How far will the diverse universe of “advisors” and financial services providers go to mitigate investor confusion as they develop the customer relationship summaries that will be mandated by June 20, 2020?
Firms are required to prepare and deliver the summaries (Form CRS) as part of the advice and conduct package of the “Regulation Best Interest” rules the SEC approved June 5. The new disclosure document is supposed to clear up investor confusion about the services, costs, fees and legal duties they are owed by different types of financial professionals.
“It is clear that retail investors are confused about the differences between brokers and investment advisors,” SEC Chairman Jay Clayton admitted to the 34 investors who showed up at the agency’s investor roundtable in Boston on July 8.
Still, Clayton maintained that the new disclosure form “is a substantial improvement over existing retail disclosures, which are often lengthy, framed in legal terminology and dispersed among many documents. ... No existing retail disclosure provides this level of transparency and comparability across SEC-registered investment advisors, broker-dealers and dual registrants."
The effectiveness of the two-page form (dually registered advisors will have four pages) will be up to firms initially, but the SEC will get the final say, Holly H. Smith, a partner who specializes in securities law at the international law firm of Eversheds Sutherland, said during an industry webcast.
“Firms will want to move quickly and begin implementation so that questions can come to the surface and be communicated and addressed by the SEC well in advance of the transition period,” said Smith, a former SEC attorney.
Form CRS includes a transition period until June 30, 2020, to give what the SEC believes to be sufficient time to come into compliance. The agency is also establishing an inter-divisional Standards of Conduct Implementation Committee to encourage firms to “actively engage” with the agency as questions arise, Smith said.
As for the CRS form itself, it must have “succinct disclosures” in the introduction that tell investors that brokerage and investment advisory services and fees differ, and that it is important for an investor to understand the differences between the two, Smith said.
Firms must also describe the relationships and services they offer to retail investors, including a discussion of whether the firm provides monitoring services, its potential investment authority, any limitations on investment offerings, account minimums and other requirements, she added.
Under the heading “What fees will I pay?” a firm must provide detailed descriptions about the fees and costs that retail investors will pay. The fees section should also explain “any conflicts of interest, and the applicable standard of conduct, including sections discussing principal fees and costs, fees and costs related to the firm’s services and investments, and other ways the firm and its affiliates make money,” Hunter said.