Countdown to Form CRS, and New OCIE Risk Alert

The due dates to prepare, file and deliver a new part of Form ADV, Form CRS (Customer Relationship Summary), are approaching rapidly for most SEC-registered investment advisers that have separate account clients.  An SEC-registered investment adviser with “retail clients” must file Form CRS on the IARD by June 30, 2020, and deliver Form CRS to its retail clients by July 30, 2020.

A “retail client” is any natural person who is seeking or receiving advisory services “primarily for personal, family or household purposes.”  This definition does not distinguish based on net worth; high net worth individuals are retail clients. Entities and fund investors are not retail clients, even if a fund investor is a natural person. An adviser that has no retail clients (for example, if it only advises investment funds, or if all its clients are entities) is not required to prepare, file or deliver Form CRS.

Form CRS must be in a specified format on no more than two pages, unless the investment adviser is also registered as a broker-dealer and elects to deliver a combined form for both roles, in which case, the form can be on no more than four pages.  The required format consists of an introductory paragraph, including certain information, and specified questions and responses, much of which must use the wording required in the form.  Most of the items must also include cross references to the adviser’s brochure and specific “conversation starters” or questions that retail clients are encouraged to ask, such as “Given my financial situation, should I choose an investment advisory service? Why or why not?”  Advisers must use text features to emphasize certain text, and advisers are encouraged to use charts, colors, fonts, graphics and interactive tools to facilitate a retail client’s understanding of the information provided and access to related information, and the headings of the form filed with the IARD must be machine readable.

Because the questions and conversation starters must track exactly the SEC’s required wording, investment advisers should carefully follow the Form CRS instructions, which are available here. A quick reference guide for filing Form CRS is available here.

After initial delivery of Form CRS, advisers are required to re-deliver it at the times described in SEC rule 204-5 (available here) and communicate any updates within 60 days to all retail clients, with a summary of the changes or the amended language highlighted.  An adviser must also post Form CRS on its website.  These delivery and updating obligations are not the same as Form ADV, Part 2.

On April 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert) describing how OCIE will conduct examinations of advisers that are required to deliver Form CRS.  The Risk Alert highlights the following areas:

  1. Has the adviser timely filed and delivered Form CRS, and implemented policies and procedures to address the delivery requirements?
  2. Does the adviser’s Form CRS include the required content, is it complete, true and accurate and not misleading?  The Risk Alert lists certain specific examples of content that advisers should include.
  3. Does the formatting of the adviser’s Form CRS follow the SEC’s instructions?
  4. Has the adviser adopted policies and procedures to update, file and deliver Form CRS?
  5. Does the adviser maintain the required records relating to delivery of Form CRS?

Although Form CRS is relatively short, advisers may find its technical requirements make it complicated to prepare.  Advisers must take special care that this short, specifically-worded document is consistent with its marketing materials, client agreements and other regulatory disclosures such as Form ADV, Part 2A, and that the cross-references to Part 2A cover all the required disclosures.  Finally, advisers must adopt written policies and procedures to meet the new delivery and updating requirements, and have records demonstrating compliance.

If you need assistance with preparing Form CRS or revising your policies and procedures to meet the new requirements, please contact one of the attorneys in the Investment Funds & Advisers Group at Shartsis Friese LLP: John P. Broadhurst, Geoffrey W. Haynes, Carolyn S. Reiser, Jahan P. Raissi, Neil J. Koren, James J. Frolik, Christina Mickelson Hamilton, David Suozzi, Anthony J. Caldwell, Kevin Leiske, Joan L. Grant, and Ellyn T. Roberts.