Form CRS “Fiduciary” Guidance Received by IAA in June 2019 Still Valid

Form CRS “Fiduciary” Guidance Received by IAA in June 2019 Still Valid

Since the compliance date of Form CRS over four months ago, the SEC has reviewed forms filed by registered investment advisers and broker-dealers to determine whether firms have made a good faith effort to comply with the rule requirements. Last week during the Commission’s Regulation Best Interest and Form CRS Roundtable, the SEC and FINRA noted observations and issues on the required Form CRS content and format requirements.

While discussing the standard of conduct disclosure requirement, a panelist from the Division of Investment Management noted that some registered investment advisers had referred to themselves as fiduciaries or stated that they were held to a fiduciary standard of care.  The panelist indicated that such language “is neither required nor permitted and should not be included on Form CRS.”

This statement seemed possibly to conflict with guidance the Commission provided to the Investment Advisers Association in June 2019 that registered investment advisers are permitted to use the word “fiduciary” in disclosures on the Form CRS to further elaborate on the duties owed to their clients, for example, when discussing their conflicts of interest.

Fear not. We spoke with Sanjay Lamba at the Investment Adviser Association and he told us that based on his discussions with the SEC staff, it is permissible for firms to use the word “fiduciary” in Form CRS provided that it is not used to change the prescribed standard of conduct language.  This is consistent with the clarification he had previously received from the SEC staff in June 2019.

The panelist’s point was investment advisers cannot amend the required text in the standards of conduct section of Form CRS (Item 3.B.(i)). The standard of conduct required text states (emphasis required): “When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours.”

Form CRS instructions state that additional information not required by the form cannot be included in the form [General Instructions 1.B.].  Except when it can. Per the June 2019 guidance, the SEC allows advisers to provide additional information stating they are fiduciaries as supplemental disclosure to the required content. Also, in the Form CRS FAQs from October 8, 2020, firms may provide two responses in the disciplinary section, a response with respect to a firm’s disciplinary history and a separate response with respect to a firm’s financial professionals (Yes, No & No, Yes), which were not options stated in the instructions. SEC Form CRS FAQ from June 26, 2020 also states:  “In limited circumstances, you may omit or modify a required disclosure or conversation starter where: (i) it is inapplicable to your business; or (ii) the specific wording required by the Instructions is inaccurate.”

Based on the overall volume and character of mistakes in Form CRS that the SEC described in the Roundtable discussion, the instructions may have been more difficult to implement than some believed.