Form CRS

A retail investor is 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.

A dual registrant is a firm that is dually registered as a broker-dealer under section 15 of the Securities Exchange Act of 1934 and an investment adviser under section 203 of the Investment Advisers Act of 1940 and offers services to retail investors as both a broker-dealer and an investment adviser. A dually licensed financial professional is a natural person who is both an associated person of a broker-dealer registered under section 15 of the Securities Exchange Act of 1934, as defined in section 3(a)(18) of that Act, and a supervised person of an investment adviser registered under section 203 of the Investment Advisers Act of 1940, as defined in section 202(a)(25) of that Act.

Format and Length

The relationship summary must include the required items, and the items require the firm to provide specific information. The firm must respond to each item and must provide responses in the same order as the items appear in the instructions. The firm may not include disclosure in the relationship summary other than disclosure that is required or permitted by the instructions and the applicable item.

The firm must make a copy of the relationship summary available upon request without charge. In paper format, the relationship summary for broker-dealers and investment advisers must not exceed two pages. For dual registrants that include their brokerage services and investment advisory services in one relationship summary, it must not exceed four pages in paper format. Dual registrants and affiliates that prepare separate relationship summaries are limited to two pages for each relationship summary. The firm must use reasonable paper size, font size, and margins. If delivered electronically, the relationship summary must not exceed the equivalent of two pages or four pages in paper format, as applicable.

Plain English and Fair Disclosure

The items of the relationship summary are designed to promote effective communication between the firm and retail investors. The firm writes the relationship summary in plain English, taking into consideration retail investors’ level of financial experience, and should include white space and other design features to make the relationship summary easy to read. The relationship summary should be concise and direct. Specifically, the firm uses short sentences and paragraphs; uses definite, concrete, everyday words; uses active voice; avoids legal jargon or highly technical business terms unless it clearly explains them; and avoids multiple negatives. The firm writes its response to each item as if it is speaking to the retail investor, using “you,” “us,” “our firm,” and similar words.

All information in the relationship summary must be true and may not omit any material facts necessary in order to make the disclosures required by the instructions and the applicable item, in light of the circumstances under which they were made, not misleading. If a required disclosure or conversation starter is inapplicable to the firm’s business or specific wording required by the instructions is inaccurate, the firm may omit or modify that disclosure or conversation starter.

Responses must be factual and provide balanced descriptions to help retail investors evaluate the firm’s services. The firm may not include exaggerated or unsubstantiated claims, vague and imprecise “boilerplate” explanations, or disproportionate emphasis on possible investments or activities that are not offered to retail investors.

The instructions encourage charts, graphs, tables, and other graphics or text features, and also text colors and graphical cues, such as dual-column charts, to compare services, account characteristics, investments, fees, and conflicts of interest. In a relationship summary that is posted on a website or otherwise provided electronically, the firm must provide a means of facilitating access to any information that is referenced in the relationship summary if the information is available online, including hyperlinks to fee schedules, conflicts disclosures, the firm’s narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures. In a relationship summary delivered in paper format, the firm may include URL addresses, QR codes, or other means of facilitating access to such information.

Item 1: Introduction

The introduction gives the firm’s name and whether it is registered with the SEC as a broker-dealer, investment adviser, or both. It also indicates that brokerage and investment advisory services and fees differ and that it is important for the retail investor to understand the differences. The introduction also tells the retail investor that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS, which also provides educational materials about broker-dealers, investment advisers, and investing. The firm includes the date prominently at the beginning of the relationship summary.

Item 2: Relationships and Services

The heading for Item 2 is “What investment services and advice can you provide me?” The firm tells the retail investor whether it offers brokerage services, investment advisory services, or both, and summarizes the principal services, accounts, or investments it makes available to retail investors, and any material limitations on such services. A broker-dealer lists the particular types of principal brokerage services it offers to retail investors, including buying and selling securities, and whether or not it offers recommendations to retail investors.

