In light of the significance of Regulation Best Interest (Reg BI) for the financial services industry, Drinker Biddle & Reath’s Best Interest Compliance Team is publishing a series of articles on the Securities and Exchange Commission’s (SEC’s) finalized “Reg BI Package” of rules and guidance. The first of these articles summarized the Final Package in “The Final Reg BI Package: What to Know and What’s Next.” This article, the second in the series, addresses Form CRS, one of the guidance documents in the Reg BI Final Package.

The TARDIS, Dr. Who’s “Time and Relative Dimension in Space” time machine/spacecraft, bigger on the inside than it is on the outside, epitomizes the new disclosure requirements accompanying the financial services industry’s new Regulation Best Interest standard of care. On June 5, 2019, the SEC approved the Regulation Best Interest Final Package. One of the four parts of that package is Form CRS − a mandate that broker-dealers and investment advisers with retail investors (natural persons, trusts or entities representing natural persons) provide those investors with a two-page relationship summary disclosing information about their firm before a new client enters an investment advisers’ agreement or engages the services of a broker-dealer, or in the case of an existing client when there is any material change in the nature and scope of the relationship.

This disclosure must be concise, direct and made in plain language, taking into consideration the level of financial experience of retail investors. The specifics of the disclosures made to the retail investor are proscribed by CSR Form 17-page Instructions, including what must be disclosed and their length, order, and even in some circumstance their wording. For instance, dual registrants must provide a side-by-side comparison of the services provided in advisory accounts versus services provided in brokerage accounts and must inform the prospective retail investors that:

There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.

Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].

Even when specific wording is not mandated, the tone of the disclosure is proscribed. Firms are advised to:

(i) use short sentences; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless you clearly explain them or you believe that reasonable retail investors will understand them; and (v) avoid multiple negatives. You must write the relationship summary as if you are speaking to the retail investor, using “you,” “us,” “our firm,” etc.

As to the specifics of the Form CRS required disclosures, it would be impossible to summarize the lengthy requirements in this Alert much less address them in detail. Instead, suffice it to say there are eight items mandated for coverage:

Item 1: Introduction
Item 2: Relationships and Services
Item 3: Standard of Conduct
Item 4: Summary of Fees and Costs
Item 5: Comparisons to be provided by standalone investment advisers and standalone broker-dealers
Item 6. Conflicts of Interest
Item 7. Additional Information.
Item 8. Key Questions to Ask.

Each item has a subset list of itemized disclosure requirements. In addition, as part of Item 8, the SEC offers conversation starters, at least some of which must be included in the disclosures. There are 10 listed questions that the SEC requires be placed in a larger or different font to distinguish them from the other information provided in the disclosures. The Instructions direct that the questions that do not apply to a particular firm should not be used and additional questions that are frequently asked of a particular firm may be included provided the list of questions does not exceed 14 questions.

The conversation-starter questions listed are:

1. Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account?

2. Do the math for me. How much would I pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees?

3. What additional costs should I expect in connection with my account?

4. Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments?

5. What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account.

6. How will you choose investments to recommend for my account?

7. How often will you monitor my account’s performance and offer investment advice?

8. Do you or your firm have a disciplinary history? For what type of conduct?

9. What is your relevant experience, including your licenses, education and other qualifications? Please explain what the abbreviations in your licenses are and what they mean.

10. Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a broker-dealer? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to?

To cover the full list of the 8 items and their subsets requires 12 pages notwithstanding the fact that firms are permitted only 2 pages in which to make their disclosures, unless they are dual registrants, in which case they are given 4 pages in which to make their disclosures. If the Form CRS is presented electronically it may include hyperlinks to information described in the firm’s disclosures; therefore, it is actually larger on the inside than it is on the outside. However, even with this allowance, the itemized disclosures that must appear in the body of Form CRS do appear to require some TARDIS-type multidimensional magic to accomplish the disclosures required.

As you would expect, the “information in [the] relationship summary must be true and may not omit any material facts necessary to make the disclosures required.” Therefore, pursuant to the Instructions if statements in the Instructions are inapplicable to the firm’s business or would be misleading to a reasonable retail investor, those statements may be omitted or modified. In addition, the disclosures must be updated within 30 days if the disclosures become materially inaccurate.

The content of the disclosures must be filed on Form CRS through IARD by investment advisers and through EDGAR by broker-dealers. Firms also should note that Form CRS’s disclosure requirements are in addition to, not instead of, firms’ disclosure and reporting obligations under federal and state law and self-regulatory organizations’ rules and procedures.

FINRA reminds its Members of their obligation to meet the Form CRS delivery obligations and provides them with SEC Staff names and telephone numbers for assistance.