Double-Check the Disciplinary Response in Form CRS, Especially Checking Histories of Financial Pros

On October 8, 2020 the SEC published updated FAQs regarding the disciplinary question in Form CRS.  In an unusual step, Chair Clayton joined SEC Directors Dalia Blass and Brett Redfearn in releasing a public statement about the FAQs.

The new FAQs follow the Wall Street Journal’s September 3, 2020 article titled “Financial Firms Fail to Own Up to Advisers’ Past Misdeeds.” The WSJ reported that “[a]t least 1300 brokerage and financial advisory firms incorrectly stated on the new document that neither they nor their financial professionals had legal or disciplinary histories.” Of the 6200 firms reviewed by the WSJ, 1800 other firms reported disciplinary history by answering “yes”, that the firm or its financial professionals have at least one reportable disciplinary event.

In the public statement, the SEC officials stated pointedly that RIAs and BDs cannot omit the required question, or respond based on only the disciplinary history of a firm or its financial professionals—both are required. The SEC officials stated that the agency has reviewed Form CRS filings and observed examples that did not include the disciplinary question or where “responses lacked required information or otherwise could be improved.”

According to the WSJ, 80 firms omitted the disciplinary question altogether, and that 20% of the firms reporting no disciplinary history actually had reportable history.

The SEC FAQs make clear that firms who do not have disciplinary history may not omit the question, and firms may not respond only about the firm and omit information about financial professionals.

In the FAQs, the SEC provided that “The staff would not object if [a] firm included the following concise response ‘No for our firm. Yes for our financial professionals.’ or “Firm – no.” “Financial professionals – yes.”  And vice versa.

The SEC also clarified in the FAQ responses that firms may not include additional information in response to yes answers to explain the disciplinary information.  Firms may however provide additional supplemental disclosure about the events, and the SEC provides examples such as Form ADV Part 2B brochure supplements or a print-out of the IAPD or BrokerCheck “Disclosures” section for the particular firm or financial professional.

Form CRS is an integral new disclosure document in the SEC’s campaign to create streamlined disclosure obligations and clear and concise information for the public to absorb.  When concerns arise that firms are not meeting expectations for around such an initiative and the warning has been publicly provided, any firms that have ongoing mistakes could subject themselves to new disciplinary proceedings. Time to double-check all disciplinary responses.

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Item 4. Disciplinary History

  1. Use the heading: “Do you or your financial professionals have legal or disciplinary history?”
  2. State “Yes” if you or any of your financial professionals currently disclose, or are required to disclose, the following information:

(i) Disciplinary information in your Form ADV (Item 11 of Part 1A or Item 9 of Part 2A).

(ii) Legal or disciplinary history in your Form BD (Items 11 A–K) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312).

(iii) Disclosures for any of your financial professionals in Items 14 A–M on Form U4 (Uniform Application for Securities Industry Registration or Transfer), or in Items 7A or 7C–F of Form U5 (Uniform Termination Notice for Securities Industry Registration), or on Form U6 (Uniform Disciplinary Action Reporting Form) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312).

  1. State “No” if neither you nor any of your financial professionals currently discloses, or is required to disclose, the information listed in Item 4.B.

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