SEC Warns Firms About Failure to Include Disciplinary History on Form CRS

A joint statement released Oct. 8 by the Securities and Exchange Commission reminds firms that they must report disciplinary history on its customer relationship summary if that history must also be reported on other forms.

“Firms do not have discretion to leave the answer blank or to omit reportable disciplinary history from the relationship summary,” said the statement by Chairman Jay Clayton; Division of Investment Management Director Dalia Blass; and Division of Trading and Markets Director Brett Redfearn. 

As such, 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, the statement advises.   

The SEC officials further emphasize that when responding to the disciplinary history heading in their relationship summaries, firms may not add descriptive or other qualitative or quantitative language. “Adding such language might, intentionally or unintentionally, obfuscate or otherwise minimize the disciplinary history,” the statement reads. It further adds, however, that firms or their financial professionals may provide the relevant disciplinary history directly to retail investors.

Despite disruptions caused by the COVID-19 pandemic, the SEC announced last spring that it was moving forward with its June 30, 2020, compliance date with Regulation Best Interest and Form CRS. In previously issued risk alerts, the SEC explained that it will be assessing good-faith efforts to comply with Reg BI, as well as the filing of a firm’s Form CRS, including, for example, whether the form includes all required information and is accurate. 

In connection with its review of these filings, the staff Standards of Conduct Implementation Committee has observed examples of relationship summaries where firms did not provide a response in the disciplinary history section. The staff also observed examples where firms’ responses in the disciplinary history section appear to lack required information or otherwise could be improved, the statement further notes.   

New Disciplinary History FAQs

To address issues that the Committee’s review has identified or questions that firms have posed, SEC staff has published additional frequently asked questions (FAQs) in relation to the Form CRS disclosure requirements to include a firm’s disciplinary and legal history. (Note: each FAQ includes the date it was posted, which for this most recent series was Oct. 8.)

The FAQs state, for example, that a firm’s relationship summary may not omit the disciplinary history section in its entirety or omit the disciplinary history with respect to either a firm or its financial professionals, even when there is no such reportable disciplinary history.

The FAQs explain that the required heading—which applies to both a firm (including relevant affiliates) and a firm’s financial professionals—requires a “yes” or “no” response. To facilitate retail investors’ ability to efficiently assess the information provided, the FAQs also advise that a firm may include separate “yes” or “no” responses for the firm (including relevant affiliates) and its financial professionals. 

Additionally, the FAQs state that Form CRS does not preclude firms or their financial professionals from providing separately copies of additional regulatory disclosures directly to a retail investor. The staff notes that these separate disclosures may include, for example, disclosures from BrokerCheck or the Investment Adviser Public Disclosure website for specific financial professionals who service or are expected to service the retail investor.

Specifically, a firm must indicate whether it or its financial professionals currently disclose, or are required to disclose:

  • disciplinary information in Form ADV (Item 11 of Part 1A or Item 9 of Part 2A);
  • legal or disciplinary history in Form BD (Items 11 A-K) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312); or
  • disclosures for any financial professionals in Items 14 A-M on Form U4, or in Items 7A or C-F of Form U5, or on Form U6 (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312).

The SEC announced recently that it will hold a roundtable discussion on Oct. 26 discuss initial observations from staff and FINRA following the June 30, 2020, compliance date for Reg BI and Form CRS. 

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