While an SEC review of customer relationship summaries (Form CRS) observed good examples of clear disclosures, the agency warns that it also observed areas where compliance improvements are needed.
In its Staff Statement Regarding Form CRS Disclosures released Dec. 17, the SEC observes, among other things, that some of the summaries the staff reviewed omitted required disclosures—such as headers, prescribed language, or conversation starters related to conflicts of interest, investment authority, monitoring services and disciplinary history—while others failed to use concise, plan English language.
“This prevents retail investors from easily comparing different firms’ relationship summaries and getting the facts they need when deciding among firms or financial professionals and the accounts and services available to them,” the SEC advised.
To help evaluate whether the relationship summary is fulfilling its intended purpose, the SEC’s Standards of Conduct Implementation Committee reviewed filed relationship summaries from a cross-section of firms and observed how firms have implemented the content and format requirements of Form CRS. Additionally, the Division of Examinations and FINRA have been examining firms to assess compliance with the Form CRS requirements, with many of the initial observations shared during an October 2020 roundtable discussion.
Jargon and Omitted Disclosures
In noting that relationship summaries must be concise, using plain English and taking into consideration retail investors’ level of financial experience, the SEC emphasized that “firms must avoid legal jargon and highly technical business terms unless they are clearly explained.” For example, the staff statement notes that some firms referenced terms such as “riskless principal, in arrears, markups and markdowns,” or cited specific SEC rules without providing clear explanations.
Additionally, firms are not permitted to include disclosures in their relationship summaries other than the disclosures that are required or permitted by the form’s instructions and the applicable item, the SEC noted.
The staff also observed some relationship summaries that included disclaimers and hedging language—often placed in footnotes using small text and, in some cases, legal jargon—that are neither required nor permitted. For example, the SEC notes that some firms included impermissible hedging language stating that their relationship summary “does not create or modify any agreement, relationship or obligation” between the investor and the firm or its financial professionals.
And while the staff frequently observed disclosures that provided succinct descriptions of relationships and services, the SEC notes that some relationship summaries did not include required information or included “impermissible, extraneous or unresponsive disclosures.” These shortcomings, according to the staff statement, were observed most frequently in the following areas:
- monitoring;
- investment authority;
- limited investment offerings;
- principal fees and costs;
- wrap fee program offerings and fees;
- extraneous disclosures regarding standards of conduct; and
- firm and financial professional compensation arrangements and conflicts of interests.
In other cases, the staff observed relationship summaries that omitted required information or failed to follow the prescribed order or formatting requirements because firms apparently relied on the proposed, rather than the final, adopted instructions to Form CRS.
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Additional Observations
Below are some of the additional observations provided in the staff statement.
Lack of Specific References to More Detailed Information. Here, the SEC notes that some relationship summaries did not include required references to more detailed information in the relationship summary sections describing the firm’s services, fees and costs, and conflicts of interests. In some instances, relationship summaries posted on firms’ websites simply stated that retail investors could find more detailed information in the firm’s Form ADV or Reg BI disclosures, but did not provide a means of facilitating access to that information, even though it was online.
Disciplinary History Disclosure. The SEC also reminds firms that they do not have discretion to leave the disciplinary history answer blank or to omit reportable disciplinary history from the relationship summary. Additionally, the staff statement explains that, when responding to the disciplinary history heading in their relationship summaries, firms may not add descriptive or other qualitative or quantitative language. “Adding such language might, intentionally or unintentionally, obfuscate or otherwise minimize the disciplinary history,” the SEC emphasizes.
Description of Affiliate Relationships. “Affiliated firms that decide to prepare a single relationship summary must present the brokerage and investment advisory information with equal prominence, and clearly distinguish and facilitate comparison of the two types of services,” the SEC further advises, noting that failure to do so undermines the ability of investors to compare the options available to them. While some firms were able to “clearly articulate intricate affiliate structures” in their relationship summaries, other firms’ summaries were difficult to evaluate and understand, the staff observes.
SEC-registered broker-dealers and RIAs were required to file their initial relationship summaries with the Commission by June 30, 2020. These firms were also required to deliver their relationship summaries to existing clients or customers by July 30, 2020. In July 2021, the SEC announced settlements with 21 investment advisers and six broker-dealers that had missed these regulatory deadlines and agreed to settle charges that they failed to timely file and deliver their customer relationship summaries to their retail investors.
Considering the observations identified in the staff statement, the SEC suggests that firms should consider reviewing their relationship summaries and confirm they address each item consistent with the form’s instructions. In addition, the SEC notes that firms with interpretive questions regarding Form CRS can submit questions to [email protected].
