Q&A: Client Relationship Summary (Form CRS)

Q&A: Client Relationship Summary (Form CRS)

Last week, Joot published an article on Regulation Best Interest and Form CRS(Customer or Client Relationship Summary). We heard from many of our readers about the article and we’re glad it was helpful. Some of you had great questions about the application of Form CRS and the definition of a “retail investor”. Below are our responses to your questions. Keep ‘em coming!

Definition of Retail Investors

  • Retail investor is defined by Form CRS as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.”

Form CRS only applies to firms that have retail investors. The SEC notes in footnote 55 of the rule release that “[f]irms that do not have any retail investors to whom they must deliver a relationship summary are not required to prepare or file [a Form CRS].” But there are a couple of points to note about the definition of retail investor. First, notice that the definition is not an asset-based definition, which means it applies to both high-net-worth (HNW) clients and non-HNW clients. In fact, the SEC specifically rejected an asset-based definition.

Second, the definition includes a natural person's legal representative. That means the definition can apply to the following scenarios:

  • Natural persons seeking services for both personal and commercial or business purposes, such as a business owner that is seeking personal services along with services for his or her business.
  • Trusts that are designed to provide for the personal well-being of natural persons (e.g., estate trusts or education trusts) and are managed by a non-professional legal representative (e.g. family members, friends, etc.).
  • Natural persons seeking advice for their retirement accounts (e.g., plan participants), including employees seeking advice on whether to take a distribution from a retirement account. But note the exceptions below for ordinary plan elections.

Retail investors do not include the following.

  • Natural persons seeking services for commercial or business purposes, such as employees or business owners that seek services for a small business.
  • Trusts that are designed to provide for the personal well-being of natural persons (e.g., estate trusts or education trusts) but are managed by a professional (e.g., bank trust entities, lawyers, etc.).
  • Employees that are making ordinary plan elections that do not involve selecting or retaining a firm to provide brokerage or advisory services (e.g., where employers or the plan sponsor has designated the terms of the plan).
  • Most workplace retirement plans or their representatives

Dual Registrants

Additionally, the Form CRS Relationship Summary rule states that dual registrants that have both broker-dealer and investment adviser retail customers have the freedom to decide if they want to create a separate Form CRS for their broker-dealer and investment adviser relationships, or have a combined Form CRS that covers both relationships. But the staff did notte that it “encourages dual registrants to prepare a single disclosure, designed in a manner that facilitates comparison between their brokerage and advisory services.”

Dual registrants that are state registered advisers would not need to create a Form CRS for that side of the business. In fact, such firms are excluded from the definition of a “dual registration”, which requires that the firm be registered as a broker-dealer under section 15 of the Exchange Act and as an investment adviser under section 203 of the Advisers Act.

Similarly, a dual registration that has retail investors on the broker-dealer side of its business but not on the investment adviser side of the business would not need to create a Form CRS for the investment advisory side. For example, a dual registrant that has retail broker-dealer clients but only advises institutional clients on the advisory side would only need to provide a Form CRS to the broker-dealer retail clients.

For my private fund clients, I assume they don’t need it.

Dually Licensed Financial Professionals

Under General Instruction 11.b to Form CRS, a “dually licensed financial professional” is “[a] natural person who is both an associated person of a broker or dealer registered under section 15 of the Exchange Act...and a supervised person of an investment adviser registered under section 203 of the Advisers Act….”

The dual registrant status gets trickier for individual representatives. A representative may be licensed with an SEC-registered investment adviser that has retail clients and also be registered with an affiliated or unaffiliated broker-dealer to provide brokerage services to retail clients through the other entity. The representative would need to provide each firm’s Form CRS if he or she was offering both brokerage and advisory services to the retail investor.

Private Fund Advisers

Private fund advisers that are either exempt from registration under section 203 of the Advisers Act or are registered with the SEC do not have the prepare a Form CRS. Of course, by private fund advisers, we imply that the adviser has no retail investors and only manages the assets of unregistered investment companies.

Registered Fund Advisers

Investment advisers that only manage an open-end fund or closed-end funds do not need to prepare Form CRS, even if those funds are designed for retail investors. Investment advisers that are directing their retail clients to these registered investment companies would need to provide their retail clients with Form CRS, but the fund manager is not considered an investment adviser to the underlying investor.

Sub-Advisers to Separate Managed Accounts (SMAs)

Similarly, an investment adviser to an SMA that provides no services to the underlying investor would not be required to create a Form CRS. Often times, the sub-adviser has no knowledge or contact with the underlying investor. But, the adviser to the SMA would need to provide its Form CRS to the underlying investor.