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You may have recently received a new disclosure form, as mandated by federal securities regulators, from your financial advisor.
Or, maybe not. And from where some experts stand, that may not be a bad thing.
While a broad swath of the nation’s broker-dealers and registered investment advisors — known as RIAs — are required to provide clients with a disclosure document called Form CRS (for “client relationship summary”), there are also many RIAs who don’t have to.
The reason? They are not registered with the Securities and Exchange Commission, but rather with state regulators — who, for the most part, have decided not to follow the lead from their federal counterparts. Form CRS was adopted by the SEC in mid-2019 alongside Regulation Best Interest, which is intended to raise standards of conduct among registered representatives — aka stock brokers — at broker-dealers.
Typically, “state regulators do try to align with the SEC in its rulemaking,” said Andrea Seidt, who chairs the Regulation Best Interest implementation committee for the North American Securities Administrators Association.
“It is more unusual that we aren’t doing it here,” said Seidt, who also is Ohio’s securities commissioner. “But we have good reason to pause.”
The form, which may be two to four pages long, is intended to provide transparency about aspects of the advisor’s firm, including fees, conflicts of interest, business structure and whether anyone at the firm has a disciplinary history.
Generally speaking, RIAs with under $100 million in assets under management register at the state level; RIAs with managed assets above that amount must register with the SEC (although there are some exceptions to that delineation). Roughly 17,500 investment advisors are registered at the state level, compared with about 11,000 at the federal level, according to NASAA.
In essence, this non-adoption by most state regulators creates a potential difference in the information received among investors. (It’s worth noting, however, that a state-registered investment advisor may also be a registered representative of a broker-dealer, which, as mentioned, would be required to provide Form CRS to clients).
Yet the big question to critics is whether the form is useful.
The original proposal from the SEC would have required it to include language stating the difference between an RIA and a broker-dealer, Seidt said. That is, an explanation that the broker relationship is transactional — the duty to the client ends when the transaction ends — and that the RIA has an ongoing fiduciary duty to clients.
“The SEC abandoned that in the final rule, and that doesn’t help ameliorate investor confusion,” Seidt said.
Additionally, she said, the form hasn’t been validated by consumers or broadly tested to prove its regulatory worth. The association also would prefer to see disclosure forms streamlined, as some of the disclosures are likely to be found elsewhere in Form ADV, which RIAs generally must file and make available to clients. (The CRS requirement is also being called Part 3 of Form ADV.)
However, even if an RIA has a state registration, there is certain oversight by the SEC.
“State-registered RIAs are still subject to anti-fraud provisions of federal securities laws,” said Jim Lundy, who focuses on securities law and is a partner with law firm Drinker Biddle.
That means those smaller RIAs still must adhere to the fiduciary duty imposed by anti-fraud provisions in federal law.
“They may not have the same prescriptive requirements as Form CRS, but they have similar disclosure requirements pursuant to their fiduciary duty,” Lundy said.
Meanwhile, not all firms required to provide the form are necessarily doing so in a way that satisfies federal regulators.
Shortly after the June 30 compliance date for Form CRS, the SEC noted in a public statement in July that it had performed an initial review of forms being sent out. Staff noted that while they saw efforts to meet the requirements — and saw some good examples — they also “have identified examples that may lack certain disclosures or could be clearer or otherwise improved.”
The SEC is scheduled to hold a roundtable on Oct. 26 at which staff and the Financial Industry Regulatory Authority — which oversees the nation’s broker-dealers and their 625,000 registered representatives — will discuss initial observations on Regulation Best Interest and Form CRS implementation.
Investor advocates also are unimpressed with the form.
“In our opinion, the CRS is more likely to mislead investors than to inform them,” said Barbara Roper, director of investor protection for the Consumer Federation of America.
“Importantly, it obscures rather than clarifies important differences in the standard of conduct that applies,” she said.
Basically, the language provided by broker dealers and RIAs regarding their standard of conduct are strikingly similar, rather than highlighting the difference between being a fiduciary and being a broker.
Roper said, however, that if testing were to show that the forms provide useful information to investors, she would rethink her position. “But the very limited testing that’s been done to date suggests that’s not the case,” she said.
She also said that if a version of the form were developed that does a better job of disclosing key information in a way that’s not misleading, “then we would hope that the states would go along,” Roper said.