A Small Entity Compliance Guide[1]

Introduction

On June 5, 2019, the Securities and Exchange Commission (the “Commission”) adopted Form CRS and new rules, as well as amendments to its forms and rules, under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Securities Exchange Act of 1934 (“Exchange Act”).[2]

Form CRS and its related rules require SEC-registered investment advisers and SEC-registered broker-dealers (together, “firms”)[3] to deliver to retail investors a brief customer or client relationship summary that provides information about the firm.[4] Firms must file their relationship summaries with the Commission.

The relationship summary is designed to assist retail investors with the process of deciding whether to (i) establish an investment advisory or brokerage relationship, (ii) engage a particular firm or financial professional, or (iii) terminate or switch a relationship or specific service.

Firms must follow certain requirements concerning their relationship summaries including formatting, filing, delivery, updating, and recordkeeping requirements.

If you are required to file and deliver a relationship summary, it is important to be familiar with Form CRS instructions and related rules.

• Form CRS instructions can be found on the Commission’s website at https://www.sec.gov/rules/final/2019/34-86032-appendix-b.pdf.

• The Advisers Act rules and the Exchange Act rules, including the new and amended rules, can be accessed through the Commission’s website at https://www.sec.gov/about/laws/secrulesregs.htm.[5]

Highlights

1. Who must file and deliver a relationship summary?

Every firm that offers services to a retail investor must file a relationship summary with the Commission and deliver it to each retail investor. A retail investor is a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.

2. Are the relationship summary requirements in addition to current disclosure and reporting requirements?

Yes. The relationship summary requirements are in addition to, and not in lieu of, current disclosure and reporting requirements for broker-dealers and investment advisers. Delivery of the relationship summary will not necessarily satisfy the additional requirements that firms have under the federal securities laws and regulations or other laws or regulations.

3. Can dual registrants[6] or affiliates[7] prepare a single relationship summary rather than a separate relationship summary for each entity?

If you are a dual registrant, you are encouraged to prepare a single relationship summary discussing both your brokerage and investment advisory services. Alternatively, you may prepare two separate relationship summaries for brokerage services and investment advisory services.

If you and your affiliate provide brokerage or investment advisory services to retail investors, you may prepare a single relationship summary discussing the services you and your affiliate provide. Alternatively, you may prepare separate relationship summaries for your services and your affiliate’s services.

For additional requirements for dual registrants and affiliates, including design and delivery requirements, please refer to Form CRS General Instruction 5.

4. What topics do I have to include in my relationship summary?

The relationship summary must present information about the firm using standardized headings in a prescribed order with the following items:

• Introduction;
• Relationships and Services;
• Fees, Costs, Conflicts, and Standard of Conduct;
• Disciplinary History; and
• Additional Information.

Firms must generally use their own wording to address the required items, as well as prescribed language in some instances. Firms are prohibited from including disclosures in the relationship summary other than the disclosure that is required or permitted by the instructions and applicable items.

5. Do I have to follow certain formatting requirements?

Yes. Firms must follow certain formatting requirements. Here are a few examples; however, it is important to refer to the instructions for a complete list of requirements.

• Plain English. Firms must write their relationship summaries in plain English, taking into consideration retail investors’ level of financial experience. For practical tips on how to write in plain English, you may wish to consult “A Plain English Handbook,” which is a publication by the Commission’s Office of Investor Education and Advocacy and can be found on the Commission’s website at http://www.sec.gov/news/extra/handbook.htm.

• Page Limits. The relationship summary should be concise and direct. For example, for broker-dealers and investment advisers, the relationship summary must not exceed two pages in paper format, or the equivalent limit if in electronic format. For dual registrants that include their brokerage services and investment advisory services in one relationship summary, it must not exceed four pages.

• Electronic and Graphical Formatting. You are encouraged but not required to use electronic and graphical formatting. For relationship summaries that are posted on your website or otherwise provided electronically, you must follow certain requirements which are outlined in the instructions.

6. Do I have to follow any requirements about how I deliver the relationship summary to a retail investor?

Yes.

If the relationship summary is delivered electronically, it must be presented prominently in the electronic medium, for example, as a direct link or in the body of an email or message, and must be easily accessible for retail investors.

If the relationship summary is delivered in paper format as part of a package of documents, you must ensure that the relationship summary is the first among any documents that are delivered at that time.

7. When is the first time I have to deliver the relationship summary to a retail investor who is a new or prospective client or customer?

Investment advisers must deliver a relationship summary to each retail investor before or at the time the firm enters into an investment advisory contract with the retail investor, even if the agreement is oral.

Broker-dealers must deliver a relationship summary to each retail investor, before or at the earliest of (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor.

Dual registrants must deliver the relationship summary at the earlier of the delivery requirements for the investment adviser or broker-dealer.

8. Do I have ongoing delivery obligations?

Yes.

Firms must deliver the most recent relationship summary to a retail investor who is an existing client or customer before or at the time the firm (i) opens a new account that is different from the retail investor’s existing account(s); (ii) recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommends or provides a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account.

Firms must deliver the relationship summary to a retail investor within 30 days upon the retail investor’s request.

