The U.S. Securities and Exchange Commission (the “SEC”) has adopted Form CRS and related rules under the Investment Advisers Act of 1940 (the “Advisers Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), in addition to amendments to its existing forms and rules. Form CRS and its related rules require investment advisers and broker-dealers (including execution-only broker-dealers) registered with the SEC (each a “firm”) to provide a client relationship summary to retail investors; the first relationship summary for such firms must be filed with the SEC by no later than June 30, 2020. If a firm does not have any retail investors to whom it must deliver a relationship summary, it is not required to prepare or file a relationship summary; however, the definition of “retail investor” is broad enough to capture high net-worth individuals who have not engaged a professional legal representative to stand between the natural person and the firm. A relationship summary does not need to be completed by exempt reporting advisers. In addition, because the definition of “retail investor” does not include clients or prospective clients that are not natural persons, firms whose sole clients are pooled investment vehicles, including registered funds and private funds, will not be required to prepare a relationship summary, even if the funds have investors that are retail investors.
The relationship summary should detail: (1) the types of client relationships and services the firm offers; (2) the standards of conduct associated with these relationships and services; (3) the fees and other costs clients should expect to pay in connection with these services; (4) the conflicts of interests the firm may face in the provision of these services; (5) any reportable legal or disciplinary history of the firm; and (6) how to acquire further information about the firm. In providing this information, the relationship summary is intended to assist retail investors in deciding whether to: (1) establish an advisory or brokerage relationship with a firm; (2) engage a specific firm or professional; or (3) terminate or modify an existing relationship or service. It should be noted that the required disclosures to be made in the relationship summary are to be made in addition to those made under current disclosure or reporting requirements applicable to investment advisers or broker-dealers; the relationship summary is not intended to replace those requirements under the federal securities laws and regulations or any other applicable laws or regulations.
If a firm offers both investment advisory and brokerage services, the firm has the option to prepare one relationship summary that discusses both the investment advisory and brokerage services offered or two separate relationship summaries, one for its investment advisory services and one for its brokerage services. Additionally, if a firm and its affiliate offer both investment advisory and brokerage services, the firm has the option to prepare one relationship summary that discusses both the investment advisory and the brokerage services the firm and the affiliate provide or two separate relationship summaries, one for the firm’s services and one for the affiliate’s services.
Format of Relationship Summary
In addition to the substantive content required to be in a relationship summary, the instructions to Form CRS provide a series of formatting requirements that must be followed in preparing a relationship summary. These requirements are intended to enhance the utility of the relationship summary to the client. For example, a relationship summary must be drafted using plain English to allow for easier communication of the relevant information. The instructions also impose a strict page limit for relationship summaries — two pages (or the electronic equivalent) for a firm reporting either investment advisory services or brokerage services or four pages (or the electronic equivalent) for a firm reporting both investment advisory services and brokerage services. Again, the aim of these requirements is to convey the necessary information to the client in a way that makes it easily digestible.
Recipients of a Relationship Summary
As noted above, Form CRS and its related rules requires each firm that offers its services to retail investors to prepare a relationship summary for submission to the SEC and to each retail investor. For purposes of Form CRS, a “retail investor” is any natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family, or household purposes. This definition is not tied to a natural person’s net worth nor is it tied to a natural person’s sophistication. Note, therefore, that the definition is broad enough to capture high net-worth individuals who have not engaged a professional legal representative to stand between the natural person and the firm. Firms should bear this in mind as they analyze to whom they may be obligated to deliver a relationship summary.
Furthermore, the definition of “retail investor” includes both existing and prospective clients and customers as well as those who seek services as to retirement accounts, including IRAs and accounts in workplace retirement plans, such as 401(k) plans, and other tax-favored retirement plans. Firms will not have to deliver a relationship summary when plan participants make certain ordinary elections that do not involve selecting a brokerage or advisory firm or to employer-sponsored retirement plans and plan representatives (e.g., plan sponsors, trustees, and other fiduciaries).
