As you work to complete your Form ADV, completing the Regulation Best Interest (Reg BI) Form CRS should also be on your list of things to do. In this week’s episode of Oyster Stew, Bob Tuch and Polly Cordle discuss what’s required and how Oyster Solutions is helping our clients make the task of completing Form CRS easier.
Oyster has assisted a number of broker-dealers and registered investment advisors with understanding their obligations under Reg BI and Form CRS. Additional guidance from regulators is expected. If you if haven’t started or are having challenges figuring out the best approach to achieving compliance at your firm, Oyster has several resources available to help you succeed.
Oyster provides free resources such as podcasts and blogs, as well a team of consultants and software to help you organize and automate your compliance program. Oyster Consulting has the knowledge and experience to support your efforts to achieve compliance. To receive assistance with the implementation of your Reg BI compliance program, or assistance in understand the impact of these rules, please give us a call at (804) 965-5400 and a Relationship Managers will be glad to connect you with an Oyster expert.
Welcome to this week’s serving of Oyster Stew, a mix of financial services, commentary and insight . Each week we’ll discuss what is happening in the industry based on what we see as we work with regulators and clients. We hope you come away with the knowledge and tools to help you make the best decisions for your firm’s future. You can learn more about Oyster Consulting and the value we can add to your firm by going to our website, www.oysterllc.com.
Polly Cordle: 0:34
Okay, welcome to another episode of Oyster Stew. I am P olly Cordle, the Managing Director of the Oyster Solutions platform. Today I am joined by Bob Tuch, one of our Senior Consultants. Hello Bob. How are you doing?
Bob Tuch: 0:50
I’m doing well, thank you.
Polly Cordle: 0:53
So today we are talking about the Form CRS, which is part of the Regulation Best Interest, or Reg BI, from the Securities Exchange Commission. So Bob, maybe you could explain to us the purpose of the Form CRS.
Bob Tuch: 1:08
Sure. Later this year, the SEC will require registered investment advisors and registered broker-dealers to provide a brief relationship summary to retail investors. The relationship summary is intended to inform retail investors about the types of client and customer relationships and services the firm offers. It will also cover fees, costs, conflicts of interest, and the required standard of conduct associated with those relationships and services. Retail investors will receive a relationship summary at the beginning of a relationship with the firm, communications of updated information following a material change in the relationship summary, and an updated relationship summary upon the occurrence of certain events . The relationship summary is part of an approach that requires layered disclosure. This means the provision of brief, concise descriptions of the topics that I just previously mentioned, and inter- relationship summary coupled with additional information about those topics, and a more comprehensive detailed disclosure document.
Polly Cordle: 2:33
So the relationship summary would be kind of a summary of a bigger document that also comes to the retail investor.
Bob Tuch: 2:43
That is correct.
Polly Cordle: 2:45
So what’s required to be covered in the Form CRS?
Bob Tuch: 2:50
The instructions in Form CRS require firms to present information under standardized headings, and to respond to all the required topics in a prescribed order. Thee instructions also provide for page limits to promote brevity, specifically for dual registrants – that is, firms that are registered to provide brokerage services and investment advisory services. They can include information about both types of services in a single relationship summary, which cannot exceed the four pages. For stand alone broker dealers and stand alone investment advisors, t,he relationship summary cannot exceed two pages. These pages limit references to a paper format or the equivalent if delivered electronically. The SEC staff has stated that it supports the use of layered disclosure and believes that investors will benefit from receiving a relationship summary containing high level information that they would be more likely to read and understand with the ability to access more detailed information. Another requirement in the relationship summary instructions is the use of conversation starters. They are in the form of questions in each section, other than the introduction, and are suggested follow-up questions for retail investors to ask when they’re with their financial professional . With all of this in mind, I’d like to briefly cover each of the specific item instructions in Formed CRS.
Sure. Bob, why don’t you walk us through some of those instructions? So you said the headings are in the form of questions?
