Continued Compliance and Supervision in Light of COVID-19

I have been receiving an uptick in questions from clients regarding the transition to remote operations and best practices in light of the current pandemic. This is a great question and one that my clients have been really preparing for since Hurricane Sandy. This post is intended to provide an investment adviser’s Chief Compliance Officer and management with a high level list of items to consider because of COVID-19. In no way should this be considered an exhaustive list, and depending on the type of business your firm operates, it may not be entirely applicable.

  1. Client Communication. The pandemic has caused great uncertainty in the U.S. and world economy and client’s portfolios are losing value at rates that haven’t been witnessed since at least 2008. Some firms are taking or have already taken proactive measures to reduce their clients’ market exposure by increasing their cash allocations. Others have determined to ride out the storm. Regardless of the investment strategy being taken, it is crucial to communicate that strategy to clients. Based on personal experience, the best litigation risk reduction strategy is regular and honest communication with clients. This is especially true with respect to those clients who have expressed concerns about their financial plan, investment objectives, or ability to withstand their current losses. It is important to listen during these times and try to best accommodate a client’s wishes. If the client’s wishes are against their interests, advisers should try and explain to the client why their desires are not prudent.
  2. Adviser Communication. As most firms have implemented business continuity plans that involve staff working entirely remote or partially remote, Chief Compliance Officers and management should maintain regular lines of communication with all staff, but especially client service, investment and operational staff responsible for trading, billing, and money movement.  
    • Client Service Staff Communication. Communication from management to client service teams must provide clear directives on the firm’s philosophy during this crisis. In addition, client service personnel should be reminded the importance of listening and empathy during this difficult time. While it is a difficult balancing act, advisers must be able to instill confidence in clients and explain the unknown direction of the market on any given day.
    • Trading Staff Communication. Given the potential for increases in the volume of trading, it is important that traders be extra careful at this time. In addition, with many traders continuing their craft remotely from their home workstations, there are many added distractions that traders have not previously had to confront. For example, children or pets, while adorable, may distract traders who are placing very important and potentially large orders. Management should remind traders of the importance of these functions and ensure that their traders are able to perform their functions remotely with absolute focus. If a trader feels like they have too many distractions at home, management and the trader may want to mutually evaluate options to optimize the situation.
    • Money Movement and Billing Staff Communication. I am seeing a number of frauds being perpetrated on investment advisers and their clients surrounding COVID-19. This is a time where money movement staff should be extra vigilant. It is necessary to follow all red flag policies currently in place and any verbal or mutli-factor authentication procedures that a firm maintains prior to disbursing client funds. If your firm’s money movement staff is working remotely, it may even make sense requiring a second verbal confirmation prior to disbursing money. If firms do not have these types of measures in place already, they will want to consider implementing them now. With monthly and quarterly billing cycles likely to take place while staff are working remotely, those responsible for billing must be kept in the loop regarding credits or waivers provided to clients during these trying times. They must also be sure the credits and waivers are being applied correctly.
  3. Cash Monitoring. In any event, if the firm’s strategy or a client’s wishes involve going to cash, the firm should have a policy or procedure to monitor cash balances and for reviewing and making decisions on when to get back in the market. If the firm is not going to take on the obligation of monitoring cash balances and determining when to get back in the market, it must communicate that to the client. Regardless, from a business perspective, a firm probably does not want any of its clients to miss out on any rebound, so a constant reminder to clients with cash balances may be a prudent practice.
  4. Fair Treatment of Clients. For firms that manage proprietary funds or that trade in less liquid or low-volume securities, or that manage accounts across various custodians, they should be extra sensitive with respect to these issues. They will want to ensure that allocations are made consistent with the firm’s policies and procedures and that clients are treated fairly. To the extent that cross transactions are being executed, both clients must be treated fairly.
  5. Investment Policy or Guideline Monitoring. Firms should be monitoring investment policies and guidelines to ensure that recent market events have not caused them to be breached. If actions can be taken to avoid breaches, they should be taken. If a breach has occurred, firms should remediate those breaches.
  6. Cybersecurity, Information Security, and the Continued Operation of Remote Working Capabilities. The importance of these items are self-evident. Firms should be reviewing their policies and procedures regarding cybersecurity and information security, and make sure their employees and staff understand their most important roles and responsibilities.
  7. Continued (and Heightened) Supervision. Given that there is no sense of direct supervision for employees (and not solely advisers who interface with clients), it is important to continue to supervise employees in whatever ways that can be done. For example, firms may want to consider:
    • performing additional or more focused email reviews with a view towards client complaints or potential complaints;
    • implementing additional safeguards for approving and reviewing money movement (especially larger transfers);
    • having teams assigned for trading or large trades that operate as a “buddy system”; and
    • randomly or scheduling calls or video conferences with employees during the work day to ensure they are performing their essential functions. In addition, the longer that offices are closed, these visits may be determined necessary as part of a firm’s branch office review policy.
  8. Plan for Mail Delivery. To the extent that main and branch offices are able, they will want to have a process for reviewing hard copy mail. The SEC Staff has provided temporary relief from the custody rule if it receives checks or securities during this period and is unable to access its mail or deliveries, but it would be best if the mail was still being processed. That guidance is available here (see Question II.1). This process must be done in a manner that is consistent with any executive orders issues by state or local government regarding continued business operations.
  9. Business Continuity Plan Review. While most business continuity plans have already been implemented, now is a good time to review and update the firm’s business continuity plan. I have personally witnessed OCIE Staff requesting information about these policies and their implementation during examinations conducted in March 2020. If you have too many things going on currently, this should absolutely be a focus of the firm’s annual review of its policies and procedures pursuant to Rule 206(4)-7.
  10. Review of Form ADV Part 2. Firms should review their Form ADV Part 2 brochures to ensure that they remain accurate in light of changes in their practices. In addition, advisers should review the offering documents for any investment vehicle sponsored by the adviser to ensure disclosures remain accurate.
  11. Due Diligence of Vendors and Service Providers. Firms should continue and perhaps increase their review of vendors and key service providers to ensure that they can continue to perform as needed.

