Item 1. Introduction
Include the date prominently at the beginning of the relationship summary (e.g., in the header or footer of the first page or in a similar location for a relationship summary provided electronically). Briefly discuss the following information in an introduction:
A. State your name and whether you are registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both. Also indicate that brokerage and investment advisory services and fees differ and that it is important for the retail investor to understand the differences. You may also include a reference to FINRA or Securities Investor Protection Corporation membership in a manner consistent with other rules or regulations (e.g., FINRA rule 2210).
B. State 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.
Firms may use their own words to describe services
- Broker-dealers are further required to state that they buy and sell securities
Address the following topics:
- Monitoring – Explain whether or not you monitor retail investors’ investments, including the frequency and any material limitations. If so, indicate whether or not the services described in response to this Item 2.B.(i) are offered as part of your standard services.
- Investment authority
- Limited investment offerings
- Account minimums and other requirements
Item 2.C. Additional Information
Include specific references to more detailed information about your services that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (Items 4 and 7 of Part 2A or Items 4.A. and 5 of Part 2A Appendix 1) and Regulation Best Interest, as applicable.
You may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such services.
Items 2.D. Conversation Starters
(i) If you are a broker-dealer and not a dual registrant, include: “Given my financial situation, should I choose a brokerage service? Why or why not?”
(ii) If you are an investment adviser and not a dual registrant, include: “Given my financial situation, should I choose an investment advisory service? Why or why not?”
(iii) If you are a dual registrant, include: “Given my financial situation, should I choose an investment advisory service? Should I choose a brokerage service? Should I choose both types of services? Why or why not?”
(iv) “How will you choose investments to recommend to me?”
(v) “What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?”
Item 3. Fees, Costs, Conflicts & Standards of Conduct
A.Use the heading: “What fees will I pay?”
(i) Description of Principal Fees and Costs: Summarize the principal fees and costs that retail investors will incur for your brokerage or investment advisory services, including how frequently they are assessed and the conflicts of interest they create.
- The fees described by investment advisers should align with the type of fee(s) disclosed in response to Form ADV Part 1A, Item 5.E, but they should be summarized in a way that provides retail investors a high-level overview.
- Investment advisers with wrap fee program fees are encouraged to explain that asset-based fees associated with the wrap fee program will include most transaction costs and fees to a broker-dealer or bank that has custody of these assets, and therefore are higher than a typical asset-based advisory fee.
- With respect to addressing conflicts of interest, an investment adviser that charges an asset-based fee could, for example, include a statement that the more assets there are in a retail investor’s advisory account, the more a retail investor will pay in fees, and the firm may therefore have an incentive to encourage the retail investor to increase the assets in his or her account.
- Broker-dealers must describe their transaction-based fees. With respect to addressing conflicts of interest, a BD 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 therefore have an incentive to encourage a retail investor to trade often.
- Standards of conduct and conflicts of interest
- Financial professional compensation and related conflicts of interest
Items 3.A.(ii) Description of Other Fees & Costs
“List examples of the categories of the most common fees and costs applicable to your retail investors (e.g., custodian fees, account maintenance fees, fees related to mutual funds and variable annuities, and other transactional fees and product-level fees).”
Per the Release, in making this determination, firms should consider, for example,
- The amount of the fee (including whether the fee varies based on options the investor may select such as optional benefits and the investment options that a contract owner may select in the context of variable annuities and variable life insurance products),
- The likelihood that the fee will be applicable,
- Whether the fee is ordinarily assessed on a significant number of the firm’s clients,
- Whether the fee is associated with a product or service that the firm frequently recommends or provides,
- Whether the fee is contingent upon certain events the investor should be made aware of, the effect on returns, and the magnitude of the conflict of interest it may create.
Item 3.A.(iii) Additional Information
- State “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.”
You must include specific references to more detailed information about your fees and costs that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (specifically Items 5.A., B., C., and D.) and Regulation Best Interest, as applicable.
Item 3.B. Standards of Conduct & Conflicts of Interest
Use the heading: “What are your legal obligations to me when providing recommendations as my broker-dealer or when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?”
Standard of Conduct
- Include (emphasis required): “When we provide you a recommendation as your broker-dealer or act as your investment adviser, 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 and investment advice we provide you. Here are some examples to help you understand what this means.”
- If you do not provide recommendations as a broker-dealer: We do not provide recommendations as a broker-dealer. When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours…”
SEC eliminated reference to “fiduciary” standard of conduct in adopting release.
However, Advisers are permitted to use the word “fiduciary” in their disclosures, including Form CRS. The IAA received this confirmation June 25, 2019 from senior staff in the SEC’s Division of Investment Management.
The final instructions to Form CRS require investment advisers, broker-dealers, and dual-registrants to include a brief statement of the applicable standard of conduct. Firms are required to use the exact language specified in the form’s instructions, which does not include the word “fiduciary.”
Item 3.B. Conversation Starter & Additional Information
“How might your conflicts of interest affect me, and how will you address them?”
You must include specific references to more detailed information about your conflicts of interest 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.
Item 3.C. Financial Professional Compensation
Use the heading: “How do your financial professionals make money?”
(i) Description of How Financial Professionals Make Money: Summarize how your financial professionals are compensated, including cash and non-cash compensation, and the conflicts of interest those payments create.
(ii) Required Topics in the Description: Include, to the extent applicable, whether your 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 (i.e., differential compensation); product sales commissions; or revenue the firm earns from the financial professional’s advisory services or recommendations.
Item 4. Disciplinary History
A. Use the heading: “Do you or your financial professionals have legal or disciplinary history?”
B. 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).
C. 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.
D. Regardless of your response to Item 4.B, you must:
(i) Search Tool: Direct the retail investor to visit Investor.gov/CRS for a free and simple search tool to research you and your financial professionals.
Item 4.D. Conversation Starter: Disciplinary History
Include the following questions for a retail investor to ask a financial professional and start a conversation about the financial professional’s disciplinary history:
- As a financial professional, do you have any disciplinary history? For what type of conduct?”
- For “you,” – the firm (Form ADV, Form BD for “yes” responses)
- For your Financial Professionals? Form U4, U5, U6 “yes” responses
“As a financial professional, do you have any disciplinary history? For what type of conduct?”
Challenge: How to manage dialogue with investors. Training, supervision, documentation, accuracy
Challenges: Written Answers to Conversation Starters
The SEC Release states: “All firms could choose to provide written answers to conversation starters, but the final instructions will only require written responses in these limited circumstances* to ensure that retail investors receive responses when they do not have access to a financial professional to ask questions.”
(*CSS note: Written responses are required for investment advisers that provide only automated investment advisory services or broker-dealers that provide services only online.)
The SEC: “We are not establishing new or separate recordkeeping obligations related to the conversation starters or the answers provided by firms in response to the conversation starters.”
Item 5. Additional Information
A. State where the retail investor can find additional information about your 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.
B. Include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary.
Item 5. Conversation Starters
- 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?”