The SEC provided observations regarding relationship summaries filed by broker-dealers and investment advisers offering services to retail investors.
The SEC issued a statement regarding Form CRS disclosures required of broker-dealers and investment advisers offering services to retail investors. The statement describes observations of the Standards of Conduct Implementation Committee based on its review of filed relationship summaries from a diverse cross-section of firms, particularly focused on whether and how firms have implemented the content and format requirements of Form CRS. The Committee observed good examples of simple, clear disclosures, including relationship summaries that provided balanced and objective descriptions of services, direct and concise explanations of fees, and avoided extraneous language and legal jargon. However, the Committee also observed areas where compliance improvements appear to be needed. For the firms to improve their relationship summaries, the SEC advised the firms to review the relationship summaries in light of the listed observations and confirm they address each item consistent with the form’s instructions. To assist firms in improving their relationship summaries, the Committee described its observations with respect to the specific disclosure topics required by the form’s instructions and with respect to the general requirements pertaining to content, format, and website posting. Firms should consider reviewing their relationship summaries considering the following observations.
Use of Technical Language, Including Disclaimers. Relationship summaries must be concise and direct, using plain English and taking into consideration retail investors’ level of financial experience. Among other things, firms must avoid legal jargon and highly technical business terms unless they are clearly explained.
Omission of Required Information. Firms must generally include all required headings, conversation starters and prescribed language. Firms may only omit or modify a required disclosure or conversation starter in limited circumstances where: (i) it is inapplicable to the firm’s business; or (ii) the specific wording required by the form’s instructions would be inaccurate with respect to the firm.
Reliance on Proposed, Rather than Final Instructions. The Committee observed relationship summaries that omitted required information, modified prescribed language, or failed to follow the prescribed order or formatting requirements because firms appeared to rely on the proposed instructions to Form CRS, rather than the adopted final instructions to Form CRS.
Lack of Specific References to More Detailed Information. Firms must include specific references to more detailed information in the relationship summary sections describing the firm’s services, fees and costs, and conflicts of interests. At a minimum, these references must include the same or equivalent information to that required by Form ADV, Part 2A and Regulation Best Interest, as applicable.
Shortcomings in Descriptions of Relationships and Services; Fees, Costs, Conflicts, and Standard of Conduct. Firms are not permitted to include disclosures in their relationship summaries other than the disclosures that are required or permitted by the form’s instructions and the applicable item. Also, all information in a relationship summary must be true and may not omit any material facts necessary in order to make the required disclosures, in light of the circumstances under which they were made, not misleading. Furthermore, the disclosures in the relationship summary should be responsive and relevant to the topics covered.
Modification and/or Supplementation of the Disciplinary History Disclosure. A firm must include in its relationship summary the heading: “Do you or your financial professionals have legal or disciplinary history?” and answer “yes” or “no” depending upon whether the firm or any of its financial professionals has a triggering event. Firms also must include a reference to Investor.gov/CRS and required conversation starters in their relationship summaries. In some relationship summaries, firms omitted or modified the heading or the conversation starters and/or provided extraneous language explaining their response. The form’s instructions do not require or permit these omissions or modifications.
Issues with Prominently Displaying Relationship Summary on Firm Website. Firms that operate a publicly available website must post the current version of their relationship summary prominently on that website. The relationship summary must be posted in a location and format that is easily accessible for retail investors. In some instances, the staff was unable to locate a relationship summary on the firm’s website or was able to locate the relationship summary only after an extensive search of the firm’s website.
Issues with Description of Affiliate Relationships. Affiliated firms that decide to prepare a single relationship summary must present the brokerage and investment advisory information with equal prominence, and clearly distinguish and facilitate comparison of the two types of services.
Poor Design. To make the relationship summary easy to read and understand, the Committee expects firms to use white space and other design features, and they are specifically required to use text features for certain information, such as conversation starters and headers. Additionally, the Committee encourages firms to use charts, graphs, tables, and other graphics or text features to explain or compare different aspects of firms’ offerings.
Use of Marketing Language. The relationship summary is designed to serve as a source for objective disclosure and information, rather than as marketing material. Relationship summary responses must be factual, provide balanced descriptions to help retail investors evaluate the firms’ services, and may not include exaggerated or unsubstantiated claims.
Boilerplate. Firms should not include vague and imprecise “boilerplate” explanations in their relationship summaries that could hinder transparency or comparability between firms. The staff observed disclosures in some relationship summaries that did not appear to be tailored to the particular firm’s services, fees, relationships, or conflicts.
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