Help for Those Who Need It

Earlier today we received an email from a Chief Compliance Owner and equity owner of an independent investment adviser firm. One of their employees appears to have tragically taken their life. I was deeply saddened by this news. It appears that the causes were the recent performance of the markets and client complaints. It is also possible that these events were totally unrelated. In any event, this post is to let everyone know that no matter how hard life gets, no matter how poorly the markets perform, no matter how angry clients may be, your life is precious. If you have any thoughts otherwise, I invite you to reach out to me. We are all in this thing called life together.

SEC Provides Relief for Advisers in Light of COVID-19

On Friday, March 13, 2020, the SEC issued an Order under Section 206A of the Investment Advisers Act of 1940 that is intended to provide relief for certain investment advisers who are impacted by COVID-19.

For the period between March 13, 2020 and April 30, 2020, the SEC is providing relief to registered investment advisers from the obligation to file an amendment to Form ADV or deliver its Form ADV Part 2 to existing clients if they meet certain conditions. In addition, during this same period, the SEC is providing relief to registered investment advisers to file Form PF if it meets these same conditions.

The conditions for relying on this relief require the investment adviser to establish:

  • The registered investment adviser is unable to meet a filing deadline or delivery requirement due to circumstances related to current or potential effects of COVID-19;
  • The investment adviser relying on this relief for Form ADV delays must promptly notify the SEC via email at and disclose on its public website (or if it does not have a public website, promptly notifies its clients and/or private fund investors of) the following information:
    • That it is relying on the SEC Order;
    • It must provide a brief description of the reasons why it could not file or deliver its Form ADV on a timely basis; and
    • The estimated date by which it expects to file or deliver the Form ADV Part 2.
  • The investment adviser relying on this relief for Form PF delays must promptly notify the SEC via email at stating:
    • That it is relying on the SEC Order;
    • It must provide a brief description of the reasons why it could not file its Form PF on a timely basis; and
    • The estimated date by which it expects to file the Form PF.
  • The investment adviser must file the Form ADV or Form PF, as applicable, and delivers the brochure (or summary of material changes) and brochure supplement required by Rule 204-3(b)(2) and (b)(4) under the Advisers Act, as soon as practicable, but not later than 45 days after the original due date for filing or delivery, as applicable.

