SEC Form CRS Enforcement Directed Sweep in Full Swing

The SEC is full throttle ahead currently targeting multiple firms for enforcement related to failure to file Form CRS.

The SEC originally gave companies some leeway in complying with filing Form CRS, but in December, the SEC indicated that they would start bringing enforcement actions against violators.

The SEC has initiated this through sweep exams requesting information related to Form CRS. The SEC appears to be targeting firms who have not filed a Form CRS, but who have responded on the ADV Part 1 indicating the adviser has clients who are Individuals and/or high net worth clients.

The SEC sweep request list asks advisers for a handful of items including the following:

  • • List of supervised persons
  • • Client list
  • • List of firm litigation, arbitration, and administrative proceedings
  • • List of client or investor complaints
  • • Compliance and operational policies and procedures specific to Form CRS
  • • Copies of Form CRS and any disclosures communicating Form CRS changes to clients OR – A brief description of a determination that Form CRS is not required and supporting documentation.
  • • The dates on which Form CRS was delivered to each client and copies of electronic delivery.

For those firms where the SEC is recommending enforcement, the staff has indicated there is no room for negotiating the settlement.  Settlements include a censure and fine, an administrative cease-and-desist, and a finding of willful violations of the Advisers Act Section 204, and Rules 204-1 and 204-5 thereunder.  Financial penalties are based on Regulatory Assets Under Management with the lowest penalty we have seen start at $10,000. The biggest issue we see is that this will be a disclosable event.  So, it won’t help with fundraising. This drives home once again the actual cost of non-compliance is much greater than it may seem initially.

Most of the firms that called us about this have somehow misinterpreted the rule as not applicable to their adviser. If you have been notified, or believe you may be “on the list,” immediate remediation may still inform the facts and circumstances examiners consider.  If you have not filed, get the filing in, or ensure documentation for the non-filing rationale is in order. If you have filed but are uncertain as to whether the filing complies with Rule 206(4)-5, conduct a review promptly and make necessary changes.  And, as always if you need help, we are here!