Review your Form CRS Disciplinary History Disclosure in Light of New Guidance

On October 8, 2020, Securities and Exchange Commission’s Chairman Clayton along with Dalia Blass, Director, Division of Investment Management and Brett Redfearn, Director of Division of Trading and Markets released a Joint Statement Regarding New FAQs for Form CRS. The Joint Statement focused on the disciplinary history section of Form CRS, which became effective earlier this year. On the same day as the Joint Statement was issued, the staff of the Division of Investment Management and the Division of Trading and Markets amended its Frequently Asked Questions on Form CRS by adding four new questions and answers.

The most newsworthy guidance under the amended FAQs effectively states that investment advisers and broker-dealers should not include additional information to explain their disciplinary history in Item 4. The precise language of the FAQ states:

Q: If we answer “Yes” in Item 4, may we include additional information in our relationship summary to explain the disciplinary history?

A: No. Item 4 requires a “Yes” or “No” response, along with the required reference to (Item 4.D.(i)) and the required conversation starter (Item 4.D.(ii)). Item 4 – and the conversation starter in particular – is designed to encourage a discussion regarding the nature, scope, or severity of any disciplinary history, including any differences between the firm’s disciplinary history and the financial professional’s disciplinary history, if applicable. Form CRS does not preclude firms or their financial professionals from providing separately copies of additional regulatory disclosures (e.g., Form ADV Part 2B brochure supplements or a print-out of the IAPD or BrokerCheck “Disclosures” section for the particular firm or financial professional). (Posted October 8, 2020)

This runs counter to what many lawyers and compliance professionals assumed (including myself).

Now is a good time to take a look at your firm’s Form CRS and amend, as applicable. The question remains whether this would be a material change requiring notification to investors, but I would posit that it is not.

On the other hand, it is important to note that the Joint Statement and the FAQs have no legal force or effect, do not alter or amend applicable law, create no new or additional obligations for any person, and have not been approved (or disapproved) by the Commission.  A firm may determine to make a business decision to provide additional content in response to Item 4, but they should do so knowing all of the relevant guidance.

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