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Form CRS: The Devil is in the Details

Form CRS: The Devil is in the Details

Last week we had an introduction to the Form CRS (the ADV Part 3) which is proposed in a recent SEC IA release. The purpose of this form is to simplify disclosures, so clients can easily understand the important information in order to make a sound decision with their finances. Under the SEC proposal, advisers will be required to deliver a relationship summary to their clients. This week we are going to dive into the details of this form.

First off, the SEC wants this to be an easy read for your clients. This form will need to be written in a plain language. Lucky for us they provide a definition. According to the SEC, “plain language” means:

  • Use of an active voice;

  • Use of short sentences;

  • Use of concrete, definitive words;

  • Avoidance of multiple negatives; and

  • Avoidance of highly technical or legal jargon.

Also, it cannot be larger than 4 standard pages with a minimum 11-point font size. The disclosures will need to adhere to the instructions for the Form CRS. This means it will need to be straight to the point with no deviation from the form’s requirements. On the other hand, it will be imperative that you don’t omit or misrepresent any material items. Please be careful about this! As former regulators, we’ve seen several firms cited simply because they made an honest mistake in understanding what is considered to be material. As with your other ADV filings, you will be required to file an amendment and notify your clients within 30 days of any material changes .

When should you give this to your client? Once this proposal goes into effect, the form should be delivered either before or at the signing of the Advisory contract. If the agreement is verbal, you will be required to have this on hand to provide to the client. Now, if you are dually registered, this will be required to be provided at the initiation of services, either on the advisory side or the broker/dealer side. You will be able to deliver the Form CRS electronically or in paper form. Regardless, if it is included with other paperwork and not as a standalone document, it will need to be at the top of the stack. If your firm has multiple documents for the client to fill out, establishing an organization system as part of your procedures will make your life much easier.

Now the interesting thing about the ADV Part 3 is that it will not only be required for investment advisers; it will also be required for broker/dealers and dually registered offices. investment advisers will need to file this on IARD and broker/dealers on the EDGAR system.

Next week, we’ll get into the specific items on the form and what they mean.

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