Form CRS Best Practices

From the Desk of the SEC

Onramp Academy

DECEMBER 30, 2021

Summary

On December 17th, the SEC’s Standards of Conduct Implementation Committee published a statement on Form CRS, identifying key areas for improvement. What is the Form CRS and what should advisers be paying attention to? Let's dive in.

In June of 2019, the SEC made an extension to the Form ADV; a customer/client relationship summary called Form CRS (or ADV Part 3) is now legally required by all SEC-registered investment advisers and broker-dealers. Annual completion of Part 3 by June 30th ensures that all interested parties are given an overview of the adviser’s biz model, such as:

  • Relationships and services
  • Fee structure
  • Billing
  • Monitoring of accounts
  • Potential conflicts of interest
  • Standards of conduct
  • Disciplinary history

Completing ADV Part 3 may seem tedious, but it affords advisers the opportunity to differentiate themselves from peers & prompt open conversations about their practice. When filled out properly, the information provided in a Form CRS helps retail investors make informed choices regarding the type of relationship best suited to their unique circumstances, preferences, and investment goals. The form should be delivered to clients and prospects.

As evidenced by the SEC’s statement, it’s clear that what most advisers do today in regard to their Form CRS is insufficient. The Standards of Conduct Implementation Committee, Division of Examinations, and FINRA all examined firms to assess compliance with Form CRS requirements. So, what areas for improvement did the SEC note specifically? We highlight the key areas below.

Language used within the document

Use of technical language such as confusing jargon, misleading marketing language that uses superlatives rather than factual information, and vague boilerplate descriptions rather than tailored disclosures are all specifically noted in the report.

Omissions

What isn't said is often more important than what is. Omission of the required information and lack of specific references to more detailed information prevents investors from easily comparing firms’ relationship summaries and getting what they need when deciding among advisers.

NOTE: Advisers may only omit or modify required disclosures in limited circumstances where:

  •  The disclosure isn’t applicable to the firm’s business
  • Specific wording required by the form’s instructions would be inaccurate with respect to the firm’s business

Modification or Supplementation of Disciplinary History Disclosure

Answers regarding disciplinary history should be kept to yes or no, and link to Investor.gov/CRS. Added language could misconstrue disciplinary history (if any). This section may NOT be omitted.

Reliance on proposed (rather than final) instructions, issues with prominently displaying relationship summary on the firm website, issues with descriptions of affiliate relationships, and poor design that makes information hard for investors to read were other commonly cited issues.

Where the rubber really meets the road in this statement is in regard to shortcomings in descriptions of relationships and services; fees, costs, conflicts, and standard of conduct. This is arguably the most important part of the form for providing transparency to investors.

Relationship disclosures may not include any added disclosures that aren’t explicitly required, and cannot omit material facts. The Committee commonly observed omission of necessary information related to required disclosures, or the addition of extraneous disclosures.

Disclosures for advisers to take note of:

  • Monitoring
  • Investment Authority
  • Limited Investment Offerings
  • Principal Fees and Costs
  • Wrap Fee Program Offerings and Fees
  • Extraneous Disclosures Regarding Standards of Conduct
  • Firm and Financial Professional Compensation Arrangements and Conflicts

Monitoring Disclosures

Does the RIA monitor retail investments and, if so, have they imposed any limitations? How frequently does the firm evaluate investments? All of these questions must be answered, and the Committee found that many firms failed to do so.

Investment Authority Disclosures

If you're an adviser that takes discretionary control over retail investor assets, you must describe the services that you offer and limitations on the aforementioned discretion in detail. Non-discretionary services must also be specified.

Limited Investment Offerings Disclosures

Do you only offer or provide financial advice on specific financial products? If so, expressly state your limitations.

Principal Fees and Costs Disclosures

All fees incurred by clients, the billing frequency of all fees, and how those fees are attributed MUST be laid out explicitly in easily comprehensible terms.

Wrap Fee Program Offerings and Fees Disclosures

Service details of any program offered by the adviser & all related fees must be highlighted. Advisers are encouraged to take the time to educate investors by explaining how asset-based fees work specifically within a wrap-fee program.

Extraneous Disclosures Regarding Standards of Conduct Disclosures

Firms must use the prescribed language, including the term “best interest,” to describe their applicable standard of conduct. Many firms have been found to swap out the term best interest for others, such as fiduciary.

Compensation Arrangements and Conflicts of Interest Disclosures

Firms must summarize advisor compensation and disclose potential conflicts related to compensation practices. Use simple language to help investors understand how conflicts can impact motivations. Focus on conflicts, not how the firm addresses conflicts.

To summarize the above, advisers should follow the explicit guidance provided by the SEC and fill out their Form CRS accordingly. No confusing language or workarounds, and no information that is not asked for. The information listed above should serve as a helpful guide.

Proper completion of Form CRS becomes even more important when it comes to cryptoassets, as outlined in our Form CRS primer in Onramp Academy. Why? Niche offerings require explicit transparency to clients and regulators.

The SEC doesn’t formally classify cryptoassets as securities, but their February 2021 Risk Alert on cryptoassets encourages advisers to make updates in 5 key areas:

  • Portfolio management
  • Books and records
  • Custody
  • Disclosures
  • Pricing client portfolios

We highly encourage advisers to take seriously their commitment to providing investors with transparency by filling out their Form CRS in accordance with the SEC’s guidance & feedback. If you’re considering integrating crypto into your practice, make it known. Be proactive.

Onramp Academy is committed to providing advisers with the information needed to give best in class advice to clients. Updates from regulatory bodies are a critical component of that, and we plan to keep our community abreast of all relevant changes. In the meantime, we encourage you to follow along by kickstarting your crypto journey with Onramp Academy. Because education never goes into a bear market.

Happy New Year!

With gratitude,

Your Onramp Family

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