Should you have any questions about whether this relief is available to your firm or whether it makes sense to rely upon this relief, do not hesitate reaching out.

SEC Focusing Efforts on Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI)

It has become abundantly clear that the Office of Compliance, Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission is focusing efforts on advisers who advertise and manage investment strategies, portfolios and funds that consider factors or matters that relate to ESG or SRI. In fact, OCIE Director Peter Driscoll said as much while he was addressing the Investment Adviser Association Compliance Conference today, on March 6, 2020.

Prior to those remarks, OCIE has issued one or more requests to investment advisers as part of examinations that are focusing on topics relevant to advisers who manage and advertise ESG and SRI strategies, portfolios, and funds. For advisers who advertise and manage these strategies, portfolios, and funds, they should be aware of where OCIE is focusing its efforts. As one can see from the request list below, OCIE is placing its focus on:

  • the scope and definition of the terms ESG and SRI for investment purposes;
  • whether the adviser adheres to the UN Principles for Responsible Investment, and if so, whether it maintains written documentation of these selection principles;
  • whether the adviser has submitted shareholder proposals for the companies that it invests in;
  • whether the adviser has proxy voting authority, and if so, examples of documentation used to form the basis for certain votes on ESG and SRI matters;
  • advertisements that discuss ESG and SRI investments; and
  • the investment performance of ESG and SRI investments.

The last one is notable in that it seems OCIE may be prepared to question whether ESG and SRI investments were consistent with an adviser’s duty of care.

Investment Losses Resulting From Robinhood’s Website and App Failures?

On March 2, 2020, Robinhood’s trading platform failed to open for trading–the single purpose for which it was created–free trading. As we have come to learn, the failure was the result of a programming error that did not account for the leap year in February.

Broker-dealers such as Robinhood Financial are governed by the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA).

FINRA Rule 2010 requires that members must “observe high standards of commercial honor and just and equitable principles of trade.” In addition, FINRA Rule 5310 requires a broker-dealer to “use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions”. While these rules don’t specifically address a broker-dealer’s responsibility in the event of a failure in their trading platforms, they should be interepreted broadly to apply to Robinhood’s failures.

While Robinhood and its lawyers will argue that it did not engage in fraud and therefore should not be liable for any trading losses, that would be the wrong outcome for the general public. Broker-dealers such as Robinhood that operate digital trading platforms must be held to a higher standard when its users only expect a single service in exchange for access to their cash–an operating platform.

If you have been financially injured as a result of Robinhood’s trading platform failures, you should evaluate your available options. The agreements that you electronically entered with Robinhood contain a mandatory arbitration provision. That means the likelihood of participating in a class action are unlikely. If you believe your case involves substantial losses (in excess of $30,000), please email me at In your email, please provide information about your situation, your trades that incurred loss, the amount of your losses, and your contact information. I stand ready to provide you with a free consultation. If your case involves losses less than $30,000, there are numerous options available to you. You should also feel free to reach out to me by email, but it might not be cost-effective for me to represent you.

Law School Clinics – Investors with limited income or with small dollar claims may find it difficult or impossible to hire a lawyer. Law schools across the country have established securities arbitration clinics to provide legal representation to investors who cannot hire a lawyer to handle their claims. For a list of these clinics, please visit – I am partial to the University of Miami’s clinic as I was part of its inaugural class of students.

File Your Own Arbitration Claim – You can file your own arbitration claim through FINRA. For information on how to file a claim, please visit Information about the process is available at and There is also a simplified arbitration process for cases involving less than $50,000. You can request a hearing on the “papers” or an abbreviated telephonic hearing. More information about that process is available at  Filing fees for simplified cases range from $50 to $600 depending on the size of the claim and claimants can also request a hardship waiver.

PIABA – You can search for an attorney at to assist you. Many attorneys will accept smaller cases, but there is no guarantee. Some will occasionally take on a matter pro bono (i.e., for free).