The description of services covers four subjects. The first is monitoring: the firm explains whether or not it monitors retail investors’ investments, including the frequency and any material limitations, and if it does, indicates whether or not the monitoring services are offered as part of its standard services. The second is investment authority: broker-dealers explain that the retail investor makes the ultimate decision regarding the purchase or sale of investments, and may, but are not required to, say whether they accept limited discretionary authority. The third is limited investment offerings: the firm explains whether or not it makes available or offers advice only with respect to proprietary products, or a limited menu of products or types of investments, and if it does, explains these limitations. The fourth is account minimums and other requirements: the firm explains whether or not it has any requirements for retail investors to open or maintain an account or establish a relationship, such as minimum account size or investment amount.

Item 2 also requires specific references to more detailed information about the firm’s services that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure and Regulation Best Interest, as applicable. A broker-dealer that does not provide recommendations subject to Regulation Best Interest includes specific references to more detailed information about its services to the extent it prepares such information. The firm may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information.

The conversation starters for Item 2 are questions for a retail investor to ask a financial professional to start a conversation about relationships and services. A broker-dealer that is not a dual registrant includes the question “Given my financial situation, should I choose a brokerage service? Why or why not?” The Item 2 conversation starters also include “How will you choose investments to recommend to me?” and “What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?”

Item 3: Fees, Costs, Conflicts and Standard of Conduct

Item 3 has three parts. The headings are “What fees will I pay?”; for a broker-dealer, the combined heading “What are your legal obligations to me when providing recommendations? How else does your firm make money and what conflicts of interest do you have?”; and “How do your financial professionals make money?”

Item 3.A: Fees and Costs

The firm summarizes the principal fees and costs that retail investors will incur for its brokerage or investment advisory services, including how frequently they are assessed and the conflicts of interest they create. Broker-dealers must explain their transaction-based fees. Investment advisers explain their ongoing asset-based fees, fixed fees, wrap fee program fees, or other direct fee arrangements. With respect to addressing conflicts of interest, a broker-dealer could include a statement that a retail investor would be charged more when there are more trades in his or her account, and that the firm may have an incentive to encourage a retail investor to trade often. The firm also explains other fees and costs related to its brokerage or investment advisory services and investments, in addition to the principal fees and costs, that the retail investor will pay directly or indirectly.

The relationship summary includes the statements “You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.” The conversation starter for fees is “Help me understand how these fees and costs might affect my investments. If I give you ten thousand dollars to invest, how much will go to fees and costs, and how much will be invested for me?”

Item 3.B: Standard of Conduct and Conflicts of Interest

For a broker-dealer providing recommendations, the standard of conduct statement includes the sentences “When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations we provide you.”

If applicable, the firm summarizes other ways in which it and its affiliates make money from the brokerage or investment advisory services and investments they provide to retail investors, and explains the incentives created by each. If none of the listed conflicts applies, the firm summarizes at least one other material conflict of interest that affects retail investors. The listed ways are proprietary products, third-party payments, revenue sharing, and principal trading.

Proprietary products are investments that are issued, sponsored, or managed by the firm or its affiliates. Third-party payments are compensation the firm receives from third parties when it recommends or sells certain investments. Revenue sharing covers investments where the manager or sponsor of those investments or another third party, such as an intermediary, shares with the firm revenue it earns on those investments. Principal trading covers investments the firm buys from a retail investor, and/or investments it sells to a retail investor, for or from its own accounts, respectively.

The conversation starter for conflicts is “How might your conflicts of interest affect me, and how will you address them?”

Item 3.C: How Financial Professionals Make Money

The firm summarizes how its financial professionals are compensated, including cash and non-cash compensation, and the conflicts of interest those payments create. The description includes, to the extent applicable, whether the financial professionals are compensated based on factors such as the amount of client assets they service; the time and complexity required to meet a client’s needs; the product sold, with differential compensation given in parentheses; product sales commissions; or revenue the firm earns from the financial professional’s advisory services or recommendations.

