SEC Office of Compliance Inspections and Examinations Issues Form CRS Risk Alert

The U.S. Securities and Exchange Commission's (SEC) Office of Compliance Inspections and Examinations issued an Examinations that Focus on Compliance with Form CRS Risk Alert on April 7, 2020. The SEC alert provides broker-dealers and investment advisors information about the expected scope and content of the SEC's upcoming examinations for compliance with Form CRS.

Form CRS was adopted on June 5, 2019, with the aim of enhancing the quality and transparency of retail investors' relationships with broker-dealers and investment advisers. Broker-dealers and investment advisors should fully understand the information provided in the SEC's recently issued risk alert so that they can best prepare themselves for the upcoming examinations, which will likely begin this year.

(See Holland & Knight's related alert, "SEC Office of Compliance Inspections and Examinations Issues Regulation Best Interest Risk Alert," May 7, 2020.)

The Risk Alert for Examinations that Focus on Compliance with Form CRS

On June 5, 2019, the SEC adopted Rule 17a-14, otherwise known as Form CRS,¹ which has a compliance date of June 30, 2020. Form CRS requires broker-dealers to

(1) "Prepare [a] Form CRS"

(2) "File your current Form CRS electronically with the Commission"

(3) "Amend your Form CRS as required by the instructions in the form"

(4) "Deliver to each retail investor your current Form CRS before or at the earliest of"

(A) "[Making] a recommendation of an account type, a securities transaction; or an investment strategy involving securities;"

(B) "Placing an order for the retail investor; or"

(C) "[O]pening of a brokerage account for the retail investor";

(5) "Deliver to each retail investor who is an existing customer your current Form CRS before or at the time you:"

(A) "Open a new account that is different from the retail investor's existing account(s)";

(B) "Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or"

(C) "Recommend or provide a new brokerage service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account";

(6) "Post the current Form CRS prominently on your public website"

(7) "Communicate any changes made to Form CRS to each retail investor who is an existing customer within 60 days after the amendments are required to be made and without charge," and

(8) "Deliver a current Form CRS to each retail investor within 30 days upon request"²

The Focus of Initial Form CRS Examinations

The SEC's Form CRS examinations, which will likely begin in the latter half of 2020, will focus on the following five areas of compliance:

• Delivery and Filing
• Content
• Formatting
• Updates
• Recordkeeping³

Delivery and Filing: To assess compliance with Form CRS' delivery and filing obligation, SEC staff may:

"(1) review whether the firm has filed its relationship summary, including any amendments, with the Commission and whether the relationship summary is posted on the firm's public website, if any;

(2) evaluate the process for delivering the relationship summary to existing and new retail investors; and

(3) review policies and procedures to assess whether they address the required relationship summary delivery processes and dates."⁴

Content: To asses compliance with Form CRS' content obligation, SEC staff may "review a firm's relationship summary to assess whether it

(1) includes all required information; and

(2) contains true and accurate information and does not omit any material facts necessary in order to make the required disclosures, in light of the circumstances under which they were made, not misleading."⁵

Formatting: To asses compliance with Form CRS' formatting obligation, SEC staff may "review a firm's relationship summary to assess whether it is formatted in accordance with the instructions."⁶

Updates: To asses compliance with Form CRS' updates obligation, SEC staff may "review a firm's policies and procedures for updating the relationship summary to:

(1) assess how and whether a firm updates and files its relationship summary within 30 days after any information becomes materially inaccurate;

(2) assess how and whether a firm communicates these changes to retail investors within 60 days after the updates are required to be made; and

(3) assess the firm's process for highlighting to retail investors the most recent changes and including an exhibit highlighting or summarizing material changes with any filed updates."⁷

Recordkeeping: To asses compliance with Form CRS' recordkeeping obligation, SEC staff may "review the firm's records related to delivery of the relationship summary, and the policies and procedures regarding record-making and recordkeeping, to assess how the firm complies with applicable delivery and recordkeeping obligations."⁸

How Holland & Knight Can Help

The SEC's upcoming Form CRS examinations, which will likely begin in 2020, will involve a detailed assessment of broker-dealers' compliance with the recently adopted SEC regulation. If you have questions about how to prepare for these examinations or how to navigate them once they begin, Holland & Knight's Global Compliance and Investigations Team, White Collar Defense and Investigations Team and Financial Services Regulatory Team can assist. The teams are comprised of individuals with extensive experience advising broker-dealers and investment advisors and handling regulatory investigations initiated by the SEC, Financial Industry Regulatory Authority (FINRA) and other federal regulatory agencies. Please contact the authors with any questions.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

Notes

¹ 17 C.F.R. § 240.17a-14

² 17 C.F.R. § 240.17a-14(a)-(c)

³ SEC Risk Alert, Examinations that Focus on Compliance with Form CRS (April 7, 2020) at 2-3

⁴ Id. at 2

⁵ Id. at 2-3

⁶ Id. at 3

⁷ Id. at 3

⁸ Id. at 3