New SEC Enforcement Actions Bring Number of Firms Charged with Form CRS Failures to 42
The SEC's Division of Enforcement continues to focus on registrants' compliance with Form CRS, a byproduct of the agency's rulemakings "designed to enhance the quality and transparency of retail investors' relationships with investment advisers and broker dealers." Recently, the SEC announced 12 new settled actions – against six broker-dealers and six investment advisers – for alleged failures to timely file and deliver Form CRS to customers. This brings the total number of registrants charged with Form CRS failures to 42 since firms were first required to provide such disclosure in June 2020.1
In their Form CRS, registrants with retail investors are required to provide a "plain English"2 summary of, among other things:
- the services they provide and required standard of conduct for providing those services
- their fees and costs
- conflicts of interest
- whether the firm or its representatives have reportable legal or disciplinary matters
- where to gather more information about the firm
In the latest settled Administrative Proceedings, the SEC found that the firms failed to timely provide customers Form CRS by the required 2020 deadline and, in some instances, failed to provide certain required information.3 The agency therefore determined that the six charged investment advisers violated Section 204 of the Investment Advisers Act of 1940 and Advisers Act Rules 204-1 and 204-5, and that the broker-dealers violated Section 17(a)(1) of the Securities Exchange Act of 1934 and Exchange Act Rule 17a-14. None of the firms was required to admit wrongdoing, though each agreed to be censured, cease and desist from further violations as alleged and pay modest civil penalties ranging from $10,000 to $25,000.4
Amid the SEC's announcement of several first-of-their-kind cases in recent months,5 the latest Form CRS actions may not stand out as particularly noteworthy at first glance. Indeed, they match the tone and tenor of prior cases addressing Form CRS compliance, and the overall chorus of messaging from the SEC's Division of Examinations and Financial Industry Regulatory Authority (FINRA), each of which has issued prior guidance on the topic.6 But we believe broker-dealer and investment adviser firms serving retail investors should consider the following takeaways as they reflect on their own disclosures on, and publication and delivery of, Form CRS:
- SEC Enforcement actions involving alleged Form CRS failures are often the result of preceding compliance examinations and information-sharing between the SEC Divisions of Examinations and Enforcement and FINRA
- Some firms serving retail investors, and who are therefore required to prepare and distribute Form CRS, have failed to do so; when it comes to SEC detection and enforcement, "better late than never" is a good approach
- Enforcement continues to encourage self-reporting by firms who have not complied, or who did not timely or adequately comply, with Form CRS requirements; self-reporting may well result in action by the Division of Enforcement, but with the possibility of smaller penalties assessed as a result of a firm's willingness to come forward; such self-reporting assessments – whether, when and how – should be made in consultation with experienced counsel and in the context of the remaining Seaboard factors (self-policing, cooperation and remediation)
- Firms who prepare and distribute Form CRS should continue to carefully review guidance from the SEC and FINRA and monitor their own disclosure practices to ensure inclusion of complete and up-to-date information; Holland & Knight's Securities Enforcement Defense team regularly reviews Form CRS, and other filings, to compare and contrast one registrant's own disclosure over time, or compare various registrants' disclosures to one another, to gauge and assess how comparable and competitor firms approach critical disclosure topics
The SECond Opinions Blog will continue to monitor the Form CRS space and provide further updates. If you need any additional information on this topic – or anything SEC- or internal-investigations-related – please contact the authors or another member of Holland & Knight's Securities Enforcement Defense Team.
3 SEC Charges 12 Additional Financial Firms for Failure to Meet Form CRS Obligations, SEC press release, Feb. 15, 2022..
4 Except for one firm, which agreed to pay a notably larger penalty of $97,523, perhaps due to the period it was out of compliance compared to others.
6 The SEC issued updated guidance in late 2021. Earlier this month, the Self-Regulatory Organization issued the 2022 FINRA Report on Examination and Risk Monitoring Program noting, among other things, deficient Forms CRS that exceeded page limits; changed or omitted required language; inaccurately described disciplinary histories, conflicts, and compensation; and failed to be timely amended and/or delivered. 2022 Report on FINRA's Examination and Risk Monitoring Program | FINRA.org.
CRS that exceeded page limits; changed or omitted required language; inaccurately described disciplinary histories, conflicts, and compensation; and failed to be timely amended and/or delivered. 2022 Report on FINRA's Examination and Risk Monitoring Program | FINRA.org.