Marking the first significant enforcement action since implementation of Regulation Best Interest (Reg BI) last year, the Securities and Exchange Commission (SEC) on Monday levied penalties totaling $910,092 across settlements with 21 investment advisers and six broker-dealers for failing to timely file and deliver their client or customer relationship summaries (Form CRS) to retail investors.
Reg BI requires broker-dealers “to act in the best interest of a retail customer” when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. It’s designed to enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that broker-dealers may not put their financial interests ahead of the interests of a retail customer when making recommendations.
In June 2019, the SEC adopted Form CRS—filed in conjunction with Reg BI—requiring registered investment advisers and broker-dealers to deliver to retail investors a brief relationship summary that provides information about the firm. Form CRS was expected to be delivered to prospective and new retail investors by June 30, 2020, and to existing retail investor clients by July 30, 2020. Firms must also post their Form CRS on their Website.
According to the SEC’s orders, each of the firms charged Monday missed those regulatory deadlines.
“The orders find that none of the firms filed or delivered [their] Form CRS, or posted it to [their] website, until being twice reminded of the missed deadlines by their regulators—in the case of investment advisers, by the SEC’s Division of Examinations, and in the case of broker-dealers, by the Financial Industry Regulatory Authority,” the SEC stated.
“Form CRS is intended to provide retail investors with a brief summary about the services a firm offers, its fees, conflicts of interest, and other information that can help investors make more informed choices,” said Adam Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a press release. “By failing to file, deliver, and post this form, these firms deprived their clients and customers of the benefits of that information.”
Without admitting or denying the findings, the firms agreed to be censured, to cease and desist from violating the charged provisions, and to pay civil penalties ranging in amount from $10,000 on the low end to $97,523 on the high end.
In its “2021 Examination Priorities” report, the SEC noted it has “identified and notified hundreds of firms that they had failed to timely file a Form CRS.”
The agency observed firms are using a “wide variety of approaches” to comply with the Form CRS requirements. “Many firms appeared to make effective use of hyperlinks in their digital Form CRSs,” the SEC stated. “We also observed that many firms are generally avoiding legalese and generic boilerplate language, but we also noted the readability of some Form CRSs could still be improved.”
Chief compliance officers and firms seeking additional guidance should review the SEC’s two related risk alerts issued in April 2020—“Examinations that Focus on Compliance with Regulation Best Interest” and “Examinations that Focus on Compliance with Form CRS”—that identify key areas of SEC scrutiny. Additionally, agency staff in December 2020 issued a statement identifying components of Reg BI that it said “may be the subject of focus in the next phase of examinations, including how firms have considered costs in making a recommendation and the processes firm personnel have used to recommend complex products.”