Filing and Delivery Requirements
Filing with the SEC
As noted above, all currently registered firms must file a relationship summary with the SEC by no later than June 30, 2020. For investment advisers, the relationship summary must be filed as Form ADV Part 3 and submitted electronically through the Investment Adviser Registration Depository. The relationship summary may be filed as either an other-than-annual amendment to a firm’s Form ADV or as part of a firm’s initial Form ADV or annual updating amendment to a firm’s Form ADV. Any investment adviser that applies for registration with the SEC on or after June 30, 2020 must include the relationship summary as part of such initial Form ADV. For broker-dealers, the relationship summary must be filed as a Form CRS filing and submitted electronically through the Central Registration Depository. Any broker-dealer that applies for registration with the SEC or has a pending application for registration with the SEC on or after June 30, 2020 must file a relationship summary by the effective date of such registration. If a firm offers both investment advisory and brokerage services, the relationship summary must be filed using the Investment Adviser Registration Depository and the Central Registration Depository. Upon filing with the SEC, each firm should post its most up-to-date relationship summary on its public website.
Delivery to Clients
Each firm with existing retail investor clients must deliver a copy of its relationship summary to such clients within 30 days after the date the firm was first required to submit its relationship summary to the SEC. A firm’s delivery requirements for each new retail investor client will depend on the types of services offered. If a firm offers investment advisory services, it must deliver a relationship summary to each client before or at the time the firm enters into an investment advisory contract with the client. If a firm offers brokerage services, it must deliver a relationship summary to the client before or at the earliest of (1) a recommendation of an account type, a securities transaction, or an investment strategy involving securities; (2) placing an order for the client; or (3) the opening of a brokerage account for the client. If a firm offers both investment advisory and brokerage services, as discussed above, it must deliver the relationship summary by the earlier of the date it is required to do so with respect to its investment advisory services or the date it is required to do so with respect to its brokerage services.
Relationship summaries may be delivered to clients electronically or in paper format. If delivered electronically, the relationship summary must be presented prominently, such as a direct link sent via email or displayed in the body of an email, and must be easily accessible. If delivered in paper format along with other documents, the relationship summary must be the first among the documents that are delivered at that time.
Investment advisers that provide only automated advisory services or broker-dealers that provide only online services without a particular individual with whom a retail investor can discuss the conversation starters must include a section or page on their website with answers for each of the questions required to be included in the relationship summary by the instructions to Form CRS and must provide a means of facilitating access to that section or page in their relationship summary.
Firms’ Ongoing Obligations Regarding Relationship Summaries
In addition to a firm’s initial delivery requirements, firms have ongoing delivery requirements that must be complied with. Each firm must deliver its most up-to-date relationship summary to a client who is a retail investor before or at the time the firm (1) opens a new account that differs from the client’s existing account or accounts; (2) recommends that the client rolls over assets from its retirement account into a new or existing account or investment; or (3) recommends or provides a new investment advisory or brokerage service or investment that does not necessarily require opening a new account but would not be held in an existing account. Additionally, a firm must deliver its most up-to-date relationship summary to a client within 30 days of a request by the client to do so. Firms must also deliver the most up-to-date relationship summary to existing clients when the relationship summary is updated.
A firm must update its relationship summary if any information in the relationship summary becomes materially inaccurate. Any required updates should be made and filed with the SEC within 30 days of the event causing the information to become materially inaccurate. A firm must inform all existing clients who are retail investors of the changes made to the relationship summary within 60 days of the event causing the information to become materially inaccurate and must do so without charge to the existing clients; this may be done by delivering the updated relationship summary to the existing clients or by delivering some other disclosure to the existing clients that communicates the changes made.
Recordkeeping Considerations
Relationship summaries are subject to recordkeeping requirements under the Advisers Act and the Exchange Act. Investment advisers are required to make and keep true, accurate, and current copies of each relationship summary and each amendment or revision thereto. Investment advisers are also required to keep a record of the dates that each relationship summary and each amendment or revision thereto is provided to any client or to any prospective client that later becomes a client. These records must be maintained in an easily accessible place for at least five years following the end of the fiscal year in which the last entry on the record was made. Broker-dealers are required to maintain a copy of each relationship summary and a record of the dates that each relationship summary was provided to each client, including any relationship summary that was provided before such client opens an account. Broker-dealers must maintain these records for at least six years after the record or relationship was created and must do so in an easily accessible place.
Investment advisers and broker-dealers should also assess their written policies and procedures to ensure compliance with the Form CRS framework.
