Get ready for Form ADV, Part 3: Form CRS

Are you ready for Form ADV Part 3? As if the last annual updating amendment filing was not tedious enough with all the additional information related to separately managed accounts, the process will further evolve with the SEC’s proposal for a Form ADV Part 3, also referred to as Form CRS. But don’t worry, it can only be four pages in length!

You will now be required to provide retail clients with a relationship summary that is concise and direct, by using short sentences, an active voice, and definite, concrete, everyday words. Firms would not be permitted to use legal jargon, highly technical business terms or multiple negatives. But never fear, the relationship summary can include references and links to other disclosure where interested investors can find additional information. The format is being required a certain way so that retail investors can compare these details about firms.

The relationship summary would require eight separate items covering: (i) introduction; (ii) relationships and services the firm provides to retail investors; (iii) standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); (vi) conflicts of interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm’s financial professional. Most importantly, all information in the relationship summary must be true and may not omit any material facts necessary to make the required disclosures not misleading. So, get ready to provide even more information to potential clients…including disciplinary information!

Investment advisers would file their relationship summaries electronically in a text-searchable format through IARD in the same manner as they currently file Form ADV Parts 1A and 2A. But do not start to draft your Form CRS just yet, as the SEC is still within the commentary period of the rulemaking and has a great deal of outstanding questions they want the industry to opine on. As highlighted in the rule proposal, the SEC is seeking guidance from the industry on many salient points, such as:

  • Should firms only be required to deliver the relationship summary to retail investors?
  • Should retail investors be defined for purposes of Form CRS to include all natural persons, as proposed?
  • Should we conform the definition of retail investor to the definition of retail customer as proposed in Regulation Best Interest, which would include non-natural persons who use the recommendation primarily for personal, family, or household purposes?
  • Should we include any additional definitions of terms or phrases in the relationship summary?
  • Will the length and presentation proposed for the relationship summary be effective for retail investors?
  • Are there too few or too many items that would be required in the relationship summary?

These are just a sampling of the questions the SEC sought feedback on. In fact, there were pages and pages of questions presented in the proposal. Never fear though, as the SEC has already provided sample documents laying the foundation of what they desire to see within the relationship summary document and the format it should take.

For now, we wait for the final rule to be presented. But while you wait, maybe ask for a modest increase in your compliance budget next year! If you need supporting information to justify this increase, just reference the 40+ pages included in the proposal on the financial impact to investment advisers.

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