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The Reg BI requirement you really need to worry about

There’s a lot of chatter about what’s right — and what’s wrong — with Regulation Best Interest. But what firms really need to focus on now is the new Form CRS requirement.

This is the first new significant regulatory filing requirement to affect RIA firms in more than 10 years. Most RIAs will need to devote significant time and resources to ensure they craft the proper, plain-English language specific to their firm.

The Form CRS, short for customer relationship summary, will soon become an RIA’s primary prospect and client-facing disclosure document. Beginning in May 2020, and no later than the end of June 2020, independent firms registered with the SEC that provide services to retail investors will need to electronically file their initial Form CRS with the Investment Adviser Registration Depository website.

Firms are also required to deliver their Form CRS to all new and prospective retail investors beginning on June 30, 2020. RIAs have an additional 30 days to deliver a copy to existing clients. Firms must keep a record of current and past Form CRS documents along with a record of the dates the documents were provided to prospective and current clients.

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An estimated 7,600 SEC-registered independent firms will be affected by the requirement. Currently, the over 17,600 state-registered RIA firms are not included in this new regulation. But they will likely feel its effects soon. States may pass their own Form CRS requirements.

This will be the first standardized disclosure used by both broker-dealers and investment advisers. While no new regulation or disclosure document is without flaws, the Form CRS may help provide better education and transparency to retail investors. Numerous studies reveal that the average investor is ill equipped to differentiate between a broker-dealer and investment adviser.

The new, finalized Form CRS is a somewhat prescriptive two-page document with five mandated sections: 1) introduction, 2) relationship and services, 3) fees, costs, conflicts and standard of conduct, 4) disciplinary history and 5) additional information. In general, the final version of the Form CRS highlights the SEC’s preference to apply what’s known as layered disclosure, which leans heavily on the increased use of hyperlinks and other cross-references for a more detailed disclosure. For most firms, item 3 will be the most significant and challenging section.

RIAs need to remember that Form CRS is not a marketing document, but a regulatory disclosure document for which “responses must be factual and provide balanced descriptions to help retail investors evaluate your services.” The SEC allows firms to customize their forms with charts, graphs, tables and other graphics.

Perhaps the greatest challenge will be fitting in all the required topics in a two-page document. Firms will need to artfully juggle the proper level of content disclosed directly in the Form CRS with references to other key disclosure documents such as the Form ADV Part 2A. Firms will need to ensure that Form CRS disclosures related to types of fees and services offered align with the Form ADV Part 1A. So before a firm drafts its initial Form CRS, it should take a step back to review its existing regulatory disclosure documents.

Given all the work involved in designing a concise yet effective Form CRS, RIA firms affected by this new regulatory requirement should begin preparing immediately. June 2020 is less than a year away.

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