By Robert R. Boeche II of Shustak Reynolds & Partners, P.C. posted on Wednesday, March 4, 2020.

Robert R. Boeche II

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 122)
Direct: (619) 546-5502
Email: [email protected]

A lot of noise has been made about the new Form CRS, but what exactly does it mean for registered investment advisers?  On June 5, 2019, the Securities and Exchange Commission (the “SEC”) adopted Form CRS and new rules, as well as amendments to its forms and rules, under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Securities Exchange Act of 1934 (“Exchange Act”).   While changes to the Exchange Act were substantive, for purposes of this article, only changes to the Advisers Act and subsequent additional requirements to investment advisers registered with the SEC will be discussed. Below is a “Q&A” of some of the more common questions being asked about Form CRS.

1.      First and Foremost, What Changed?

Per the SEC’s “Form CRS Relationship Summary; Amendments to Form ADV”[1] as part of the new rules, the SEC “adopted rule 204-5 (delivery of Form CRS) and amended the following form and rules: Form ADV to add a new Part 3: Form CRS, rule 203-1 (Application for investment adviser registration), rule 204-1 (Amendments to Form ADV), and rule 204-2 (Books and records to be maintained by investment advisers).”  Basically, the SEC created a new document that needs to be drafted and filed as part of each SEC registrant’s Form ADV filing, which subsequently must be kept in the firm’s books and records in accordance with applicable books and records keeping requirements.  

2.      Is the New Form CRS in Addition to Current Form ADV Requirements?

Yes.  The SEC is considering Form CRS to be “Form ADV Part 3” and is therefore in addition to all current Form ADV disclosure requirements.

3.      Does New Form CRS Apply to Me?

If your firm is registered with the SEC, likely yes.  According to the new rules, “every firm that offers services to retail investors must file.”[2]  The SEC goes on to define “retail investors” as “a natural person, or the legal representative of such natural person.”[3]  However, if your firm is registered at the state-level, you will want to confirm with the respective state’s governing body.  Several states have chosen not to implement Form CRS requirements at this time.

4.      What Needs to be Included in Form CRS?

There are five topics that are required to be addressed as part of Form CRS: (1) Introduction; (2) Relationships and Services; (3) Fees, Costs, Conflicts, and Standard of Conduct; (4) Disciplinary History; and (5) Additional Information.  Each topic must be discussed in “plain English” and drafted pursuant to certain electronic and graphical formatting requirements.  Additionally, the Form CRS is strictly limited to two (2) pages (or 4 if the firm is a dual registrant).  The SEC has provided instructions to assist in the drafting of Form CRS as part of its adopting release which can also be found on the SEC’s website.[4]

5.      Is there Any Special Considerations Regarding Form CRS?

Yes, quite a few actually.  Below are some of the more important considerations:

Delivery: If delivered electronically, Form CRS must be "prominent' by including it as an attachment or providing a direct link to the document. If delivered in paper format, Form CRS must be first among any documents delivered at that time.

Disseminating Form CRS: Form CRS must be provided to each retail investor:

• Before or at the time the firm enters into an investment advisory contract with the retail investor;
• Each time a retail investor opens a new account that is different from the retail investor’s existing account(s) (i.e., if a client opens an account for an IRA after already having a joint account under advisement by the firm, the firm must send out Form CRS at that time);
• Each time the advisory firm recommends the retail investor rolls over assets from a retirement account into a new or existing account or investment;
• Each time the advisory firm recommends or provides new service or investment that “does not necessarily involve the opening of a new account and would not be held in an existing account;”[5]
• Within 30-days of a retail investor’s request;
• Within 60-days following any updates/revisions to the current version; and
• Annually within 120-days following the end of the advisory firm’s fiscal year.

6.      When Does All of this Need to Happen?

For existing SEC registrants, Form CRS must be filed as part of an “other than annual amendment” made by the firm no later than June 30, 2020.[6]  Firms applying for registration with the SEC on or after June 30, 2020 will need to include Form CRS as part of its registration application.

As evidenced above, new Form CRS will require not only the drafting of a new disclosure document, but also additional policies and procedures to ensure its content, delivery, dissemination and recordkeeping are in accordance with the new rules promulgated by the SEC.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
To speak with an attorney, contact us at (619) 696-9500.

Share This Article