In its first major Regulation Best Interest enforcement action, the Securities and Exchange Commission charged 27 firms on Monday for failing to file and deliver customer relationship summaries (Form CRS) to retail investors. The form is supposed to spell out the services a financial professional or broker-dealer provides, how they charge customers, their conflicts of interest and whether they offer fiduciary-level advice.
The firms—some 21 investment advisors and six broker-dealers—have agreed to settle SEC charges that they failed to file and deliver the Form CRS to investors by deadline last year. As part of their settlements, they’ll pay fines ranging from $10,000 to $97,523.
“Registration with the SEC as an investment adviser or broker-dealer comes with mandated filing and disclosure obligations,” SEC Director of the Enforcement Division Gurbir S. Grewal said in a statement. The cases “reinforce the importance of meeting those obligations and providing retail investors with information that is intended to help them understand their relationships with their securities industry professionals.”
The firms charged range from individual advisors such as Lexington, Mass.-based James Stephen Altschuler (who was given a $25,000 penalty) and Boston-based investment advisory firm Minot DeBlois Advisors LLC (which was hit with the highest civil penalty of $97,523) to Tradier Brokerage Inc., a Charlotte, N.C.-based broker-dealer that agreed to pay a $50,000 civil penalty.
Firms were supposed to deliver the form to new or prospective retail investors by June 30 of last year and had until July 30, 2020, to deliver the document to existing clients and customers, the SEC said. Firms were also required to file the form with the SEC and prominently post them on their websites.
The agency said none of the firms filed or delivered the form, or posted the forms on their websites, until being reminded twice about the missed deadlines by their regulators—in the case of investment advisors by the SEC’s Division of Examinations and in the case of broker-dealers by the Financial Industry Regulatory Authority.
“By failing to file, deliver, and post this form, these firms deprived their clients and customers of the benefits of that information,” said Adam S. Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit. “Form CRS is intended to provide retail investors with a brief summary about the services a firm offers, its fees, conflicts of interest, and other information that can help investors make more informed choices.”
Dale Brown, president and CEO of the Financial Services Institute, said the trade group continues to support Reg BI and its enforcement, but will be watching the SEC closely for signs of “regulation by enforcement”—a term the institute coined several years ago to describe regulatory creep and enforcement actions the group does not believe are based on violations of actual rules.
“We’re not in a position to comment on these specific enforcement cases, but our position all along has been that effective implementation of Reg BI … accomplishes what policy makers and those of us in the industry who actively supported it wanted all along, which is enhanced investor protection, enhanced transparency, all of the above that’s included in Reg BI,” Brown said at a press conference at the FSI OneVoice conference in Orlando today.
“An important component of effective implementation is effective SEC examination and enforcement of it. So through that lens I think it’s good that we’re seeing the SEC focusing on those firms that are allegedly blatantly disregarding those not complying with the rule. The rule’s not effective if firms don’t abide by it,” Brown continued.
At the same time, the trade group will be aggressively looking for instances where the SEC’s enforcement exceeds actual rules. “Because of the SEC’s unfortunate track record of using its extensive enforcement powers to change the rules in the middle of the game, we’re going to keep a close eye on it. Because it will not support the effectiveness of Reg BI if they’re rewriting it on the enforcement side of the equation,” Brown added.
David Bellaire, the institute's senior vice president and general counsel, said that Reg BI “has really been a success story with a few outliers who have had some compliance challenges,” but said FSI agrees with SEC commissioners who have said that the rule is working and needs time to play out before evaluating progress.
Robin Traxler, FSI’s senior vice president of policy and deputy general counsel, called the industry-wide implementation of the sweeping rule last year a “significant development,” adding, “If we feel that the SEC is engaging by rulemaking by enforcement, we are prepared to engage quickly on that.”