Contact Robinhood, FINRA, and the SEC – If you are interested in taking a less confrontational path towards resolving your potential claim, you may want to try reaching out directly to Robinhood, FINRA or the SEC. You can lodge a complaint at Robinhood at The SEC’s Office of Investor Education and Advocacy maintains a website for investors to file complaints, which is available at FINRA maintains its own informal complaint website at

Registered Investment Adviser Entity Formation, Registration and Employment Transition Checklists

I have assisted numerous financial industry professionals with their transition from the wire-house channel to operating as independent investment advisers. To do so takes experience, legal know-how, preparation, and patience. While other compliance companies can offer to register an investment adviser for a very small fee, I always caution prospective clients to be wary of going that route. Below is a sample checklist that I prepared and relied on for a recent wire-house breakaway and registration with the U.S. Securities and Exchange Commission. As you will see, registration is just one small piece of the equation. With all of the legal elements of registration and operating an investment adviser, do you really want to try and cut corners and costs on what will presumably be your biggest career decision?

TaskAssigned ToDate PerformedNotes
Formation of Entity   
Name Selection   
Entity Selection   
Name Registration (state-wide and trademark)   
Entity Formation   
Obtain tax identification number   
Prepare Operating Agreement   
Designate registered agent   
Elect “S” Corporation Tax Status by filing Form 2553, if desired (within 75 days)   
Registration of Investment Adviser   
Review firm and “advisory affiliate” disqualifications, as applicable (Item 11 of Form ADV Part 1A)   
Request Entitlement through FINRA   
Determine state, federal or exempt reporting adviser registration status   
Prepare Draft Form ADV Part 1A   
Appoint Chief Compliance Officer   
Determine “Custody” Requirements (surprise examination, financial statement audit, etc.)   
Prepare Draft Brochures   
A. Form ADV Part 2A   
B. Wrap Fee Brochure   
C. Part 2B (Brochure Supplement)   
Initial Draft of Policies and Procedures   
A. Compliance Manual   
B. Code of Ethics   
C. Business Continuity Plan   
D. Privacy Notice/Policy   
E. Information Security Policy/Cybersecurity Policy   
Determine initial licensing of “investment adviser representatives”   
Determine initial state notice filings and reporting by exempt reporting advisers   
Draft initial Investment Advisory Agreement(s), Financial Planning Agreements and Solicitor (referral) Agreements   
Submit initial application of Form ADV (if registering with the SEC, begin the 45 day clock for approval)   
File initial Form-U4s, as applicable   
Establish appropriate procedures for preparation and maintenance of “books and records” under Rule 204-2   
Review any performance advertising, sales literature and marketing materials (including website content and social media sites)   
Receive Registration Approval   
Analyze and update registration as needed within 120 days if relying on Rule 203A-2(c)   
Employment Transition Issues   
Review employment agreements for potential non-compete, non-solicit and “garden leave” issues   
Analyze state law to determine whether provisions are enforceable   
Review departing and “new” RIA for potential Protocol for Broker Recruiting compliance   
Advise client on transition risks, including potential for temporary restraining orders   
Formulate transition plan with client (enforceability of confidentiality provisions in employment agreement and inability to take certain client information)   
Prepare resignation letters   
Prepare and submit Joinder Agreement to Protocol for Broker Recruiting, if required   
Submission of resignation(s)   
Client transitioning   

You should not rely on this checklist as this was a highly customized checklist that was prepared for a specific engagement. This should not be relied upon as legal advice. Not for distribution or commercial use.

Form ADV Part 1 and Determining United States Person Status

Due to the constant shrinking of the globe, we have witnessed a rise in investment advisers who render investment advice to separate account clients across borders or to foreign citizens. For example, it is now not uncommon for (i) a wealth manager to have a client who resides in the United States decide to move to a foreign country and want to keep receiving investment advice from their investment adviser located in the United States, or (ii) a foreign citizen come to the United States temporarily or permanently and seek out investment advice. While these situations raise numerous questions, the issue this post focuses on are the ramifications these scenarios create under Form ADV Part 1A.

There are two items on Form ADV Part 1A that investment advisers and their legal and compliance officers frequently struggle addressing. These two questions are both located in Item 5 of Form ADV Part 1A. Each of these questions is set forth below:

  1. Item 5.C.(2) states: “Approximately what percentage of your clients are non-United States persons?
  2. Item 5.F.(3) states: “What is the approximate amount of your total regulatory assets under management (reported in Item 5.F.(2)(c) above) attributable to clients who are non-United States persons?

