On April 18, 2018, the SEC proposed rules that would require investment advisers and broker-dealers to provide retail investors a short customer or client relationship summary on Form CRS. Form CRS is intended to address confusion among retail investors about the nature of their relationships with investment professionals by providing them with simple, easy-to-understand information about the relationship that would supplement more detailed disclosures required of investment advisers in Form ADV and of broker-dealers by proposed Regulation Best Interest.13

The SEC also proposed new rules under the Investment Advisers Act of 1940 (Advisers Act) and the Securities Exchange Act of 1934 (Exchange Act) to reduce investor confusion in the retail marketplace for financial services by restricting the use of term “adviser” or “advisor” by broker-dealers and their associated persons and requiring investment advisers and broker-dealers to disclose certain information about their registration status in communications with retail investors.

Form CRS

Required Information 

As proposed, Form CRS would be a standardized form limited to four pages on which investment advisers and broker-dealers would disclose the following in a mixture of tabular and narrative forms:

  • introductory information describing the types of services and accounts offered to retail investors;
  • information about the relationships between the firm and retail investors and the advisory/brokerage services offered to such investors;
  • a description of the standard of conduct applicable to the services the firm provides to retail investors;
  • a summary of the fees and costs that retail investors will pay for advisory/brokerage services;
  • comparisons of brokerage and investment advisory services, applicable to stand-alone broker-dealers and investment advisers;
  • a summary of conflicts of interest;
  • where to find additional information about legal or disciplinary events, services, fees and conflicts of interest, as well as whom to contact about complaints; and
  • key questions for retail investors to ask the firm’s financial professionals.

Form CRS would be required by a new Part 3 to Form ADV and Rule 204-5 under the Advisers Act for investment advisers and by Form CRS and Rule 17a-14 under the Exchange Act for broker-dealers.

Delivery and Public Disclosure Requirements

Investment advisers would include their Forms CRS in a new Part 3 to Forms ADV; broker-dealers would be required to file Forms CRS with the SEC on EDGAR. Dual registrants would be required to do both.

Investment advisers and broker-dealers would deliver Form CRS to retail investors at or before the beginning of a client relationship and when there is a material change in the nature or scope of the client relationship. Firms would also be required to deliver Form CRS to existing retail clients within a specified period after the effective date of the proposal.

Under the proposal, investment advisers would be required to make an initial delivery of the Form CRS to a new retail investor at or before the time the firm enters into an investment advisory agreement with the investor, and broker-dealers would be required to make an initial delivery at or before the time a retail investor first engages the firm’s services. Initial delivery for dual registrants would be required at or before the earlier of the two deadlines.

One-time delivery to existing retail clients would be required within 30 days of the date the firm is first required to include a Form CRS in its Form ADV, in the case of an investment adviser, or within 30 days of the date the firm is first required to file a Form CRS with the SEC on EDGAR, in the case of a broker-dealer. In addition, firms would be required to deliver a Form CRS to existing retail clients at or before the time:

  • a new account is opened that is different from the investor’s existing account(s); or 
  • changes are made to the retail investor’s existing account(s) that would materially change the nature and scope of the firm’s relationship with the investor.

Firms would also be required to post their Forms CRS to their websites, if they have one, and to communicate any changes to retail clients without charge within 30 days after updates are required to be made. Firms would be required to update their Forms CRS whenever any information in the form becomes materially inaccurate.

Exchange Act and Advisers Act Amendments

In conjunction with Form CRS, the SEC also proposed (1) a new rule under the Exchange Act that would restrict broker-dealers and associated natural persons of broker-dealers from using the term “adviser” or “advisor” in specified circumstances when communicating with retail investors, and (2) new rules under the Exchange Act and the Advisers Act that would require investment advisers, broker-dealers and their associated natural persons and supervised persons, respectively, to disclose, in communications with retail investors, their registration status with the SEC and the relationship of any associated natural person or supervised person, as applicable, with the firm.

The public comment period will be open until August 7, 2018.

The proposing release for Form CRS and the other proposals described above, Exchange Act Release No. 83063, is available at: https://www.sec.gov/rules/proposed/2018/34-83063.pdf