SEC Charges 27 Registered Investment Advisers and Broker-Dealers With Form CRS Failures

Form CRS, Reg BI, and Fiduciary and Solely Incidental Interpretations

On June 5, 2019, the SEC adopted a package of rulemaking and interpretations focused on enhanced disclosures to retail investors. First, the SEC adopted a requirement that registered investment advisers and broker-dealers file and deliver to retail investors, and post on their websites, a Form CRS summarizing information about services, fees and costs, conflicts of interest, legal standard of conduct, and whether or not the firm and its financial professionals have disciplinary history. The Form CRS was designed to allow investors to make side-by-side comparisons of firms and services. Second, the SEC simultaneously adopted Reg BI, which created a new standard of care for broker-dealers, requiring them to act in their retail customers’ best interest when making securities or account type recommendations. Finally, the SEC released interpretations of the fiduciary standard applicable to investment advisers, and the “solely incidental” exclusion from the definition of investment adviser for broker-dealers whose performance of advisory services are solely incidental to the conduct of the broker-dealer.

The Form CRS rule and Reg BI went effective in June 2020. Shortly thereafter, the SEC’s Division of Examinations (EXAMS) began conducting examinations of firms for compliance with those new rules. The first wave of examinations focused on whether firms were delivering and filing Forms CRS, whether Forms CRS were complete and accurate, and whether firms subject to Reg BI had established policies and procedures reasonably designed to achieve compliance with Reg BI. The second wave of examinations focused on whether broker-dealers had a reasonable basis to believe that recommendations were in customers’ best interest under Reg BI and transaction testing for implementation of written policies and procedures.

On October 26, 2020, following the first wave of examinations, the SEC shared preliminary results of its examinations with the industry at a Roundtable on Regulation Best Interest and Form CRS. Among other things, the SEC indicated that it had identified and notified hundreds of firms that they had failed to timely file a Form CRS. Those examinations appear to be the basis of the 27 enforcement actions the SEC has filed against subject firms.

Form CRS Enforcement Actions

On July 26, 2021, the SEC charged 21 registered investment advisers and 6 registered broker-dealers for failure to timely file or deliver the Form CRS, or post it to the website, until being reminded twice of the missed deadline by their regulators — in the case of investment advisers, by EXAMS, and in the case of broker-dealers, by the Financial Industry Regulatory Authority. The orders make clear that EXAMS first contacted these firms by email on October 14, 2020, about these failures, that is, just days before the SEC Roundtable on Reg BI and Form CRS where the failure by hundreds of firms was publicly announced.

These 27 enforcement actions charged the investment advisers with violations of Section 204 of the Advisers Act and Rules 204-1 and 204-5 thereunder, and the broker-dealers with violations of Section 17(a)(1) of the Securities Exchange Act and Rule 17a-14 thereunder. The settlements, which did not involve admissions, included censures, cease-and-desist orders, and penalties ranging from $10,000 to $97,523 per firm. The charged registered investment advisers had assets under management ranging from $34 million to $2.2 billion. The 27 actions resulted in total penalties of $910,092, which will be remitted to the Treasury and will not be distributed to investors, likely because there was no calculable monetary harm to clients resulting from the violations.

Takeaways

1. Packaging. The packaging of 27 individual actions each involving small penalties is not a new approach for the Division of Enforcement or for the Asset Management Unit, which investigated the investment adviser respondents. In June 2018, the division and the Asset Management Unit announced settlements with 13 private fund advisers who failed to file annual reports on Form PF on multiple occasions over multiple years. In March 2019, the Division of Enforcement and Asset Management Unit announced charges against 79 investment advisers for the receipt of 12b-1 fees without disclosure of conflicts of interest. Even back in the late 1990s and early 2000s, the SEC packaged small cases in a single announcement to signal particular regulatory topics.
   
   The packaging of enforcement actions is designed to make a larger impact than would have been made by filing smaller actions individually or even successively. This approach signals that no case is too small to warrant enforcement action and that compliance with the new package of rulemaking is a top priority for the SEC. It is not unreasonable to expect that enforcement actions for violations of Reg BI will be next.
2. Civil Penalties. Although neither the press release nor the orders explain the differences in civil penalties, it seems that, for at least the registered investment adviser respondents, there is a correlation between the penalty and the firm’s assets under management (AUMs), with a $97,523 penalty for AUMs over $1 billion, $50,000 for an adviser with AUMs over $500 million, $25,000 for advisers with nine-figure AUMs under $500 million, and $10,000 for advisers with eight-figure AUMs.
3. Aggressive Enforcement. These 27 enforcement actions are consistent with the expectation of an aggressive enforcement agenda under Chair Gensler and a willingness to bring charges for technical violations of the securities laws without evidence of customer harm.