As an aside, the SEC included these items in Form ADV Part 1A so that its examination staff could better understand the extent of investment advice provided to non-U.S. clients, which apparently would assist in its risk assessment process. To date we haven’t noticed any trends in this area.

To respond accurately to each of these questions, the person compiling this information must first be able to understand the definition of “United States persons”. Luckily, “words that appear in italics on Form ADV are defined in the Glossary of Terms to Form ADV.” In fact, if you are competing the Form ADV electronically, you can actually access the definition by clicking on an italicized word.

The Glossary of Terms to Form ADV defines “United States Persons” has having “the same meaning as in rule 203(m)-1 under the Advisers Act, which includes any natural person that is resident in the United States.” You are probably thinking that that is the least helpful definition in the world, and I concur. Rule 203(m)-1 defines that term as “any person that is a U.S. person as defined in Rule 902(k) of Regulation S under the Securities Act of 1933, except that any discretionary account or similar account that is held for the benefit of a United States person by a dealer or other professional fiduciary is a United States person if the dealer or professional fiduciary is a related person of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.” Again, another definition using an incorporated definition.

Rule 902(k) of Regulation S defines the term “U.S. person” to mean: (i) any natural person resident in the U.S.; (ii) any partnership or corporation organized or incorporated under the laws of the U.S.; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the U.S.; (vi) any nondiscretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; and (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the U.S., and (viii) any partnership or corporation if (A) organized or incorporated under the laws of any foreign jurisdiction, and (B) formed by a U.S. person principally for the purpose of investing in securities not registered under the Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a)) who are not natural persons, estates or trusts.

What each of these definitions establishes is that for natural persons (i.e., human beings), the definition of United States Person is a person who is resident in the United States. Unfortunately (or fortunately, depending on how you prefer ambiguity) the SEC did not define the phrase “resident in the U.S.”. Therefore, I would look to the plain meaning of that term for its meaning. Merriam-Webster defines it several ways, but the most helpful definition in my view is “the place where one actually lives as distinguished from one’s domicile or a place of temporary sojourn.” There you have it. A non-United States person for purposes of Form ADV means a person who is not living in the United States for more than a temporary period. There remains a ton of flexibility in this definition and investment advisers and compliance departments are free to set their own guidelines that work within this framework. I would be failing if I didn’t mention that firms should document this decision and seek to remain consistent from year to year.

Massachusetts Fiduciary Rule and Regulation Best Interest

Earlier today, on February 21, 2020, the Massachusetts Securities Division (“MASD”) adopted amendments to its regulations in an effort to hold broker-dealers and agents to a fiduciary standard when dealing with their customers (the “Massachusetts Rule”).

While I personally believe that the rule will ultimately be overturned based on federal preemption, in an effort to avoid that from happening, MASD drafted the regulation so that the failure to adhere to the fiduciary standard would be deemed a dishonest or unethical practice. Also in an effort to avoid preemption arguments under the National Securities Markets Improvements Act, the rule states that it does not require any making or keeping of additional records, but at a minimum, it would seem to require revisions to policies and procedures.

Regardless of my predictions and the ultimate staying power of the Massachusetts Rule, legal and compliance departments will need to start preparing for its effective date of September 1, 2020. In an effort to help easily digest the rule, below is a chart outlining the aspects of the rule in comparison to Regulation Best Interest (the “SEC Rule”).

