On October 8, 2020 the SEC published updated FAQs regarding the disciplinary question in Form CRS.\u00a0 In an unusual step, Chair Clayton joined SEC Directors Dalia Blass and Brett Redfearn in releasing a public statement about the FAQs.<\/p>\n
The new FAQs follow the Wall Street Journal\u2019s September 3, 2020 article titled \u201cFinancial Firms Fail to Own Up to Advisers\u2019 Past Misdeeds.\u201d The WSJ reported that \u201c[a]t least 1300 brokerage and financial advisory firms incorrectly stated on the new document that neither they nor their financial professionals had legal or disciplinary histories.\u201d Of the 6200 firms reviewed by the WSJ, 1800 other firms reported disciplinary history by answering \u201cyes\u201d, that the firm or its financial professionals have at least one reportable disciplinary event.<\/p>\n
In the public statement, the SEC officials stated pointedly that RIAs and BDs cannot omit the required question, or respond based on only the disciplinary history of a firm or its financial professionals\u2014both are required. The SEC officials stated that the agency has reviewed Form CRS filings and observed examples that did not include the disciplinary question or where \u201cresponses lacked required information or otherwise could be improved.\u201d<\/p>\n
According to the WSJ, 80 firms omitted the disciplinary question altogether, and that 20% of the firms reporting no disciplinary history actually had reportable history.<\/p>\n
The SEC FAQs make clear that firms who do not have disciplinary history may not omit the question, and firms may not respond only about the firm and omit information about financial professionals.<\/p>\n
In the FAQs, the SEC provided that \u201cThe staff would not object if [a] firm included the following concise response \u2018No for our firm. Yes for our financial professionals.\u2019 or \u201cFirm \u2013 no.\u201d \u201cFinancial professionals \u2013 yes.\u201d\u00a0 And vice versa.<\/p>\n
The SEC also clarified in the FAQ responses that firms may not include additional information in response to yes answers to explain the disciplinary information.\u00a0 Firms may however provide additional supplemental disclosure about the events, and the SEC provides examples such as\u00a0Form ADV Part 2B brochure supplements or a print-out of the IAPD or BrokerCheck \u201cDisclosures\u201d section for the particular firm or financial professional.<\/p>\n
Form CRS is an integral new disclosure document in the SEC\u2019s campaign to create streamlined disclosure obligations and clear and concise information for the public to absorb.\u00a0 When concerns arise that firms are not meeting expectations for around such an initiative and the warning has been publicly provided, any firms that have ongoing mistakes could subject themselves to new disciplinary proceedings. Time to double-check all disciplinary responses.<\/p>\n