OCIE Issues Risk Alert on Form CRS Compliance

With the compliance date of June 30, 2020 approaching for Form CRS and its related rules,^[1] the Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) recently issued a risk alert to provide SEC-registered broker-dealers and investment advisers with the following guidance about the scope and content of its initial examinations with respect to Form CRS compliance.

OCIE explained that initial examinations will focus on assessing whether firms have made a good faith effort to implement Form CRS. Specifically, OCIE highlighted the following areas of interest:

(1) Delivery and Filing. OCIE may review (i) whether the firm has filed its relationship summary, including any amendments, and whether such summary is posted on the firm’s public website, if any, (ii) the process for delivering the relationship summary to existing and new retail investors, and (iii) the policies and procedures to assess whether they address the required relationship summary delivery processes and dates. In particular, OCIE may review records of the dates on which each relationship summary was provided to retail investors to validate whether the firm has complied with the following delivery obligations:

• Existing Retail Investors: The initial delivery of the relationship summary must occur by July 30, 2020, and before or at the time of:
  • the opening of a new account that is different from the retail investor’s existing account;
  • a recommendation for a rollover of assets from a retirement account into a new or existing account or investment; or
  • a recommendation of a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account but would not be held in an existing account.
• New Retail Investors: Delivery of the relationship summary must occur before or at the earliest of:
  • entering into an investment advisory contract with the retail investor;
  • making a recommendation to a retail investor of an account type, a securities transaction or an investment strategy involving securities;
  • placing an order for the retail investor; or
  • opening a brokerage account for the retail investor.

(2) Content. OCIE may review the firm’s relationship summary to assess whether it (i) includes all required information and (ii) contains true and accurate information and does not omit any material facts necessary in order to make the required disclosures not misleading in light of the circumstances in which they were made. This may include a review of the firm’s:

• description of relationships and services offered to retail investors;
• description of fees and costs, including principal fees and costs that will be incurred directly and indirectly by retail investors, and examples of the categories of the most common fees and costs applicable to retail investors; 
• description of how the firm’s financial professionals are compensated and conflicts of interest such payments may create;
• description of the firm’s conflicts of interest, including incentives related to proprietary products, third-party payments, revenue sharing and principal trading; and
• disclosure of whether it or its financial professionals have any legal or disciplinary history.

(3) Formatting. The firm’s relationship summary may be reviewed to assess whether it is formatted in accordance with the instructions to Form CRS (e.g., it includes particular wording where required, it uses text features where required and it is written in plain English).

(4) Updates. OCIE may focus on the firm’s policies and procedures to assess: (i) how and whether a firm updates and files its relationship summary within 30 days after any information becomes materially inaccurate; (ii) how and whether a firm communicates these changes to retail investors within 60 days after the updates are required to be made; and (iii) the firm’s process for highlighting to retail investors the most recent changes and including an exhibit highlighting or summarizing material changes with any filed updates.

(5) Recordkeeping. OCIE may also review the firm’s records related to delivery of the relationship summary and its policies and procedures related to record-making and recordkeeping to assess compliance with applicable delivery and recordkeeping obligations.

Firms should use this guidance as a road map to ensure that they are prepared as OCIE begins its examinations after June 30 of this year.

^{[1] Form CRS and its related rules require firms to deliver to retail investors a brief customer or client relationship summary that provides information about the firm. Firms must also post the current relationship summary on their public website, if they have one. A “retail investor” is a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.}