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Form CRS — What advisors need to know

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The SEC’s new Form CRS, the ultra concise disclosure document that requires advisors to lay out their obligations to clients in “plain English,” may be a bigger compliance lift than some firms realize.

According to the commission’s 564-page rule, firms have until June 30, 2020, to craft a two-page document that includes affiliation and registration details, conflicts of interest, disciplinary history and suggested questions to bring up to a rep. (Dually registered reps are allowed up to four pages.)

That’s a lot of detail to include in a short document, especially if firms stick to paper and don’t use hyperlinks, warns a client alert about Form CRS from law firm Stradley Ronon.

“It is unclear whether it is practical, or even possible, to disclose such information in a paper-based format within these page constraints,” the law firm wrote in the alert.

While it may be difficult, concise clarification is necessary, according to the SEC. “Research continues to show that retail investors are confused about the services, fees, conflicts of interest and the required standard of conduct for particular firms, and the differences between broker-dealers and investment advisors,” says the commission.

Sanjay Lamba, associate general counsel at the Investment Adviser Association, agrees it may be a daunting task. “It may not seem like a lot in terms of what you have to prepare and deliver. After all, it's only two pages,” says Lamba, who laid out specifics of the document last week on a TD Ameritrade Institutional webcast on Regulation Best Interest. “But I think once you start going through the release, reading through the instructions and putting pen to paper, you'll realize that there are a lot of issues, a lot of questions, a lot of implementation challenges.”

Here's what advisors should know about the form:

Firms will be required to file their first Form CRS to the SEC by June 30, 2020. After filing, advisors and firms will have 30 days to deliver the form to existing clients, according to the SEC.

“It’s a relatively short compliance period — you have less than a year to prepare it,” Lamba said on the webcast.

The document must be in text-searchable format, and machine-readable headings are required, according to Lamba. ”The idea here is, I think, to encourage third-party firms to collect the data that's in all these forms, the documents and offer comparison tools for retail investors with respect to your delivery obligations,” he said.

Investment advisors will submit the form as part three of their Form ADV, according to the SEC.

Advisors can deliver Form CRS to clients in the same format they typically use to deliver disclosures, according to Lamba.

“Even Warren Buffet will be getting a Form CRS,” says Sanjay Lamba, associate general counsel at IAA.

If by paper, it must be on top of any other materials delivered at the same time, according to the SEC. All advisors will need to make the form readily available on their website, if they have one.

Every client who has retirement savings or whose investment objectives are included in the SEC’s definition of a retail investor, regardless of net worth or investment sophistication, according to Lamba.

“Even Warren Buffett will be getting a Form CRS,” he said on the webcast.

Clients seeking services for commercial or business purposes, such as services for small business or on behalf of a charitable trust, are excluded. However, clients who are seeking advice for a mix of personal and commercial purposes still count as retail clients.

“This does beg the question on how you will know whether a new client is seeking advice for something other than personal family or household purposes,” Lamba said. In circumstances when an advisor is unclear, the SEC suggests treating a client as a retail investor, he said.

Initially, investment advisors will be required to give clients the form before, or at the time, they enter into a contract with a client, according to the SEC. Brokers must give a client the form before making recommendations, placing orders or opening a brokerage account. Dually registered reps must deliver it at the time of recommending a product, or of entering into a contract — whichever happens first.

In addition, advisors will need to deliver a subsequent Form CRS to existing clients when opening a new account for them, rolling over assets from a retirement account, as well as when recommending or providing a new brokerage or investment advisory service, directs the SEC.

If there are material changes to the document, advisors must update it within 30 days and communicate those changes to client within a 60-day period.

Advisors will be required to keep a record of the dates they give clients the form, according to the SEC.

The document is intended to help clients better understand the relationship they have with their advisor. Therefore, “in terms of the presentation and format of Form CRS, [it] will be required to be written in plain English, avoiding the use of legal jargon,” Lamba says.

Form CRS is in a Q&A format and encourages layered disclosure that references other disclosures and hyperlinks to other sources, according to Lamba.

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“The final instructions include a mixture of limited, prescribed wording that firms must include. This is mainly for the heading, the conversation starters, the statement of your legal standard of conduct and to statements relating to fees and costs,” he said.

Conversation starters in the new form have raised the most concern from advisors, according to Lamba.

“Throughout Form CRS, there are going to be these sentences, these questions that are designed to encourage your clients or prospective clients to ask your reps questions,” he said on the webcast. “Obviously this will require policies and procedures.”

Questions found in Form CRS include: As a financial professional, do you have any disciplinary history? For what type of conduct? Who can I talk to if I have concerns about how this person is treating me?

While reps will not be required to proactively address the questions in the form, “obviously we'll need to be prepared to answer them — another compliance burden that was created here,” Lamba said.

Form CRS requires advisors to disclose conflicts of interest in one of two ways: by summarizing one of the four conflicts provided in the SEC rule, which includes disclosing proprietary products and revenue sharing arrangements, or, if none of the conflicts apply, summarizing at least one other conflict of interest, according to the SEC.

“You'll have to think about your material conflicts again and how you want to present them in your form,” Lamba said, encouraging firms to hyperlink to more detailed disclosures.

One advisor asked on the webcast whether a firm could report they had no conflicts of interest.

Gail Bernstein, general counsel of IAA, who also spoke on the webcast, recommended firms rethink what constitutes a conflict of interest.

“Just because you have mitigated a conflict, does not mean that a conflict does not exist,” Bernstein said.

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