 The Massachusetts RuleThe SEC RuleNotes
Who it applies to? Broker-dealers and agentsA broker, dealer, or a natural person who is an associated person of a broker or dealer…The scope of coverage is identical.
For what category of investors does the standard apply?The term “customer” shall include current and prospective customers, but shall not include: (a) A bank, savings and loan association, insurance company, trust company, or registered investment company; (b) A broker-dealer registered with a state securities commission (or agency or office performing like functions); (c) An investment adviser registered with the SEC under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or agency or office performing like functions); or (d) Any other institutional buyer, as defined in 950 CMR 12.205(1)(a)6. and 950 CMR 14.401.   Does not apply to a fiduciary to an employee benefit plan, its participants, or its beneficiaries, as those terms are defined in the Employee Retirement Income Security Act (ERISA)Retail customers: a natural person, or the legal representative of such natural person, who: (i) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (ii) Uses the recommendation primarily for personal, family, or household purposes.The Massachusetts Rule is arguably broader in scope than the SEC Rule. The Massachusetts Rule applies to all customers, but provides 4 specific carve outs which encompass most institutional investors.  However, the Massachusetts Rule would seem to apply to most organizations with assets of less than $5 million and 501(c)(3) charities with portfolios less than or equal to $25 million
When it applies?When providing investment advice or recommending an investment strategy, the opening of or transferring of assets to any type of account, or the purchase, sale, or exchange of any security.   During any period in which the broker-dealer or agent: 1.  Has or exercises discretion in a customer’s account, unless the discretion relates solely to the time and/or price for the execution of the order; 2. Has a contractual fiduciary duty; or 3. Has a contractual obligation to monitor a customer’s account on a regular or periodic basis, as such regular or periodic basis is determined by agreement with the customerWhen making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer… at the time the recommendation is made 
Standard of CareFiduciary duty- To meet the fiduciary duty, each broker-dealer or agent shall adhere to duties of utmost care and loyalty to the customer.Shall act in the best interest of the retail customerThe Massachusetts Rule appears to be more amorphous and potentially more restrictive.  The SEC Rule is met if a broker-dealer or agent meets the specific component obligations (i.e., Disclosure Obligation, Care Obligation, Conflict of Interest Obligation, and the Compliance Obligation)
Duty of Care/Care Obligation(a) The duty of care requires a broker-dealer or agent to use the care, skill, prudence, and diligence that a person acting in a like capacity and familiar with such matters would use, taking into consideration all of the relevant facts and circumstances. For purposes of this paragraph, a broker-dealer or agent shall make reasonable inquiry, including: 1. The risks, costs, and conflicts of interest related to all recommendations made and investment advice given; 2. The customer’s investment objectives, risk tolerance, financial situation, and needs; and 3. Any other relevant information.The broker, dealer, or natural person who is an associated person of a broker or dealer, in making the recommendation, exercises reasonable diligence, care, and skill to: (A) Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (B) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; (C) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile and does not place the financial or other interest of the broker, dealer, or such natural person making the series of recommendations ahead of the interest of the retail customer. 
Duty of LoyaltyThe duty of loyalty requires a broker-dealer or agent to: 1. Disclose all material conflicts of interest; 2. Make all reasonably practicable efforts to avoid conflicts of interest, eliminate conflicts that cannot reasonably be avoided, and mitigate conflicts that cannot reasonably be avoided or eliminated; and 3. Make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.Disclosure Obligation: The broker, dealer, or natural person who is an associated person of a broker or dealer, prior to or at the time of the recommendation, provides the retail customer, in writing, full and fair disclosure of: (A) All material facts relating to the scope and terms of the relationship with the retail customer, including: (1) That the broker, dealer, or such natural person is acting as a broker, dealer, or an associated person of a broker or dealer with respect to the recommendation; (2) The material fees and costs that apply to the retail customer’s transactions, holdings, and accounts; and (3) The type and scope of services provided to the retail customer, including any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer; and (B) All material facts relating to conflicts of interest that are associated with the recommendation   Conflict of Interest Obligation: The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to: (A) Identify and at a minimum disclose, or eliminate, all conflicts of interest associated with such  recommendations; (B) Identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for a natural person who is an associated person of a broker or dealer to place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; (C)(1) Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations, , and (2) Prevent such limitations and associated conflicts of interest from causing the broker, dealer, or a natural person who is an associated person of the broker or dealer to make recommendations that place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer….  The Massachusetts Rule imposes an obligation to avoid conflicts of interest to the extent reasonably practical, and eliminate those that cannot be reasonably avoided.  This is a more difficult standard to implement than the SEC Rule’s standard to identify and disclose or eliminate.
Duty of Loyalty and Sales ContestsIt shall be presumed to constitute a breach of the duty of loyalty for a broker-dealer or agent to recommend any investment strategy, the opening of or transferring of assets to a specific type of account, or the purchase, sale, or exchange of any security, if the recommendation is made in connection with any sales contest.The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to: … (D) Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.The Massachusetts Rule appears to prohibit additional types of sales contests.  The SEC Rule is limited is limited to security-specific or product specific contests and are tied to a limited duration.   The Massachusetts Rule extends to strategies, account types and conversions, and exchanges.