Firms must deliver the relationship summary to all retail investors who are existing clients or customers when a relationship summary is updated. For more information about updating requirements, including guidance on delivering an updated relationship summary, please refer to Question 9 (Do I have to update my relationship summary?) and the Form CRS instructions.

9. Do I have to update my relationship summary?

Firms must update, file amendments to, and re-deliver the relationship summary under certain circumstances.

Firms must update the relationship summary and file it within 30 days whenever any information in the relationship summary becomes materially inaccurate.

Firms must communicate any changes in the updated relationship summary to retail investors who are existing clients or customers within 60 days after the updates are required to be made and without charge. Firms can make the communication by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor.

Form CRS General Instruction 8 sets forth requirements for updating the relationship summary including filing and delivering an exhibit that highlights changes to an updated relationship summary.

10. Do I have to post the relationship summary on a website?

You must post the current version of the relationship summary prominently on your public website, if you have one. The instructions set forth requirements, including design requirements, for a relationship summary that is posted on your website.

11. How do I file my relationship summary with the Commission?

Investment advisers must file their relationship summary as Form ADV Part 3 (Form CRS) electronically through the Investment Adviser Registration Depository (IARD).

Broker-dealers must file their relationship summary as Form CRS electronically through the Central Registration Depository (Web CRD®).

If you are a dual registrant and are required to deliver a relationship summary to one or more retail investor clients or customers of both your investment advisory and brokerage businesses, you must file using IARD and Web CRD®.

All relationship summaries must be filed using text-searchable format with machine-readable headings to facilitate data aggregation and comparison. Firms could minimize costs associated with using text-searchable format and machine-readable headings by filing their relationship summaries as PDF formatted documents using bookmarks for the headings.

12. Do I have to follow any recordkeeping requirements?

Yes. The Commission adopted amendments to current recordkeeping requirements to address the new relationship summary.

Investment Advisers. Amended Advisers Act rule 204-2 requires investment advisers who are registered or required to be registered with the Commission to make and keep true, accurate and current, a copy of each relationship summary and each amendment or revision to the relationship summary. They also must keep a record of the dates that each relationship summary, and each amendment or revision thereto, was given to any client or to any prospective client who subsequently becomes a client. Investment advisers must maintain and preserve these records in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment adviser.^[8]

The recordkeeping rules for the relationship summary mirror the existing recordkeeping requirements for the Form ADV brochure and brochure supplement.^[9] Therefore, investment advisers could leverage existing recordkeeping requirements to implement the new recordkeeping requirements associated with the relationship summary.

Broker-Dealers. Amended Exchange Act rule 17a-3 requires broker-dealers to make and keep current a record of the date that each relationship summary was provided to each retail investor, including any relationship summary that was provided before such retail investor opens an account. Amended Exchange Act rule 17a-4 requires broker-dealers to maintain and preserve, in an easily accessible place, the following records until at least six years after such record or relationship summary is created: (i) all records of the dates that each relationship summary was provided to each retail investor, including any relationship summary that was provided before such retail investor opens an account, as well as (ii) a copy of each relationship summary.

13. When do I have to start complying with the new requirements?

Filings for Investment Advisers.

• If you are already registered or have an application for registration pending with the Commission as an investment adviser before June 30, 2020 you must file your initial relationship summary beginning on May 1, 2020 and by no later than June 30, 2020 either as (i) an other-than-annual amendment or (ii) part of your initial application or annual updating amendment.
• If you file an application for registration with the Commission as an investment adviser on or after June 30, 2020, the Commission will not accept any initial application that does not include a relationship summary.

Filings for Broker-Dealers.

• If you are already registered with the Commission as a broker-dealer before June 30, 2020, you must file your initial relationship summary beginning on May 1, 2020 and by no later than June 30, 2020.
• If you file an application for registration or have an application pending with the Commission as a broker-dealer on or after June 30, 2020, you must file your relationship summary by no later than the date that your registration becomes effective.

Delivery to New and Prospective Clients and Customers. As of the date by which you are first required to electronically file your relationship summary with the Commission, you must begin to deliver your relationship summary to new and prospective clients and customers who are retail investors. For information about initial delivery requirements, please refer to Question 7 (When is the first time I have to deliver the relationship summary to a retail investor who is a new or prospective client or customer?) and the Form CRS instructions.

Delivery to Existing Clients and Customers. Within 30 days after the date by which you are first required to electronically file your relationship summary with the Commission, you must deliver your relationship summary to each of your existing clients and customers who are retail investors.

Other Resources

• The adopting release and related rules can be found on the Commission’s website at https://www.sec.gov/rules/final/2019/34-86032.pdf.
• The proposing release can be found on the Commission’s website at https://www.sec.gov/rules/proposed/2018/34-83063.pdf.
• The amended General Instructions for Form ADV can be found on the Commission’s website at https://www.sec.gov/rules/final/2019/34-86032-appendix-a.pdf.

Contacting Commission Staff

The Commission’s Division of Investment Management and Division of Trading and Markets are happy to assist small entities with questions regarding the Form CRS relationship summary and amendments to Form ADV. You may submit a question by email to IABDQuestions@sec.gov. Additionally, you may contact the Division of Investment Management’s Office of Chief Counsel at (202) 551-6825 or the Division of Trading and Market’s Office of Chief Counsel at (202) 551-5777.