Investment advisers registered with the Securities and Exchange Commission are scrambling to put together a client relationship summary required by the agency’s investment advice reform rules that go into force at the end of the month.
Advisers registered at the state level don’t have the same deadline bearing down – unless they operate in Oklahoma or Rhode Island.
The so-called Form CRS is part of the regulatory package that also includes Regulation Best Interest, the new advice standard for brokers. The new rules must be implemented by June 30.
In Form CRS, advisers and brokers outline their services, fees, costs, conflicts of interest, the standard of conduct that governs them and disciplinary history. The document, which is two pages for stand-alone advisers and brokers and four pages for dual registrants, also outlines key questions investors should ask before selecting a financial professional.
The Form CRS requirement applies to SEC-registered advisers, who have more than $100 million in assets under management. Advisers with less than $100 million AUM register with their states.
Most state regulators have resisted Form CRS from the beginning of the rulemaking process. In an August 23, 2018, comment letter, the North American Securities Administrators Association outlined their concerns about the disclosure document.
State regulators have criticized the SEC for promulgating Form CRS without conducting appropriate investor testing. They also say it is duplicative of information recorded in the adviser registration document known as Form ADV.
Most states are not imposing a Form CRS requirement on their advisers because of continued worries that it won’t be effective.
“We’re really concerned it’s going to be another boilerplate form that is not going to be useful to investors,” said Andrea Seidt, Ohio securities commissioner. “If that’s the case, we would not require it in our state. It may exacerbate investor confusion. We want to make sure it delivers the value that it promises.”
One of the outliers is Oklahoma. State-registered advisers must attach Form CRS to their Form ADV Part 2 in the Investment Adviser Registration Depository.
“We’re requiring that they file it through IARD so that there is a complete Form ADV on file,” said Melanie Hall, Oklahoma securities administrator.
The state is not mandating delivery of Form CRS to retail clients but is encouraging it as a “best practice,” Hall said. The document will help clients grasp how an adviser operates.
“The Form CRS becomes an important part of that understanding,” Hall said.
A Rhode Island securities official was not available for comment.
Valerie Mirko, a partner at Baker & McKenzie, doesn’t anticipate states will follow in the footsteps of Oklahoma and Rhode Island. The IARD doesn’t give states the ability to file Form CRS as a Form ADV Part 3 the way it does for SEC-registered advisers.
“I don’t expect additional states to move forward on adopting Form CRS,” Mirko said.
State regulators don’t have plans to draft a model rule for a disclosure document to supplement Form ADV, said Christopher Gerold, chief of the New Jersey Bureau of Securities and NASAA president.
Instead, they will monitor how Form CRS works.
“We’re going to look at the data,” Gerold said. “A lot of it is going to be a product of getting a better understanding of the impact of Form CRS.”
In a few weeks, an investor assessing financial professionals would get a Form CRS from an SEC-registered adviser but not from a state-registered adviser.
“I don’t see that it would cause a problem,” Gerold said. “We’re always focused on investor protection. ADV Parts 1 and 2, if done appropriately, are going to give [investors] the information they need to make that decision.”
Mirko agreed Form ADV disclosures can be as effective as Form CRS, depending on the conversation with the investor.
“It really depends on how the state-registered advisers provide [their ADV] information and how they walk the investor through it,” Mirko said.