Securities and Exchange Commission Chairman Jay Clayton told industry executives at the Securities Industry Financial Market Association annual conference yesterday he is troubled by instances where firms and advisors have failed to disclose their disciplinary histories to investors in the new Form CRS (client relationship summary).
“We have seen some outliers that bother me,” Clayton said. “One thing in particular is around disclosure of disciplinary history. If you have a disciplinary history the answer is yes [it must be disclosed]. Now you can talk to your customer about it, but your client or your customer should know that you have it,” he said.
Omitting disciplinary histories leave investors in the dark about who they’re hiring. As examiners cross reference Form CRS filings against state and federal regulator databases of enforcements and discipline, they’re finding that firms and advisors have omitted their entire history of disciplinary run-ins and findings. “We have these databases. We built it out,” Clayton said.
Leaving the truth about disciplinary events off investor disclosures troubles Clayton, he said, because a firm’s or advisor’s disciplinary track record “is one of the single most reliable indicia of future problems. I’m not saying that everybody who had a disciplinary history is going to have a future problem but customers should know. We’re going to have a roundtable on this. I think it’s a key part of Form CRS and it applies to both broker-dealers and investment advisors, he added.
The SEC first announced they were seeing disciplinary omissions in a joint statement on Oct. 8. “Firms do not have discretion to leave the answer blank or to omit reportable disciplinary history from the relationship summary,” Clayton, Division of Investment Management Director Dalia Blass and Division of Trading and Markets Director Brett Redfearn, said in a joint statement.
They directed firms to review their reportable disciplinary history and that of their financial professionals to ensure that their relationship summaries are “accurate, complete and consistent” with those other forms, the statement advises.
SEC officials emphasize that firms may not add descriptive or other qualitative or quantitative language to their disciplinary histories. “Adding such language might, intentionally or unintentionally, obfuscate or otherwise minimize the disciplinary history,” officials said.
The staff also observed examples where firms’ responses in the disciplinary history section “appear to lack required information or otherwise could be improved,’ Clayton said.
“Firms do not have discretion to leave the answer blank or to omit reportable disciplinary history from the relationship summary. Firms should review their reportable disciplinary history and that of their financial professionals to ensure that their relationship summaries are accurate, complete and consistent with those other forms,” he added.
To help firms and advisors with any lingering questions regarding disciplinary history disclosures, the SEC has posted information on its website.
The SEC also announced it is hosting a virtual roundtable to review issues with firms’ initial relationship summaries on Oct. 26, from 1 p.m. to 3 p.m. ET.
The SEC has been poring over firm’s Regulation Best Interest and Form CRS filings since the new regulation went live June 30.
Clayton said that other than disciplinary omissions, the implementation is “going pretty well. We now have a fair amount of what I’d say is harmonization across the customer experience whether you’re in a commission model or a fee-for-service model and we both know that there some products where the commission model is much better for the customer than the annual fee-for-service model including in this low-interest rate environment. I’m very happy that we preserved that customer choice,” he added.