Logistical Wrinkles Relating to Form CRS

The rules and form implementing Form CRS became effective on September 10, 2019, and investment advisers and broker-dealers are currently in the early stages of preparing and developing internal procedures to comply with the rule and the form. By June 30, 2020, investment advisers registered with the U.S. Securities and Exchange Commission and broker-dealers will need to file their initial copy of Form CRS. This post is intended to highlight some of the less known formatting, delivery and logistical issues arising from Form CRS and its rules.


  1. It must be written in plain English. The instructions state that firms must (i) use short sentences and paragraphs; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless you clearly explain them; and (v) avoid multiple negatives. You must write your response to each item as if you are speaking to the retail investor, using “you,” “us,” “our firm,” etc.
  2. It can be prepared and delivered in other languages, but an English version must accompany a version in a language other than English.
  3. You must file Form CRS using a text-searchable format with machine-readable headings. Not sure how to do this? The staff of the Division of Investment Management helpful instructions at

Filing and Delivery

  1. Investment advisers must deliver a relationship summary to each retail investor before or at the time they enter into an investment advisory contract with the retail investor.
  2. Investment advisers must electronically file their initial relationship summary beginning on May 1, 2020 and by no later than June 30, 2020. It should be done as part of (1) an other than-annual amendment or (2) part of their initial application or annual updating amendment.
  3. New and Prospective Client Delivery. By June 30, 2020, investment advisers must begin to deliver their relationship summary to new and prospective clients and customers who are retail investors.
  4. Existing Client Delivery. By July 30, 2020, investment advisers must deliver their relationship summary to existing clients who are retail investors. See my earlier post discussing this issue.
  5. Ongoing Delivery. Investment advisers must deliver the most recent relationship summary to a retail investor who is an existing client or customer before or at the time they: (i) open a new account that is different from the retail investor’s existing account(s); (ii) recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account.
  6. Website Posting. If an investment adviser has a website, it must post a copy of its relationship summary on it.

Timeline for Delivery of Initial Form CRS

Investment advisers registered with the U.S. Securities and Exchange Commission will begin filing their initial Form CRS on May 1, 2020 through the IARD system. They will need to file their initial Form CRS no later than June 30, 2020. Pursuant to the instructions to Form CRS, existing clients must be delivered an initial Form CRS within 30 days after the date that the investment adviser is first required to file the Form CRS (i.e., by July 30, 2020).

For investment advisers with fiscal year ends that end in the calendar year, they must file an annual updating amendment to Form ADV within 90 days of the calendar year end (i.e., March 30). Each year, these investment advisers must also deliver within 120 days of the end of your fiscal year (i.e., April 30), to each client:

  • a free updated brochure that either includes a summary of material changes or is accompanied by a summary of material changes (“Brochure Delivery”), or
  • deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure (“Offer Delivery”).

Given that the Brochure Delivery or the Offer Delivery is generally required to be made by April 30, it places a great burden on adviser to make an additional delivery of their initial Form CRS by July 30. This is especially true for advisers who do not have mechanisms to deliver regulatory disclosures through electronic means and have a large number of retail investors who will need to receive an initial Form CRS. This leaves advisers with only a couple of options. Each of these options is outlined below in a diagram discussing their pros and cons.


The adviser could deliver its initial Form CRS at the the same time they make a Brochure Delivery or Offer Delivery. (i.e., by April 30)

The adviser could deliver its Form CRS between May 30, 2020 and July 30, 2020


Reduces number of communications to clients; reduces mailing costs; reduces operational time and costs

Delivery would be made in strict conformity with the instructions to Form CRS


Would be delivered before the legal requirement to prepare or deliver Form CRS becomes effective; additional guidance could be released on the form or delivery obligations; the form could be repealed

Increases the number of communications to clients; increases mailing costs; increases operational time and costs