their focus will be on working with firms to identify deficiencies and achieve an acceptable level of compliance.

That’s not to imply that you shouldn’t be taking things very seriously or that FINRA or the SEC will just give you a free pass on their initial visit, especially if you’ve not done anything!  What can you do to show them how serious you are about complying?

  1. Know your company – Take some time to review all your lines of business, the structure of your business, the relationships with third parties, existing written supervisory procedures and documents. Time consuming?  Yes, but a good starting point to identify where changes need to be made.

  2. Language – What are your existing disclosures and are they going to be compliant with Reg BI? What new disclosures are necessary and how many and what types of disclosure documents are needed?  Review all marketing materials, including business cards, and ensure they meet the new requirements around the word “advisor” and properly disclose service/account limitations.  Review your client account agreements (both BD and RIA) and see what promises are made with respect to “monitoring” that could potentially be problematic under the new rules.

  3. Training – Nothing speaks more to how serious the firm takes the new regulation than providing comprehensive training to registered representatives (BD), investment adviser representatives (RIA) and those that supervise them. Firms are responsible for developing the disclosure documents and compliance surrounding the rule, but reps are responsible for implementing these functions and, of course, ensuring that the recommendations to the clients satisfy the rule’s care obligation.

Joot for CRS GuideOnce the initial filings start to trickle in (May 1, 2020 is when filings can commence) and firms post the summary forms on their websites, we can compare approaches and learn from each other – but do NOT wait until then to start your preparations!  A good practice would be to have a reasonably solid draft of what your Form CRS will look like and then you may want to review those that are publicly available to see what modifications might be necessary.  Changing your Form CRS will trigger re-delivery requirements, so it is best to file as few times as necessary.

To help with preparing your customer relationship summary, we’ve created a reference guide that covers the key details you need to know. Click here to get our guide.

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