Securities and Exchange Commission examiners are finding that broker-dealers and registered investment advisor firms are leaving their disciplinary histories off the agency's new customer relationship summary (CRS) forms.
The lynchpin of the agency’s Regulation Best Interest, the new disclosure is supposed to allow retail investors to more easily compare different firms’ services, fees, and other important information, including whether or not a firm or its financial professionals have a reportable disciplinary history. But firms are leaving the disciplinary history blank in the first wave of filings, SEC Chairman Jay Clayton said yesterday in a statement.
Staff and the SEC committees looking at Reg BI implementation have “observed examples of relationship summaries where firms did not provide a response in the disciplinary history section,” Clayton said in a joint statement with SEC Director of Investment Management Dalia Blass and Division of Trading and Markets Director Brett Redfearn.
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.
For the first time, Form CRS allows retail investors to view at a glance whether or not a firm or its financial professionals have a reportable disciplinary history, so leaving off the required information will be a red flag for SEC examiners.
“This provides important information to retail investors before they enter into a relationship by alerting them when there is disciplinary history they may want to research, review, or discuss with their particular firm or financial professional,” 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,” Clayton added.
Under the instructions for Form CRS, a firm must include in its relationship summary a yes or no answer to the question, ‘Do you or your financial professionals have legal or disciplinary history?’ depending upon whether the firm or any of its financial professionals has a triggering event.
Firms are not authorized to add “descriptive or other qualitative or quantitative language. Adding such language might, intentionally or unintentionally, obfuscate or otherwise minimize the disciplinary history,” Clayton said.
The SEC is, however, encouraging advisors and firms themselves to provide the relevant disciplinary history directly to retail investors, in addition to Form CRS.
Firms must direct the retail investor to visit Investor.gov/CRS for a free and simple search tool to research the firm and its financial professionals. Additionally, a firm must include a conversation starter that will allow a retail investor to assess his or her financial professional’s disciplinary history and engage in further discussion about those events or any events applicable to the firm, regulators said.
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.