Investment Advisers that serve retail investors are required to maintain Form CRS and deliver it to each such retail investor. According to Rule 204-5 of the Advisers Act, a retail investor is a natural person (or their legal representative) who seeks or receives services primarily for personal, family or household purposes. This is not as straightforward as it seems.
An adviser who was included In the recent Form CRS sweep, was advised by the SEC to provide additional disclosure when relying on a determination that their clients are not “retail investors” under the Rule. This is not in the frequently asked questions (“FAQs”) or the rule.
The scope of the sweep included advisers that reported AUM under the “Individual or “High net worth individual” client categories (for our purposes, the “separate account” categories) under Item 5.D of Form ADV Part 1, but yet did not file a Form CRS.
It is possible for advisers to have clients that are not funds and who also are not retail investors. For example, a client receiving services solely for commercial or business purposes, such as for a small business, or seeking services on behalf of a charitable trust often will not be considered retail investors. In addition, separate accounts holding co-investments for investors in private funds not intended for personal, family or household purposes would cause an adviser to answer affirmatively to Item 5.D, but not file a Form CRS.
The Staff observed that advisers that have these types of situations should add a clarification to Schedule D, Miscellaneous to the effect that all of the adviser’s individual and high net worth individual clients reported on Form ADV are separately managed accounts receiving services that are not primarily for personal, family or household purposes.
In addition for advisers that have separate account clients who are solely comprised of non-retail investors under the Rule, we recommend they be sure to:
• document the basis for determining that each client is not a retail investor, and
• mention in the firm’s Form ADV Part 2A Brochure, Item 7 – Client Descriptions of the nature of the firm’s individual and high-net-worth clients (e.g., firm provides advisory services to separately managed accounts established for institutional clients, non-household purposes).
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