Form CRS requirements for investment advisers

Form CRS, the client relationship summary, is a short disclosure that an SEC-registered adviser with retail investors must file as Part 3 of Form ADV, post on its website and deliver to each retail investor. It may not exceed two pages, must be amended within 30 days when it becomes materially inaccurate, and the changes must reach existing retail clients within 60 days. Its content is largely prescribed: required headings, required sentences and required "conversation starter" questions.

Rule 204-5 under the Advisers Act sets the delivery obligations, and the Instructions to Form CRS (Form ADV Part 3) set the content. The Commission adopted it in June 2019 (Release IA-5247), and advisers had to file their first Form CRS by June 30, 2020.

Who has to file

• SEC-registered advisers with retail investors. 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" (Rule 204-5(d)(2)).
• Not advisers with only institutional clients. If you have no retail investors to whom you must deliver one, you need not prepare or file Form CRS.
• Not exempt reporting advisers. Part 3 does not apply to them.
• Not state-registered advisers, under the federal rule. Part 3 applies to advisers registered or applying for registration with the SEC. Check your state's rules for any parallel requirement.

Broker-dealers have a parallel obligation under Exchange Act Rule 17a-14. Dual registrants are encouraged to prepare one combined relationship summary.

Since June 30, 2020, the SEC will not accept an initial application for registration from an adviser with retail investors unless it includes a Form CRS (Rule 203-1(a)(2)).

Format rules

• Length: no more than two pages in paper format, or the equivalent if delivered electronically. A dual registrant's combined summary may run to four pages (General Instruction 1.C).
• Order: respond to each item in the order given. You may not include anything the instructions do not require or permit.
• Plain English, written as if speaking to the retail investor ("you," "us," "our firm"), with short sentences, active voice and white space.
• Balanced and factual. No exaggerated or unsubstantiated claims, no vague boilerplate, and no disproportionate emphasis on investments or activities not offered to retail investors.
• Conversation starters must stand out with text features such as larger font, a text box or bold type.
• Electronic versions must link to any referenced information available online, such as the fee schedule or the Part 2A brochure.
• Filing through IARD in a text-searchable format with machine-readable headings.

The five required items

Item 1. Introduction

State the date prominently at the start, your name, and that you are registered with the SEC as an investment adviser. Note that brokerage and advisory services and fees differ and that it is important to understand the differences. State that free and simple tools to research firms and financial professionals are available at Investor.gov/CRS.

Item 2. Relationships and Services

Heading: "What investment services and advice can you provide me?" Describe the principal services offered to retail investors, and address monitoring (whether and how often), investment authority (discretionary or not, and any limits), limited investment offerings, and account minimums. Point to more detailed information, at minimum the equivalent of Items 4 and 7 of Part 2A.

Conversation starters for an adviser that is not a dual registrant:

• "Given my financial situation, should I choose an investment advisory service? Why or why not?"
• "How will you choose investments to recommend to me?"
• "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

"What fees will I pay?" Summarize the principal fees and how often they are charged, and the conflicts they create. For an asset-based fee, the instructions suggest explaining that the more assets in the account, the more the client pays, which gives the firm an incentive to encourage more assets. List other common fees, such as custodian fees and fund expenses. Include the required statement beginning "You will pay fees and costs whether you make or lose money on your investments," and the conversation starter: "Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?"

"What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?" Include, with emphasis, the prescribed standard of conduct statement beginning "When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours." Then summarize, where they apply, proprietary products, third-party payments, revenue sharing and principal trading. If none applies, describe at least one other material conflict. Conversation starter: "How might your conflicts of interest affect me, and how will you address them?"

"How do your financial professionals make money?" Summarize cash and non-cash compensation and the conflicts it creates, for example compensation based on assets serviced, product sold or revenue generated.

