SEC Adopts Rule Intended to Protect Retail Investors

By Shawn Wilborne

On June 5 2019, the U.S. Securities and Exchange Commission (SEC) adopted a package of rules and interpretations relating to its Regulation Best Interest, including the Form CRS Relationship Summary (Form CRS). Form CRS is designed to increase transparency and decrease confusion surrounding investment relationships. Form CRS requires broker-dealers and registered investment advisors to provide retail investors with clarity and understanding. For example, firms are required to provide the nature and scope of services offered, the type of fees the investor will incur, any conflicts of interest, and the firm’s disciplinary history.

In the interest of simplicity, the Form CRS has a two-page limit. Dual registrants — firms operating as both a broker-dealer and an investment adviser — are permitted to combine the forms, but it must not exceed four pages. The format of the form is question-and-answer to promote standardization and to allow the SEC to easily compare filings. Initially, the Form CRS filings will be under close review by SEC staff “to help ensure that the relationship summary fulfills its intended purpose.”

Indeed, clarity and transparency are key elements that the SEC wants to preserve for retail investors. The SEC defined retail investor as any “natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family, or household purposes.” This definition includes potential and existing customers. In addition, the retail investor definition applies to natural persons regardless of assets or net worth. In pertinent part, the SEC found that “all individual investors would benefit from clear and succinct disclosures regarding key aspects of available brokerage and advisory relationships.”

Individuals participating in 401(k) and other employment retirement plans are also included in the Form CRS requirements. However, the SEC noted that participants making ordinary plan elections and not selecting a firm or brokerage or advisory service, fall outside the definition of retail investor and the Form CRS delivery obligations.

Moreover, brokerage firms and registered investment advisors must include on their websites an introductory paragraph with a link to the SEC’s investor education website. The SEC and its staff will also develop additional education content to increase the information available to investors.

The deadline for firms to file initial Form CRS’s is June 30, 2020.