Item 4: Disciplinary History

The heading for Item 4 is “Do you or your financial professionals have legal or disciplinary history?” The firm answers “Yes” if it or any of its financial professionals disclose, or are required to disclose, the following information at present. The first source is disciplinary information in the firm’s Form ADV, in Item 11 of Part 1A or Item 9 of Part 2A. The second is legal or disciplinary history in the firm’s Form BD, in Items 11 A through K, except to the extent such information is not released to BrokerCheck pursuant to FINRA Rule 8312. The third is disclosures for any of the firm’s financial professionals in Items 14 A through M on Form U4, the Uniform Application for Securities Industry Registration or Transfer, or in Items 7A or 7C through F of Form U5, the Uniform Termination Notice for Securities Industry Registration, or on Form U6, the Uniform Disciplinary Action Reporting Form, except to the extent such information is not released to BrokerCheck pursuant to FINRA Rule 8312.

The firm answers “No” if neither it nor any of its financial professionals discloses, or is required to disclose, that information at present. Regardless of the response, the firm directs the retail investor to Investor.gov/CRS for a free and simple search tool to research the firm and its financial professionals, and includes the conversation starter “As a financial professional, do you have any disciplinary history? For what type of conduct?”

Item 5: Additional Information

The firm tells the retail investor where to find additional information about its brokerage or investment advisory services and request a copy of the relationship summary. This information should be disclosed prominently at the end of the relationship summary. The firm also includes a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary. The conversation starter is “Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me?”

Delivery to Retail Investors

Under Rule 17a-14, a broker-dealer delivers to each retail investor its current Form CRS before or at the earliest of a recommendation of an account type, a securities transaction, or an investment strategy involving securities; placing an order for the retail investor; or the opening of a brokerage account for the retail investor.

A broker-dealer delivers its current Form CRS to each retail investor who is an existing customer before or at the time it opens a new account that is different from the retail investor’s existing accounts; recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment; or recommends or provides a new brokerage service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account. Within the third trigger, the instructions name the first-time purchase of a direct-sold mutual fund or insurance product that is a security through a “check and application” process, where the product is not held directly within an account.

The firm also delivers a current Form CRS to each retail investor within thirty days upon request. If the relationship summary is delivered electronically, it must be presented prominently in the electronic medium, as a direct link or in the body of an email or message, and must be easily accessible for retail investors. If the relationship summary is delivered in paper format as part of a package of documents, the firm must ensure that the relationship summary is the first among any documents that are delivered at that time.

Filing, Posting and Updating

A broker-dealer prepares Form CRS by following the instructions in the form, files its current Form CRS electronically with the SEC through Web CRD, which FINRA operates, and files an amended Form CRS in accordance with the instructions in the form. The firm posts the current Form CRS prominently on its public website, if it has one, in a location and format that is easily accessible for retail investors.

The firm must update its relationship summary and file it within thirty days whenever any information in the relationship summary becomes materially inaccurate. The filing must include an exhibit highlighting changes. The firm must communicate any changes in the updated relationship summary to retail investors who are existing clients or customers within sixty days after the updates are required to be made and without charge. It can make the communication by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor. Each amended relationship summary that is delivered to a retail investor who is an existing client or customer must highlight the most recent changes by marking the revised text or including a summary of material changes, attached as an exhibit to the unmarked amended relationship summary.

The firm must maintain records in accordance with Rule 204-2(a)(14)(i) under the Investment Advisers Act of 1940 and/or Rule 17a-4(e)(10) under the Securities Exchange Act of 1934, as applicable.

Form CRS and Regulation Best Interest

Rule 15l-1, Regulation Best Interest, requires a broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities, including account recommendations, to a retail customer, to act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person ahead of the interest of the retail customer. The Regulation Best Interest disclosure obligation requires the broker, dealer, or natural person, prior to or at the time of the recommendation, to provide the retail customer, in writing, full and fair disclosure of all material facts relating to the scope and terms of the relationship and all material facts relating to conflicts of interest associated with the recommendation. Under Rule 15l-1(a)(2), the best interest obligation is satisfied if the broker, dealer, or natural person meets four obligations: the Disclosure obligation, the Care obligation, the Conflict of Interest obligations, and the Compliance obligation.

Form CRS and Regulation Best Interest operate side by side. Item 2 of Form CRS refers retail investors to more detailed information about the firm’s services that includes the same or equivalent information to that required by Regulation Best Interest, as applicable, and Item 3.B sets out the firm’s standard of conduct when it provides a recommendation. Delivering a Form CRS in compliance with Rule 17a-14 does not relieve the firm of any other disclosure obligations arising under the federal securities laws and regulations or other laws or regulations, including the rules of a self-regulatory organization.

