In the Alert, OCIE gave SEC-registered investment advisers a preview of the areas that may be the focus of initial examinations occurring after the June 30, 2020 compliance date for Form CRS. OCIE advised that initial examinations will assess whether investment advisers have made a good faith effort to comply with Form CRS. Areas that may be examined include the following:
Content of the Relationship Summary. OCIE may review the content of an investment adviser’s relationship summary to ensure (i) it contains the required information, (ii) the information that is included is accurate and not misleading and (iii) there are no misleading omissions. Disclosure regarding account monitoring and other services provided by the investment adviser, the adviser’s investment discretion, conflicts of interest (including incentives relating to the sale of proprietary products, other cash and non-cash compensation arrangements, principal trading and revenue sharing), the disciplinary history of the investment adviser and its staff and fees and costs to be paid by retail investors may be of particular interest to OCIE. Advisory agreements and other documents of investment advisers may be reviewed by OCIE to determine whether the disclosure in the adviser’s relationship summary is consistent with the written agreements and other documents between the adviser and its retail investors.
Required Wording and Formatting. OCIE may review an investment adviser’s relationship summary to determine whether it contains the wording and formatting required by the instructions to Form CRS.
Filing and Delivery. The examination may include a review to determine whether the relationship summary was filed through IARD, posted on the investment adviser’s website (if the adviser has a website) and delivered to its retail investors. OCIE also may review the timeliness of the filing, posting and delivery of the relationship summary.
- Existing Retail Investors. For existing retail investors, the initial relationship summary is required to be provided by July 30, 2020 (30 days after the relationship summary is required to be filed through IARD). In addition, a relationship summary is required to be provided at or before the time (i) a new (and different type of ) account is opened for the retail investor, (ii) the investment adviser recommends a rollover of retirement account assets into a new or existing account or investment or (iii) the investment adviser recommends a new brokerage or investment advisory service or investment that does not necessarily involve opening a new account and would not be held in an existing account (such as the first-time purchase of a mutual fund sold directly to a retail investor where a paper application is processed and the retail investor writes a check in payment of its interest in the fund).
- New Retail Investors. For new retail investors, a relationship summary is required to be delivered by the investment adviser at or before the earliest of (i) entering into an investment advisory contract with the retail investor, (ii) making a recommendation to a retail investor of an account type, securities transaction or investment strategy that involves securities, (iii) placing an order for a retail investor or (iv) opening a brokerage account for a retail investor.
Compliance Policies and Procedures. OCIE may review an investment adviser’s compliance policies and procedures to see whether they adequately address relationship summary delivery obligations and timelines. Examinations of policies and procedures likely will assess whether they include procedures for (i) updating and filing a relationship summary within 30 days after any information in the summary becomes materially inaccurate, (ii) notifying retail investors of material changes to information in the relationship summary within 60 days after updates are required to be made and (iii) highlighting the most recent changes for retail investors, including providing an exhibit or summary of material changes with the update to the relationship summary that is filed through IARD.
Recordkeeping. As is always the case, maintaining evidence of compliance is an essential part of any compliance program. OCIE warned that it may review an investment adviser’s records to substantiate compliance with relationship summary delivery requirements. The staff also may review and assess policies and procedures related to making and keeping records pertaining to compliance with Form CRS requirements.
Considerations. The Alert made clear that, although the SEC and staff continue to monitor the effects of COVID-19, the compliance date for Form CRS has not been extended. For registered investment advisers that have retail investors and have not already done so, the time is now to design and implement their Form CRS compliance programs. Although the format and a portion of the content are prescribed, each investment adviser’s relationship summary should be tailored specifically to its business and describe the business plainly and accurately. Exempt reporting advisers, SEC-registered investment advisers with no retail investors and advisers solely to pooled investment vehicles (including pooled investment vehicles that have investors who are natural persons) are not subject to Form CRS requirements, and, therefore, will not be subject to examination by OCIE for Form CRS compliance.
