On April 7, 2020, the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) announced that, after the initial June 30, 2020 compliance date to file Form CRS, the OCIE will conduct initial examinations to focus on assessing whether firms have made a good faith effort to implement Form CRS.¹ Despite the current COVID-19 environment, the SEC has not extended the compliance date for Form CRS.

Filing Form CRS is mandatory for every broker or dealer and investment adviser registered with the SEC, or any firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and an investment adviser. This article will discuss Form CRS requirements applicable to investment advisers.

Intended Recipients

Form CRS, adopted by the SEC on June 5, 2019 and incorporated into a new Part 3 of Form ADV, is a relationship summary written in plain English and designed to promote effective communication between investment advisers and their retail investors. Registered investment advisers that have retail investors are required to prepare the relationship summary; however, exempt reporting advisers are not subject to Form CRS requirements.

For purposes of Form CRS, “retail investor” is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.”² If an investment adviser does not know whether a natural person is seeking services for something other than personal, family or household purposes at the beginning of a relationship, it may treat that natural person as a retail investor for purposes of delivering the relationship summary. Investment advisers are not excused from delivering Form CRS to retail investors based on high net worth or other factors indicating investor sophistication.³

Natural persons who invest in pooled investment vehicles, such as hedge funds or private equity funds, but who have no direct advisory relationship with the investment adviser, are not considered to be the clients of the investment adviser and, therefore, are not required to receive Form CRS.⁴ However, hedge fund and private equity fund managers who directly manage separate accounts for retail investors in addition to their private fund clients must deliver Form CRS to these separately managed account clients.

The SEC clarified that the term “legal representative” of a natural person covers only nonprofessional legal representatives (e.g., a nonprofessional trustee who represents the assets of a natural person and similar representatives, such as executors, conservators and persons holding a power of attorney for a natural person) and does not include regulated financial services professionals retained by natural persons to exercise independent professional judgment.⁵

When a natural person seeks services for his or her retirement accounts — including but not limited to IRAs and individual accounts in workplace retirement plans, such as 401(k) plans and other tax-favored retirement plans — in order to select and retain a firm to provide brokerage or advisory services, Form CRS must be delivered. For example, firms will be required to deliver a relationship summary to plan participants seeking advice about whether to take a distribution from a 401(k) plan or other workplace retirement plan and how to invest that distribution.

However, when a plan representative retains and supervises the investment advisory firm to provide services to the plan — e.g., where a participant is not selecting or retaining a firm to provide brokerage or advisory services but is merely selecting among plan features offered by firms and financial professionals retained and supervised by a plan representative — these plan participants should not be viewed as “seeking or receiving services” for purposes of the Form CRS definition of “retail investor.” Additionally, when considering whether to engage an investment adviser to provide services to a retirement plan established, maintained and operated by an employer to provide pension or retirement savings benefits to employees, plan representatives are not seeking or receiving services primarily for personal, family or household purposes, and, accordingly, these workplace retirement plans or their plan representatives would not be included under the definition of a “retail investor.”⁶

Format and Content

In the relationship summary, investment advisory firms must provide information about (1) relationships and services the firm offers to retail investors; (2) fees and costs that retail investors will pay, conflicts of interest, and the applicable standard of conduct; and (3) disciplinary history.

Form CRS’s instructions provide requirements on length, formatting and content. Investment advisers must use plain English and take into consideration a retail investor’s level of financial experience. The introductory paragraph must contain a link to Investor.gov/CRS, a government site that offers educational information about investment advisers, broker-dealers and individual financial professionals and other materials. Each item in Form CRS must be presented in a prescribed order and under standardized headings, which would allow investors to compare Form CRS responses across advisory firms. However, firms are permitted to respond to the relationship summary items using their own wording. The Form CRS instructions prescribe wording for the introduction, headings, conversation starters, and the applicable standard of conduct, as well as for factual disclosures concerning the impact of fees and costs on investments over time. Form CRS requires advisers to include suggested follow-up questions that retail investors can ask their financial professionals. Conversation starters and follow-up questions are intended to facilitate discussions between retail investors and their investment advisers. The instructions encourage firms to use graphics or text features (including charts, graphs, tables and similar measures) to respond to the required disclosures or to make comparisons among their offerings. When using hyperlinks in the relationship summary to provide additional information, firms should make sure that the information is relevant and responsive and is not used to replace the narrative descriptions required by the instructions. Firms should be aware that the antifraud standards under the federal securities laws apply to any linked information incorporated into Form CRS.

In addition to investment advisory services, firms are allowed to acknowledge other financial services that they provide, such as insurance, banking or retirement services or investment advice pursuant to state registration or licensing.

Dual registrants and affiliated investment advisory firms are permitted to prepare a single Form CRS. Investment advisers must limit their disclosure to two pages. Dual registrants will be limited to four pages.

Deadlines and Additional Information

Form CRS advisory relationship summaries must be filed electronically through the Investment Adviser Registration Depository (IARD), posted prominently on the investment adviser’s website (to the extent the investment adviser has one), and delivered to the adviser’s retail investors.

Although relationship summaries are not required to be made available in paper format, they must be easily accessible regardless of the mediums that are used to deliver them. Generally, delivery should conform with the SEC’s existing guidance regarding electronic delivery.⁷ In the case of an initial delivery, a firm is permitted to deliver the relationship summary to new or prospective clients or customers in a manner that is consistent with how the retail investor requested information about the firm or financial professional. For existing investors, the firm may deliver the relationship summary in a manner that is consistent with the firm’s existing delivery arrangement with that client or customer. The instructions to Form CRS provide that the electronic delivery should be easily accessible and presented prominently in the electronic medium (e.g., provided as a direct link or in the body of an email or message). If delivered as part of a package of documents, the relationship summary must be the first among any documents that are delivered at that time. All investment advisers are required to make a copy of their relationship summary available upon request free of charge.

Initial Form CRS filings are due by June 30, 2020 and must be delivered to (1) existing retail investors by July 30, 2020 and (2) new retail investors before or at the time of entering into an advisory agreement. The SEC has recently emphasized the importance of Form CRS, and advisers should expect this to be a focus area in future SEC compliance examinations. For more information regarding Form CRS see the SEC’s final rule, general instructions to Form CRS and Form CRS FAQ.

Endnotes