Bob Tuch: 4:47
Yes. Before I do that, however, I want to go back to who must receive a relationship summary. I mentioned earlier that retail investors will receive a relationship summary at certain times. The SEC defines the term retail investor as a natural person or the legal representative of such natural person who seeks to receive, or received, services primarily for personal family or household purposes. Keep in mind here that broker-dealers and investment advisors with customers or clients who meet this definition will need to make plans to ensure that each of these retail investors will receive a relationship summary at appropriate times, regardless of whether a recommendation is made. Okay – on to the specific item instructions. Item one is entitled “Introduction.” It requires identifying information, including if the firm is a broker-dealer, a registered investment advisor or both. It also requires some boilerplate language designed to inform the reader that services and fees differ depending upon the capacity in which the firm is operating. There’s also a boilerplate language that refers to a location that provides educational materials. Item two is entitled “Relationships and Services.” It calls for a heading and a description of services. The heading is ,”What investment services and advice can you provide me?” The description calls for a high level explanation of the principles , services, accounts, and investments that are provided. Firms must specifically address the following: Broker-dealers must address the p rincipal brokerage services that are offered and must state whether recommendations are made. Investment advisors must address the principal investment advisory services that are offered. Each firm must explain whether investments are monitored along with some details, if they are. Investment advisors must include a discussion of discretionary authority. Each firm must describe limitations on investments that are offered and must address requirements pertaining to opening and maintaining accounts, such as a minimum investment amount or a minimum account size. Also, each firm must provide a cross reference to the more detailed information that is disclosed pursuant to the Reg B I disclosure obligation. And last but not least, there are five conversation starters. Item three is “Entitled Fees, Costs, Conflicts and Standard of Conduct.” It calls for a heading and a description of principal fees and costs. “The heading is what fees will I pay?” Each firm must summarize the principal fees and costs, and address how frequently they’re assessed, and the conflicts of interest they create. Broker-dealers must describe their transaction based fees, and investment advisors must describe their ongoing asset based fees. Examples are given regarding how certain conflicts of interest could be described. Each firm must describe additional fees and costs related to its services, and provide examples of common fees and costs that would apply. In addition, the following must be included: “You will pay fees and costs. Whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying,” in addition to some additional conversation starters that must be included in this section. Item three requires firms to include a heading in the form of a question that addresses their legal obligations to investors, how else they make money and conflicts of interest that they have. Underneath that heading, broker-dealers that provide recommendations subject to Reg BI must include prescribed language that describes the Reg BI Best Interest Standard and makes reference to conflicts with investors’ interests. Examples of those conflicts must be provided. Similar language and examples must be used by investment advisors. Specific references to more detailed information about conflicts of interest must be provided. Next in item three is another heading in the form of a question: “How do your financial professionals make money?” Firms must summarize how their financial professionals are compensated and the conflicts of interests that this compensation creates. Certain specifics regarding how compensation is structured must be addressed as well. Moving on to item four, which is entitled “Disciplinary History.” This item calls for the following heading: “Do you or your financial professionals have legal or disciplinary history?” Firms must provide a “yes” answer if legal or disciplinary history must be disclosed in certain forms, including Form ADV, Form BD and Form U-4. In addition, firms must direct retail investors to a search tool that can be used to research this, and they must include a conversation starter that prompts readers to inquire about this. Item five is entitled, “Additional Information,” and it requires contact information for investors to use to seek additional information. It also requires inclusion of a following conversation starter: “Who is my primary contact person? Is he or she a representative of an investment advisor or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me.”
So it seems like there’s a lot of required language in there which could fill up two pages pretty quickly. So if you’ve got conflicts, they’d have to be pretty succinctly defined and refer you to that more detailed document.
Bob Tuch: 11:38
That’s absolutely right.
Two pages doesn’t sound like a lot to work with if you’re an investment advisor who has affiliates, so it’s probably a good idea to get started on this form pretty quickly so you can start to figure out how to concisely describe this and fit in all those conversation starters and all that required language.
Bob Tuch: 11:58
And of course, Oyster is ready, willing and able to help with that.
We are always ready, willing and able to help. So , I think we’ve talked about required delivery. Is there anything else you want to tell us about when it needs to be required? I think you said it could be delivered electronically. Is that correct?
