The Securities and Exchange Commission on Friday told brokerages and investment advisory firms they need to more clearly disclose their fees and explain their conflicts of interest while using less jargon on a document known as Form CRS.
The SEC approved Form CRS — client relationship summary — as part of the rulemaking package whose centerpiece was Regulation Best Interest, the broker standard of conduct that went into force in June 2020.
The disclosure document, which is supposed to outline a firm’s services, fees, conflicts of interest, disciplinary history and other information, must be filed with the SEC and made available to retail investors on a firm’s website. The two-page form for brokerage and advisory firms — or four-pages for dually registered advisers — is meant to help investors compare firms to decide where to do business.
But in reviewing a cross-section of Form CRS filings, the SEC’s Standard of Conduct Implementation Committee found problems firms are having meeting the content and format requirements of the document.
“Some relationship summaries included only vague fee descriptions and/or did not appear to sufficiently address the frequency with which those fees are assessed and billed,” the committee said in a statement posted on the SEC website. “For example, some firms stated that they charge an ‘advisory fee’ but did not describe how such a fee is assessed (e.g., whether the fee is based on the amount of client assets) and billed (e.g., quarterly or annually) to the client. Other relationship summaries summarized fees, but did not address the associated conflicts of interest or incentives.”
The committee found similar shortcomings in disclosures of conflicts of interest.
Some “relationship summaries the committee reviewed did not explain the incentives created by a particular conflict of interest or used vague phrasing to suggest the firm ‘may’ have a particular conflict without also explaining when the conflict could exist,” the committee said. “In some relationship summaries, rather than focusing on the conflicts, the disclosure explained how the firm addresses or mitigates its conflicts.”
It contrasted that approach with firms that provided “concrete examples to help investors understand the incentives associated with proprietary products, third party payments, revenue sharing, and principal trading. For example, some of the helpful conflicts disclosures that we observed concretely explained incentives associated with cash sweep programs and order flow or order routing payments.”
Another problem is that some firms did not clearly explain that they offer a limited menu of investment products.
“Some relationship summaries did not expressly state whether the firm has any product limitations, while others acknowledged limitations but did not describe such limitations, as required,” the committee said.
An additional shortcoming was that some documents were not written in plain English so that investors with limited financial experience could understand them.
“[F]irms must avoid legal jargon and highly technical business terms unless they are clearly explained,” the committee said. “For example, some firms referenced terms such as ‘riskless principal,’ ‘in arrears,’ ‘markups’ and ‘markdowns,’ or cited specific SEC rules without providing clear explanations.”
The committee also emphasized that Form CRS must be easily accessible for retail investors on a firm’s website and provided pointers on how some firms could improve its design and readability.
The committee’s statement is a follow-up to an October 2020 roundtable about Reg BI compliance. The SEC Division of Examinations and Finra are continuing to examine firms to assess compliance with the Form CRS requirements, the agency said.
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.