SEC warns firms not to omit disciplinary history from Form CRS
Top agency officials say staff members are finding compliance shortcomings in the disclosure document
The Securities and Exchange Commission warned financial firms not to omit the disciplinary history of the firm or its personnel from a new disclosure document.
Top agency officials said SEC staff members have been finding shortcomings in a client relationship summary, known as Form CRS, that was implemented in June as part of broader investment advice reform centering on Regulation Best Interest, the new broker standard.
Form CRS outlines a firm’s services, fees, conflicts of interest, standard of conduct and disciplinary history. Firms started filing Form CRS on June 30 and were to have begun delivering it to clients later in the summer.
But the SEC said Thursday that some firms are skipping the disciplinary disclosures on Form CRS. The Wall Street Journal first reported the problem in late August.
“In connection with its review of Form CRS filings, the staff Standards of Conduct Implementation Committee has observed examples of relationship summaries where firms did not provide a response in the disciplinary history section,” SEC Chairman Jay Clayton, Division of Investment Management director Dalia Blass and Division of Trading and Markets director Brett Redfearn said in a joint statement. “The staff also observed examples where firms’ responses in the disciplinary history section appear to lack required information or otherwise could be improved.”
On Thursday, the agency added four questions to its frequently asked questions document regarding Form CRS. The FAQs say the disciplinary history section cannot be omitted even if a firm and its advisers have no disciplinary background. The section must reflect the disciplinary background of the firm and its individual advisers.
“The Commission required a ‘yes’ or ‘no’ disclosure because of the potential benefit to the retail investor of seeing at a glance whether a firm or its financial professionals have disciplinary history, which may encourage the investor to conduct further research or monitor the relationship or financial professional more closely,” the FAQs state.
Form CRS compliance has been a stumbling block for advisory firms and brokerages ever since it was implemented. The SEC issued a statement about Form CRS deficiencies in July.
The document is limited to two pages for advisers and brokers and to four pages for dually registered professionals. Some financial firms try to cram too much information into Form CRS, while others omit important information, observers have said.
The SEC will report on its initial observations about Reg BI compliance at an Oct. 26 forum.
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