New FAQs for Regulation Best Interest and Form CRS provide guidance on how to handle accredited investors, what is a “recommendation”, how to define “retail investor”, and how to address affiliate services. RIAs and BDs must apply Regulation BI and send Form CRS to accredited investors because the definition of retail investor does not exclude high-net worth natural persons and accredited investors, according to the SEC’s Trading and Markets staff. A retail client does not include a legal representative (e.g. RIA, BD) of a retail client but would include non-professional legal representatives (e.g. trustees, executors, attorneys-in-fact). The FAQs also address several affiliate relationships, generally allowing the use of a single Form CRS so long as you can fit all the required disclosure in 4 pages. Certain investor education – general information about retirement planning, minimum distributions – would not be considered a recommendation. An RIA that provides services solely to another RIA would not have to deliver a Form CRS to its client’s retail clients.
Because the Form CRS is new and the “best interest” standard has no common law history (like the fiduciary standard), the SEC has its work cut out to define what’s required. Compli-pros must keep watch for future FAQs as the staff has already published three sets of FAQs since November.
The staffs of two SEC divisions published Form CRS FAQs that apprised advisers and broker-dealers that they can only use one Form CRS even if the firm offers multiple products and services. The newly adopted Customer Relationship Summary or Form CRS will require RIAs and BDs to provide retail customers with a description of the relationship including fees, services, standard of conduct, and firm information. The FAQs declare that a firm cannot deliver a separate CRS for each service but must prepare a comprehensive Form including all services. However, a dual registrant can prepare a separate Form CRS for its advisory and broker-dealer services. The FAQs also clarify that private fund sponsors need not deliver a Form CRS to retail investors in the funds. Also notable is that delivery of the Form CRS can be included with other document delivery so long as the Form CRS is “the first among any documents delivered…at that time” or are “presented prominently in the electronic medium.” The Divisions of Investment Management and Trading and Markets jointly issued the FAQs.
Time to start drafting. Call your lawyers and compli-pros to craft the Form CRS before the experts fill up their dance cards. After all, there are approximately 13,000 registered investment advisers and over 3,000 broker-dealers out there, most of whom have to prepare a Form CRS.
Last month, the SEC adopted Regulation Best Interest for broker-dealers making recommendations to retail clients and adopted the new Form CRS requiring advisers and broker-dealers to provide standardized disclosure to retail customers. Companion releases included an interpretation of an adviser’s fiduciary responsibilities as well as the contours of the “solely incidental” exception to adviser registration for broker-dealers. The CCS team has spent the last few weeks reviewing the new regulatory information and offer the following summaries. Please feel free to contact Jay Haas, Mark DeAngelis, Suzette Hagan or Larry Clay directly if you want to ask any deeper questions.
Regulation Best Interest: The CCS Summary by Jay Haas
Form CRS: The CCS Summary by Mark DeAngelis
Fiduciary Interpretation: The CCS Summary by Suzette Hagan
“Solely Incidental”: The CCS Summary by Larry Clay