The Securities and Exchange Commission (SEC) has released updated frequently asked questions guidance on the customer relationship summary, or Form CRS, that narrows in on a very specific area of disclosure – your firm’s disciplinary history.
This comes on the heals of a recent Wall Street Journal article, which found that at least 1,300 brokerage and financial advisory firms incorrectly stated on the new document that neither they nor their financial professionals had legal or disciplinary histories.
While there are many different aspects of the Form CRS, the section of particular interest to the SEC is the part that allows retail investors—for the first time—to view at a glance whether or not a firm or its financial professionals have a reportable disciplinary history. According to the SEC, “this provides important information to retail investors before they enter into a relationship by alerting them when there is disciplinary history they may want to research, review, or discuss with their particular firm or financial professional.”
Under the instructions for Form CRS, a firm must:
1.) include in its relationship summary the heading: “Do you or your financial professionals have legal or disciplinary history?” and answer “yes” or “no” depending upon whether the firm or any of its financial professionals has a triggering event.
2.) direct the retail investor to visit Investor.gov/CRS for a free and simple search tool to research the firm and its financial professionals.
3.) include a conversation starter that will allow a retail investor to assess his or her financial professional’s disciplinary history and engage in further discussion about those events or any events applicable to the firm.
4.) report disciplinary history in its relationship summary if that history already must 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. 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.
Additionally, the SEC adds 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.”
To read the complete Form CRS FAQ, click here.