On Oct. 8, the SEC released a Joint Statement Regarding New FAQs for Form CRS,which focused on the disciplinary history section of the Client RelationshipSummary (Form CRS), which becameeffective earlier this year. I sat downwith my colleague, Ryan Walter, to discuss the Joint Statement.
Ryan advised that the firms that needto pay special attention to the new guidance are those which have tried to provide extraneous or explanatory detailsof their own or their representatives’disciplinary history.
Under the Instructions for Form
CRS, a firm must include 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. The
Joint Statement made clear that “firms
may not add descriptive or other quali-
tative or quantitative language.”
On the same day as the Joint
Statement was issued, the SEC amend-
ed its Frequently Asked Questions on
Form CRS by adding four new questions
and answers.
The first two FAQs made clear that:1) firms may not omit the disciplinaryhistory section, even if they and theirrepresentatives have no disciplinaryinformation to report; and 2) the specific language of the disciplinary historysection heading (“Do you or your financial professionals have legal or disciplinary history?”) may not be altered.
The remaining two FAQs concern the
requirement regarding the above head-
ing pertaining to a firm or representa-
tive’s disciplinary history, and to provide
a corresponding “yes” or “no” response.
A number of firms were frustrated by
this “yes” or “no” limitation, because it
provides no real insight as to the details
surrounding the underlying event. This
called into question whether the answer
is of any real value for a retail investor,
and tends to disadvantage a larger firm.
For example, a firm employing 50 representatives, with no firm-level disciplinary history, could still be requiredto answer “yes” if a written client complaint was made against a single representative — regardless of the merits orultimate outcome of the complaint. Thisis because client complaints alleging certain misdeeds are reportable on the FormU4 at Item 14.I. 3, based on the terms ofthe complaint itself, with no consideration for the complaint’s validity.
For firms that have tried to combat
this limitation by providing explanatory
details regarding their disciplinary his-
tory in the Form CRS, it may be time to
re-think this approach. The FAQ states
clearly this is not permissible:
In the staff’s view, it would not be
appropriate to add descriptive or
other qualitative or quantitative lan-
guage. Adding such language might
... obfuscate or otherwise minimize the
disciplinary history. Accordingly, based
on your facts, in the staff’s view, it would
not be appropriate to respond, for exam-
ple, “No for our firm. Yes for only one of
our 50 financial professionals.”
Instead, the most leeway granted to
firms is to draw a distinction between dis-
ciplinary disclosures concerning the firm
and those concerning its representatives:
The staff would not object if a rela-
tionship summary includes a sepa-
rate “yes” or “no” response for the
firm (including relevant affiliates)
and the firm’s financial profession-
als. Accordingly … the staff would not
object if the firm included the follow-
ing concise response “No for our firm.
Yes for our financial professionals.” or
“Firm — no.” “Financial profession-
als — yes.”
Similarly, in circumstances where
the firm (or relevant affiliates) has
disciplinary history but none of the
financial professionals does, the staff
would not object if a relationship sum-
mary includes the following concise
response: “Yes for our firm. No for our
financial professionals.” or “Firm —
yes.” “Financial professionals — no.”
As if to leave no room for doubt, the
staff concluded the new FAQs with the
following (in pertinent part):
Q: If we answer “Yes” in Item 4, may
we include additional information in
our relationship summary to explain the
disciplinary history?
A: No.
Thomas D. Giachetti is chairman of theInvestment Management and SecuritiesPractice Group of Stark & Stark. He can bereached at tgiachetti@stark-stark.com.
THE COMPLIANCE COACH
By Thomas D. Giachetti
Heed the New Guidance on Form CRS
Requesting brevity, the SEC explains how firms must answer questions in
its Joint Statement.
MarkVanScyoc/Shutterstock;r.classen/Shutterstock