Item 4. Disciplinary History

Heading: "Do you or your financial professionals have legal or disciplinary history?" Answer "Yes" if the firm or any financial professional currently discloses, or is required to disclose, disciplinary information in Item 11 of Part 1A or Item 9 of Part 2A, or certain items of Forms U4, U5 or U6. Otherwise answer "No." Either way, direct the reader to Investor.gov/CRS and include: "As a financial professional, do you have any disciplinary history? For what type of conduct?"

Item 5. Additional Information

At the end, say where to find more information and request a copy, give a telephone number, and include: "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

Rule 204-5(b) requires an adviser to deliver its current Form CRS:

1. Before or at the time it enters into an advisory contract with a retail investor, even if the agreement is oral.
2. To an existing retail client, before or at the time the adviser:
   • opens a new account that is different from the client's existing accounts
   • recommends that the client roll over assets from a retirement account into a new or existing account or investment
   • recommends or provides a new advisory service or investment that does not involve a new account and would not be held in an existing account
3. Within 30 days of a retail investor's request.

It must also be posted prominently on the adviser's website, if it has one, in a location and format easily accessible to retail investors.

Electronic delivery is allowed, consistent with SEC guidance. Delivered electronically, it must be presented prominently, for example as a direct link or in the body of the message. Delivered on paper in a package of documents, it must be first in the package (General Instruction 10).

Updates: the 30-day and 60-day clocks

• Amend within 30 days. General Instruction 8.A requires you to update and file Form CRS within 30 days whenever any information in it becomes materially inaccurate. Unlike the brochure, it does not wait for the annual amendment, and including it in the annual amendment is optional.
• File an exhibit. The filing must include an exhibit highlighting the changes, such as marked text or a summary of material changes.
• Tell existing retail clients within 60 days. Rule 204-5(b)(4) requires you to communicate the changes to each existing retail client within 60 days after the amendment is required to be made, without charge. You can deliver the amended Form CRS, with the exhibit, or communicate the information through another disclosure delivered to the client.

The 60 days run from when the amendment was required, not from when you filed it. A firm that files late has less time to notify clients.

Records

Rule 204-2(a)(14)(i) requires you to keep each Form CRS and each amendment, and a record of the dates it was given to each client and to each prospective client who became a client. Delivery you cannot evidence is a books and records problem as well as a Form CRS one.

What examiners look for

The library's notes on Rule 204-5 list the recurring findings:

• Delivered at onboarding and never again, missing rollover recommendations and new services.
• An outdated version on the website while the current one is on file.
• No record of when it was delivered, or to whom.

Before filing, also check the document against the instructions themselves. It should not run over two pages or add content the instructions do not permit, it should keep every required statement and conversation starter that applies to the firm, and Item 4 should not say "No" when Part 1A reports a disciplinary event.

Common questions

Do RIAs have to file Form CRS?

An SEC-registered adviser that has retail investors must. An adviser whose clients are all institutional does not need one, and Part 3 does not apply to exempt reporting advisers or, under the federal rule, to state-registered advisers.

How long can Form CRS be?

No more than two pages in paper format, or the electronic equivalent. A dual registrant that combines its brokerage and advisory services in one summary may use four pages.

When do I have to update Form CRS?

Within 30 days of any information becoming materially inaccurate, with an exhibit showing the changes. Existing retail clients must be told about the changes within 60 days of when the amendment was required.

Is Form CRS the same as Form ADV Part 2?

No. Form CRS is Part 3 of Form ADV: a short, standardized summary with prescribed headings. Part 2A is the full narrative brochure, delivered separately. Form CRS must point readers to the brochure for detail. See the Form ADV Part 2 guide.

Does a rollover recommendation require delivering Form CRS?

Yes. Rule 204-5(b)(2)(ii) requires delivery to an existing retail client before or at the time you recommend rolling over assets from a retirement account into a new or existing account or investment.

Keep the clocks straight

Form CRS has three clocks that do not line up with the annual Form ADV cycle: 30 days to answer a request, 30 days to amend, and 60 days to notify. Luna's compliance calendar lets you add each one as its own dated obligation, alongside the annual amendment. The regulatory filings template covers who prepares, reviews and delivers Form CRS.