SEC Updates FAQ on Form CRS

The Securities and Exchange Commission recently updated its frequently asked questions guidance for its Customer Relationship Summary form, or Form CRS — including disclosures required by dually licensed professionals, private placements, as well as firms that act as a principal underwriter to a mutual fund or variable annuity.

The answers to the FAQ were prepared on Dec. 8 by the SEC Division of Investment Management and the Division of Trading and Markets. The agency updates the FAQ from time to time as it receives questions.

Private Placements

One brokerage firm queried the agency on filing Form CRS as a BD that services issuers of private placement securities. “In this role, we interact directly with retail investors by, for example, assisting investors with completing subscription agreements, but we do not make any recommendations to retail investors nor do we offer brokerage accounts. Would my firm have to file and deliver Form CRS?” the firm asked.

The SEC’s response: “Generally, yes. Broker-dealers registered with the SEC that offer services to retail investors must file and deliver a Form CRS under Rule 17a-14 …. In the staff’s view, whether a retail investor engages in a securities transaction for a private placement security through a broker-dealer requires a facts and circumstances evaluation of whether the broker-dealer or an associated person of the broker-dealer participates as an intermediary between the issuer and the retail investor in the purchase or subscription process.”

Dually Licensed

Another broker-dealer stated that some of its financial professionals “are dually licensed and offer investment advisory services to retail investors through unaffiliated registered investment advisers.”

The BD asked: “In addition to making recommendations or opening accounts for my brokerage customers, I also offer execution-only services to my financial professionals’ advisory clients. The advisers’ relationship summaries are posted on their public websites. In the staff’s view, am I subject to the Form CRS requirements when providing execution-only services to those advisory clients?”

The SEC’s response: “No. Broker-dealers providing execution-only services to an investment adviser’s advisory clients do not typically establish the kind of relationship with the adviser’s retail clients that Form CRS was designed to address. Accordingly, the staff believes the broker-dealer in this scenario would not be considered to be offering services to a retail investor for purposes of Exchange Act Rule 17a-14, and would not be subject to the Form CRS requirements when acting in such capacity.”

To the extent the broker-dealer interacts with the advisor’s retail investor clients in a capacity other than providing execution-only services, the broker-dealer, the SEC said, “may be subject to Form CRS requirements depending on the facts and circumstances.”

Principal Underwriters

Another firm stated that it acts as principal underwriter to a mutual fund or variable annuity or variable life insurance contract issuer.

The firm asked: “In some instances, rather than purchasing the security through another intermediary (e.g., broker-dealer or investment adviser), retail investors contact us to make a purchase or open accounts directly with my firm. Are we considered to be offering services to retail investors for purposes of Exchange Act Rule 17a-14?”

The SEC’s response: “Yes. In the staff’s view, a broker-dealer acting as a principal underwriter to a mutual fund or variable annuity or variable life insurance contract issuer that interacts with retail investors purchasing such securities directly through the broker-dealer would be considered to be offering services to retail investors for purposes of Exchange Act Rule 17a-14, and the obligations of Form CRS would apply.”

‘Check and Application’

Another broker-dealer that sells mutual funds to retail investors through a “check and application” arrangement queried the SEC on whether it would have to file a Form CRS.

“In circumstances where we do not recommend the mutual fund, and do not open a brokerage account for a new or prospective retail investor, would my firm have to file and deliver Form CRS?” the firm asked.

The SEC’s response: Yes. The Form CRS filing and delivery requirements under Rule 17a-14 apply even when a retail investor does not open or have an account with a broker-dealer but still engages in a securities transaction through a broker-dealer, such as the purchase of a mutual fund via a “check and application” process (i.e., the mutual fund is not held directly within a brokerage account).”