Exam Relevance

The Securities Industry Essentials (SIE) Exam content outline does not name Form CRS in any topic. The SEC Rules and Regulations listed for Section 3, Understanding Trading, Customer Accounts and Prohibited Activities, include, under the Securities Exchange Act of 1934, 15l-1, Regulation Best Interest, and 17a-14, Form CRS, for Preparation, Filing and Delivery of Form CRS.

Topic 3.2.5, Communications with the Public and General Best Interest Obligations and Suitability Requirements, in Section 3, lists communications with the public and telemarketing, with classifications and general requirements and do-not-call list listed beneath it; and best interest obligations and suitability requirements, with know-your-customer (KYC) and general requirements, with what constitutes a recommendation named in parentheses, listed beneath it. Candidates should check the current outline before the examination.

Common Misunderstandings

Form CRS is a long disclosure packet. In paper format, the relationship summary for broker-dealers and investment advisers must not exceed two pages, and a dual registrant that includes its brokerage services and investment advisory services in one relationship summary must not exceed four pages.

Form CRS is delivered once, when an account opens. A broker-dealer also delivers its current Form CRS to an existing customer before or at the time it opens a new account that is different from the retail investor’s existing accounts, recommends a retirement account rollover, or recommends or provides a new brokerage service or investment that would not be held in an existing account, and delivers a current Form CRS within thirty days upon request.

Form CRS applies only to broker-dealers. Broker-dealers registered under section 15 of the Securities Exchange Act of 1934 and investment advisers registered under section 203 of the Investment Advisers Act of 1940 are required to deliver a relationship summary to retail investors.

Every customer receives Form CRS. A retail investor is 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, and a firm that does not have any retail investors to whom it must deliver a relationship summary is not required to prepare or file one.

Delivering Form CRS satisfies the firm’s other disclosure duties. Delivering a Form CRS in compliance with Rule 17a-14 does not relieve the firm of any other disclosure obligations arising under the federal securities laws and regulations or other laws or regulations, including the rules of a self-regulatory organization.

A firm may write Form CRS in technical language and add any marketing it wants. The firm must write the relationship summary in plain English, and it may not include disclosure other than disclosure that is required or permitted by the instructions and the applicable item.

A broker-dealer files Form CRS with FINRA only. A broker-dealer files its current Form CRS electronically with the SEC through Web CRD, which FINRA operates.

Form CRS is a one-time document that never changes. The firm must update its relationship summary and file it within thirty days whenever any information in it becomes materially inaccurate, and must communicate changes to existing retail investors within sixty days after the updates are required to be made and without charge.

Key Points to Retain

Form CRS is the relationship summary that broker-dealers registered under section 15 of the Securities Exchange Act of 1934 and investment advisers registered under section 203 of the Investment Advisers Act of 1940 are required to deliver to retail investors.

Rule 17a-14 governs the preparation, filing and delivery of Form CRS by broker-dealers.

A retail investor is 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.

The relationship summary must not exceed two pages in paper format, or four pages for a dual registrant that combines brokerage and advisory services in one relationship summary.

The five items are the introduction; relationships and services; fees, costs, conflicts and standard of conduct; disciplinary history; and additional information.

A broker-dealer delivers its current Form CRS before or at the earliest of a recommendation of an account type, a securities transaction, or an investment strategy involving securities; placing an order for the retail investor; or the opening of a brokerage account for the retail investor.

A broker-dealer files Form CRS electronically through Web CRD, posts it prominently on its public website if it has one, updates and files it within thirty days whenever it becomes materially inaccurate, and communicates changes to existing retail investors within sixty days.

Delivering Form CRS does not relieve the firm of other disclosure obligations, and Regulation Best Interest requires a broker-dealer to act in the best interest of the retail customer at the time a recommendation is made.

The Securities Industry Essentials (SIE) Exam content outline does not name Form CRS in any topic, and the Section 3 Rules list includes 17a-14, Form CRS, for Preparation, Filing and Delivery of Form CRS.