Bob Tuch: 12:16
Sure. Let me go ahead and go over the Form CRS instructions that address filing and delivery requirements for the relationship summary. The initial filing must be done electronically using the investment advisor registration depository, or IARD, for investment advisors and the central registration depository, or web CRD, for broker-dealers. Dual registrants must file using both the IARD and the web CRD when filing. Firms are required to use a text searchable format with machine readable headings. For currently registered firms, the initial relationship summary will need to be filed between May 1st and June 30th of this year. Now, let’s talk about initial delivery. Investment advisors must deliver a relationship summary to each retail investor before or at the time they enter into an investment advisory contract with a retail investor. Broker-dealers must deliver a relationship summary to each retail investor before or at the earliest of: 1) a recommendation of an account type, a securities transaction or an investment strategy involving securities; 2) the placing of an order for the retail investor; or 3) the opening of a brokerage account for the retail investor. These initial delivery times kick in for new and prospective clients and customers as of the date firms are first required to file t his summary with the SEC. They kick in for existing clients and customers within 30 days after the date firms are required to file. Again, keep in mind that it is retail investors who must receive the relationship summary. There are additional instructions that address updating the relationship summary, the filing of amendments and additional delivery requirements. These filing and delivery requirements can be found in Section 7 of the Form CRS general instructions.
Polly Cordle: 14:41
So Bob , that first filing, when is that due?
Bob Tuch: 14:43
Folks need to keep in mind the following time period, May 1st, 2020 through June 30th. So that’s basically the window for filing. The staff doesn’t want to be dealing with filings before that. As the Oyster practice lead for our software program known as Oyster Solutions, you can help folks understand how Oyster Solutions can be a valuable tool for preparing and delivering r elationship summaries. I thought I’d give you a few moments to talk about that.
Polly Cordle: 15:21
Sure. So in Solutions, what we did is we kind of took all of that guidance that you just gave and we built it out in a survey for clients and let them answer questions that would then create a document for them, and that would at least give them a draft document to build off of. So for our clients , where we are offering compliance support or outsource compliance officer positions, we can go through and answer basic questions for them, and then that will at least build them a draft Form CRS based on all of that guidance. As you know, in reading the instructions you have some required language based on whether you’re a broker-dealer or an advisor, and whether you’re a duly-registered firm. And then you also have some requirements in the language that you use. So it has to be very plain English. You have to use words like “our, we, our firm ,” and “you” in reference to the client. So we made sure that we built all of that kind of guidance in the conversation starters were required to be called out in some sort of fashion. And so we built that into our template for our clients. And that way they’re kind of locked into fitting the instructions that the SEC provided without having to put quite as much effort into reading the instructions. We still recommend, of course, that they read those instructions, and we still recommend that they read all of the guidance that the SEC has provided, but it gives them a much easier way to at least formulate that first draft. And we try to do that in a lot of the forms that we build in Solutions. And that way the system does a lot of the work for them. So that’s one of the things we’re trying to do with the software to make sure the system does as much of the work for our clients as it can.
Bob Tuch: 17:20
And I’ll just mention , back to the topic of conversation starters, firms need to be careful in terms of how they present those questions, so that it’s clear to the reader that these are questions that are being suggested for retail investors to consider asking their financial professional, as opposed to questions that need to be answered on the Form. The way you built the software that you just described is designed to make that really clear and avoid that potential confusion.
Polly Cordle: 18:04
Yeah, we tried to spell it out right at the beginning that we’ve got these conversation starters within the form that are really meant for you as the client to engage us and get to know us. So yeah, we try to make it very clear and we recommend that our clients do the same as they’re building out their Form CRS. There’s a lot that’s required in those instructions, and so it can be a bit daunting when you print off those pages of instructions and start to read them. But as you plow through it, I think it’s a very helpful document that’s provided for the firms. But I definitely think it means getting involved sooner rather than later in that process, so that daunting task doesn’t feel quite so daunting if you can get ahead of it.
Bob Tuch: 18:53
And of course it’ll give folks an important head start on what they’re going to have to do when it comes time to develop the full-blown disclosure document that they’ll have to use to comply with the Reg BI disclosure obligation.
Polly Cordle: 19:10
Sure. Our advisory firms have their brochure documents that they’re used to writing, and so they’ve kind of built that out in the past. But the broker-dealers are not used to having a more extensive disclosure document. So this will be new for them. As you said, Oyster is definitely here to help. We have quite a few clients that this Reg applies to, so we’re definitely in the weeds on the Reg and we’re happy to provide guidance wherever we can for our clients.
This has been another episode of Oyster Stew. We hope everybody has gotten something out of it and we welcome you to subscribing to the podcast. We try to make sure that the topics that we cover are pertinent to the industry and helpful to clients and others out there in the industry. If there’s a topic you’d like to hear about, please feel free to reach out. You can find out more about Oyster at www.oysterllc.com. Or, you can contact us directly at (804) 965-5400. Thanks everybody. We look forward to talking to you next week.