A key component of the SEC’s proposal designed to address investor confusion about their advisory relationships is the Form CRS Relationship Summary. In this fifth segment of our series on the CRS, we look at how the SEC proposes that this information would be delivered to investors.
As noted in Part 1, the proposal would, of course, require registered investment advisers, registered broker-dealers that serve retail customers and dual registrants to deliver a relationship summary, though it notes that delivery of the relationship summary would not necessarily relieve the firm of any other disclosure obligations it has to its retail investors or prospective retail investors under any federal or state laws or regulations. Firms would be required to file the relationship summary with the SEC, and it would be available on the Commission’s public disclosure website, though “if a firm does not have retail investor clients or customers and is not required to deliver a relationship summary to any clients or customers, the firm would not be required to prepare or file a relationship summary.”
How and How Often
Broker-dealers would file their relationship summaries electronically in a text-searchable format with the Commission on EDGAR. Investment advisers would file their relationship summaries electronically in a text-searchable format through IARD in the same manner as they currently file Form ADV Parts 1A and 2A. Dual registrants would file on both EDGAR and IARD. While other electronic filing platforms were considered, the SEC chose IARD and EDGAR because they are familiar filing systems for investment advisers and broker-dealers.
In addition to the distribution frequencies noted above, the SEC is also proposing a requirement for firms that maintain a public website to post their relationship summaries on their websites “…in a way that is easy for retail investors to find.” As for firms that do not maintain a website – well, they would be required to include in their relationship summaries a toll-free number for investors to call to obtain documents.
As for existing clients, the SEC proposes that a firm would be required to provide a relationship summary to an existing client or customer who is a retail investor before or at the time a new account is opened or changes are made to the retail investor’s account(s) that would materially change the nature and scope of the firm’s relationship with the retail investor. That would include things like a recommendation for a transfer from an investment advisory account to a brokerage account or from a brokerage account to an investment advisory account, or moving assets from one type of account to another in a transaction that is not in the normal, customary or already agreed-upon course of dealing.
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The SEC proposal says that retail investors should receive the relationship summary as part of the process of engaging the services of a financial professional or firm so the retail investor has the relevant information to make that decision.
The proposal does, of course, request feedback on filing, delivery and updating requirements generally, and on a number of other areas (beginning on page 149, and running through page 157).
To provide adequate notice and opportunity to comply with the proposed relationship summary filing requirements, newly registered broker-dealers and new applicants for registration with the Commission as investment advisers would not be required to file or deliver their relationship summaries until six months after the effective date of the proposed new rules and rule amendments.
After that date, newly registered broker-dealers would be required to file their Form CRS with the SEC by the date on which their registration with the Commission becomes effective, and the SEC would not accept any initial application for registration as an investment adviser that does not include a relationship summary that satisfies the requirements of Form ADV, Part 3: Form CRS.
The SEC is proposing to require that a firm deliver its relationship summary to all of its existing clients and customers who are retail investors on an initial one-time basis within 30 days after the date the firm is first required to file its relationship summary with the Commission, a time period they say would allow existing retail investor clients and customers to receive the disclosures in the relationship summary that will be provided to new and prospective retail investor customers and clients.
A firm would be required to give its relationship summary to its new and prospective clients and customers who are retail investors beginning on the date the firm is first required to electronically file its relationship summary with the SEC, and would be required to give the relationship summary to its existing clients and customers who are retail investors within 30 days, pursuant to the rule’s requirements for initial delivery and updating.
About This Series
This is the fifth in our ongoing series of posts analyzing the Form CRS. The other installments in the series are: