SEC Charges RIAs + Broker-Dealer Firms for Failure to File + Deliver Form CRS

On July 26, the Securities and Exchange Commission (“SEC”) announced that 21 registered investment advisors (“RIAs”) and 6 broker-dealers agreed to settle charges that they failed to timely file and deliver customer relationship summaries, known as Form CRS, to their retail investors.  The SEC’s orders found that the 27 firms violated the Investment Advisers Act of 1940 and the Exchange Act^[i] and were ordered to pay civil penalties ranging from $10,000 to $97,523.

The SEC’s press release announcing the orders can be viewed here. 

In the release, SEC staff observed that firm registration comes with mandated filing and disclosure obligations, emphasizing the importance of meeting these obligations and providing retail investors with information designed to help them understand their relationship with securities industry professionals.

Form CRS was adopted in June 2019 with guidelines aimed at increasing transparency and communication between investment firms and retail clients by providing investors with this information.  The SEC mandated specific instructions on content, filing and delivery for the Form and required firms to prominently post the Form CRS on firm websites if one existed.

In the orders, firms were found to have willfully violated the rule requiring them to electronically file an initial Form CRS no later than June 30, 2020^[ii]  and deliver the Form to existing retail clients by July 30, 2020.

Each RIA and broker-dealer firm charged under the orders failed to meet these regulatory deadlines. They did not take action to become compliant despite being alerted by their respective regulators of the deficiencies. Many of the firms charged did not become compliant until well into 2021.

SEC Staff Observations

In its release, the SEC continued to emphasize the principles of firm transparency and client communication that Form CRS was designed to serve. Adam Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, observed that “By failing to file, deliver, and post this form, these firms deprived their clients and customers of the benefits of that information.”

Form CRS: Filing and Retail Client Delivery Requirements

RIAs and broker-dealers with retail clients must have completed a Form CRS filing with the Securities and Exchange Commission on IARD or WebCRD.

For retail RIA clients, initial delivery of Form CRS must occur before or at the time the firm enters into an investment advisory contract with a client.

For retail broker-dealer clients, initial delivery of Form CRS must occur 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 retail investor, or;
3. the opening of a brokerage account for the retail investor.

The rules also require ongoing delivery of Form CRS.  For each existing retail investor client of an RIA or broker-dealer, delivery of the firm’s current Form CRS must occur before or at the time the firm:

• opens a new account that is different from the retail investor client’s existing account(s);
• recommends that the retail investor client roll over assets from a retirement account into a new or existing account or investment; or
• recommends or provides a new investment advisory service or investment that does not necessarily involve opening a new account and would not be held in an existing account.

Key Takeaways from the SEC Release

Since its introduction in 2019, the SEC has prioritized Form CRS compliance in guidance and examination priorities.  RIA and broker-dealer firms should review policies and procedures for complying with Form CRS filing and delivery requirements with the following questions in mind:

1. Has the form been filed with the SEC and delivered to clients on time?
2. Does firm staff understand and are they meeting the initial and ongoing delivery requirements?
3. Is the form complete and accurate? Is the information up to date?
4. Is the form easily accessible to retail clients on the firm’s website?
5. Is the form written in plain English and formatted according to SEC instructions?
6. Do firm procedures address how to update the Form when necessary?
7. Are firm recordkeeping policies and procedures sufficient to document and demonstrate to a regulator the firm’s overall compliance with Form CRS rules?

For additional guidance on Form CRS instructions and related rules, please see Form CRS Relationship Summary: Amendments to Form ADV – A Small Entity Compliance Guide.

^{[i]Investment advisors violated Section 204 of the Investment Advisers Act of 1940 and Adviser Act Rules 204-1 and 204-5, and broker-dealers violated Section 17(a)(1) of the Securities Exchange Act of 1934 and Exchange Act Rule 17-a-14.}

^{[ii] Rule 204-1(e) under the Advisers Act requires all Commission-registered investment advisors offering services to a retail investor to amend their Form ADV by electronically filing on the Investment Adviser Registration Database (“IARD”) an initial Form CRS satisfying the requirements of Part 3 of Form ADV.  Rule 17a-14 under the Exchange Act requires all Commission-registered broker-dealers offering services to a retail investor to electronically file on the Central Registration Depository (“Web CRD”) operated by the Financial Industry Regulatory Authority, Inc. (“FINRA”) an initial Form CRS satisfying the requirements of Rule 17a-14.}