Beginning May 1, 2020, and by no later than June 30, 2020, an SEC-registered investment adviser (“adviser”) that has retail investors must file a Form CRS relationship summary (“relationship summary”) with the SEC.1 Thereafter, the adviser must deliver its relationship summary to its retail investors. The relationship summary is intended to inform retail investors about the types of client relationships and services the adviser offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the adviser and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the adviser. This memorandum provides an overview of certain key considerations regarding the relationship summary for advisers.2
Who must prepare and file a relationship summary?
An adviser that has retail investors to whom it must deliver a relationship summary must prepare and file a relationship summary with the SEC. A retail investor is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.”3 An adviser is not required to deliver a relationship summary to retail investors in pooled investment vehicles, such as hedge funds, private equity funds and venture capital funds, unless the adviser has a separate basis for delivering a relationship summary to these investors, such as separately managed account arrangements.4 Therefore, an adviser that only advises these types of pooled investment vehicles is not required to prepare, file or deliver a relationship summary even if those vehicles include retail investors.
What items must be included in the relationship summary?
The relationship summary must include the following items:
- Introduction. An adviser must state its name and that it is registered with the SEC as an investment adviser.
- Relationships and Services. The adviser must summarize the principal services, accounts, or investments it makes available to retail investors, and any material limitations on such services. Additionally, the adviser must address monitoring of retail investors’ investments; investment authority; limited investment offerings; and account minimum investment amounts and other requirements.
- Fees, Costs, Conflicts, and Standard of Conduct. The adviser must summarize the fees and costs that retail investors will incur for its investment advisory services, including how frequently they are assessed and the conflicts of interest they create. If applicable, the adviser must describe other ways in which the adviser or its affiliates make money from investment advisory services it provides to retail investors and the incentives they create, including proprietary products, third-party payments, revenue sharing, and principal trading. Additionally, the adviser must summarize how its financial professionals are compensated and the conflicts of interest those payments create.
- Disciplinary History. An adviser must disclose whether it or any of its financial professionals have legal or disciplinary history.
- Additional Information. An adviser must state where a retail investor can find additional information about its investment advisory services and request a copy of the relationship summary.
The relationship summary must include prescribed “conversation starter” questions that a retail investor can ask the adviser. Among other formatting requirements, the relationship summary must not exceed two pages and be written in plain English.
When and how must the relationship summary be delivered?
An adviser must deliver a relationship summary to each retail investor before or at the time it enters into an investment advisory contract with the retail investor. The adviser must begin to deliver its relationship summary to new and prospective retail investors as of the date by which the adviser is first required to file its relationship summary with the SEC.
The adviser must deliver its relationship summary to existing retail investors:
- within 30 days after the date by which the adviser is first required to file its relationship summary with the SEC; and
- before or at the time the adviser: (i) opens a new account that is different from the retail investor’s existing account(s); (ii) recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommends or provides a new 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.5
The adviser must also deliver its relationship summary to an existing retail investor within 30 days of the investor’s request.
The adviser must post its current relationship summary prominently on its website, if it has one, in a location and format that is easily accessible for retail investors. An adviser may deliver the relationship summary electronically, such as by email. If delivered in paper format as part of a package of documents, the adviser must ensure that the relationship summary is the first among the documents delivered.
When must the relationship summary be updated?
An adviser must update its relationship summary and file it with the SEC within 30 days whenever any information in the relationship summary becomes materially inaccurate. The adviser must communicate any changes in the updated relationship summary to existing retail investors within 60 days after the updates are required to be made. The adviser can communicate the updates by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to existing retail investors. Each amended relationship summary delivered to existing retail investors must be accompanied by a separate exhibit that highlights the most recent changes by, for example, marking the revised text or including a summary of material changes.
In light of the upcoming June 30, 2020, filing deadline, we recommend advisers that are required to file and deliver a relationship summary to start preparing its relationship summary as early as possible. Please contact your primary attorney in Seward and Kissel’s investment management group for assistance with preparing a relationship summary.
Seward & Kissel has created a “Template Form CRS Relationship Summary for Investment Advisers” to assist advisers with preparing a relationship summary. This document and other compliance tools, resources, webinars and publications are available on our SKRC Online Compliance Subscription Service, which is free to our active investment adviser clients. Please click here to request free client access.
1 See Instructions to Form CRS available at https://www.sec.gov/rules/final/2019/34-86032-appendix-b.pdf and Form CRS Relationship Summary; Amendments to Form ADV, Investment Advisers Act Release No IA-5247 (June 5, 2019) available at https://www.sec.gov/rules/final/2019/34-86032.pdf. The SEC will not accept an initial application for registration with the SEC on or after June 30, 2020, from an adviser that provides services to retail investors that does not include a relationship summary. On April 2, 2020, SEC Chairman Jay Clayton issued a public statement in which he confirmed the June 30, 2020, compliance date for the relationship summary. See SEC Public Statement, Investors Remain Front of Mind at the SEC: Approach to Allocation of Resources, Oversight and Rulemaking; Implementation of Regulation Best Interest and Form CRS (April 2, 2020) available at https://www.sec.gov/news/public-statement/statement-clayton-investors-rbi-form-crs.
2 SEC-registered broker-dealers and registrants that are dually registered with the SEC as an investment adviser and broker-dealer that provide services to retail investors are also required to file and deliver a relationship summary. This memorandum only addresses the relationship summary requirements applicable to registrants that are solely registered with the SEC as an investment adviser.
3 See Instructions to Form CRS, General Instruction 11, at page 9.
4 See SEC FAQs on Form CRS available at https://www.sec.gov/investment/form-crs-faq.
5 This includes, for example, the first-time purchase of a direct-sold mutual fund or insurance product that is a security through a “check and application” process that is not held directly within an account. See Instructions to Form CRS, General Instruction 9, at page 8.