SEC fines 12 firms total of $292,523 in Form CRS enforcement actions

The SEC Tuesday fined 12 financial firms a total of $292,523 for compliance failures related to the client relationship summary known as Form CRS, marking the agency’s second round of enforcement actions on this topic.

The Securities and Exchange Commission charged six investment advisory firms and six broker-dealers with failing to file and deliver Form CRS on time. The agency also found that some of the firms didn’t include information and language that’s required for the document, which outlines a firm’s services, fees, conflicts of interest, disciplinary history and other information.

The SEC promulgated the relationship summary as part of the rulemaking package for Regulation Best Interest, the broker-dealer standard of conduct. Both Reg BI and Form CRS went into force in June 2020. Advisers and brokers were supposed to start delivering Form CRS to new and prospective clients by July 30, 2020, as well as posting the document on their websites and filing it with the SEC.

The fines the SEC announced on Tuesday ranged from a low of $10,000 for four of the firms to a high of $97,523 for the broker-dealer Wall Street Access. The penalties were the second tranche levied by the agency, which fined 27 firms for Form CRS violations last July.

“With today’s actions, the SEC has now charged forty-two financial firms for failing to meet the obligations that are required to ensure retail investors understand their relationships with their securities industry professionals,” Sanjay Wadhwa, deputy director of the SEC’s Enforcement Division, said in a statement. “We urge firms that continue to be delinquent in fulfilling their Form CRS obligations to come into compliance with the law and to self-report to the SEC.”

Investment advisers and brokers who are delinquent with their Form CRS should take seriously the encouragement to turn themselves in, said Jim Lundy, a partner at Faegre Drinker Biddle & Reath.

“For firms who remain in violation and do not self-report, the message is they will be pursued aggressively, and the SEC will attempt to obtain larger fines,” said Lundy, a former SEC senior trial counsel.

In this round of enforcement cases, the SEC went beyond punishing firms for missing Form CRS deadlines to charging them with failing to include language that must appear on the document, said Susan Schroeder, a partner at WilmerHale.

The SEC released guidance in December warning firms it had found problems in the content and format of their Form CRS, which is two pages for stand-alone advisers and brokers and four pages for dual registrants.

“These enforcement matters are consistent with the SEC’s stated focus, and the December guidance is a good roadmap for firms assessing their own CRS compliance,” Schroeder, former head of Finra enforcement, wrote in an email through her law firm’s spokesperson.

In addition to Wall Street Access, the firms charged in Tuesday’s actions were Arthur Zaske & Associates; Banyan Securities; Church Gregory Adams Securities Corp.; Gutt Financial Management; Hinsdale Associates; J.K. Financial Services; N.V.N.G. Investments; Personal Financial Planning; Stone Run Capital; The Winning Edge Financial Group; and Watermark Securities. None of them admitted nor denied the SEC’s findings.

The SEC’s actions against Form CRS violations is low-hanging fruit when it comes to enforcement related to Reg BI. Any case that centers on the heart of the broker standard of conduct — whether investment recommendations were in a customer’s best interests — will take more SEC time and resources, Lundy said.

Nevertheless, he expects the first major Reg BI violation in the next few months.

“In 2022, we may see the first Regulation Best Interest enforcement actions,” Lundy said.

Related Topics: Form CRS