This article originally appeared on FinancialPlanning.com by Justin L. Mack.
An SEC committee is calling out firms over form CRS disclosures, stating that many of the summaries provided by registered broker-dealers and investment advisors are inundated with jargon, technical terms and readability issues that impede the intended goal of the process.
But fiduciary and plain-language experts critical of the required summaries say the commission’s call to action is missing key elements needed to address the deeper failures of Form CRS.
The SEC Standards of Conduct Implementation Committee late last week issued a statement highlighting problems identified during a recent review of submitted relationship summaries. The committee said while members did observe examples of simple, clear disclosures, there were multiple areas where “compliance improvements appear to be needed.”
Suggested improvements include the removal of technical language, legal terminology and disclaimers lacking clear explanation. “Relationship summaries must be concise and direct, using plain English and taking into consideration retail investors’ level of financial experience,” said the SEC committee statement. “For example, some firms referenced terms such as ‘riskless principal,’ ‘in arrears,’ ‘markups’ and ‘markdowns,’ or cited specific SEC rules without providing clear explanations.”
The committee also zeroed in on correcting omissions or improper modifications of required disclosures in the form, including those related to conflicts of interest, investment authority, monitoring services and disciplinary history. “This prevents retail investors from easily comparing different firms’ relationship summaries and getting the facts they need when deciding among firms or financial professionals and the accounts and services available to them,” the statement said.
The committee notes 11 areas of improvement. It included reliance on proposed, rather than final, instructions; lack of specific references to more detailed information; shortcomings in descriptions of relationships and services; modification and/or supplementation of the disciplinary history disclosure; issues with prominently displaying relationship summaries on firm websites; issues with the description of affiliate relationships; poor design; use of marketing language; and use of boilerplate language.
Knut A. Rostad, co-founder and president of the Institute for the Fiduciary Standard, said the statement shared by the SEC committee is valid in terms of the shortcomings that it’s highlighted. But the former regulatory and compliance officer said last week’s address is “entirely missing” anything related to the fundamental goal of form CRS and the universal confusion its implementation has created.
“Our focus is determining if form CRS is serving its intended purpose, and its intended purpose going back to 2018 and 2019 is to help investors understand how broker-dealers and investment advisors differ,” Rostad said. “This is what the SEC says is the purpose. And we say in terms of content, it fails and it fails miserably in achieving this goal.”
Rostad contends that investors do not understand Form CRS, and RIAs do not understand their ability to describe their fiduciary status within the summaries. To determine the extent of the confusion, Rostad’s organization partnered with The Plain Language Group to conduct a pair of independent reviews of Form CRS submissions. Rostad said the Institute for the Fiduciary Standard in September reviewed 41 CRS forms from 29 of the largest dually registered firms and 12independent RIAs. A review of 30 fee-only firms with AUM between $1 billion and 3 billion was conducted in November.
Rostad said key findings were that in submissions from dually registered firms, many material facts about how broker-dealers and RIAs differ are either entirely omitted or overlooked. None of the firms stated that the broker-dealer standard is a lesser, more conflicted or more limited standard.
In addition, only 12 of the 29 dually registered firms used the word “fiduciary,” and just a single firm described fiduciary as a higher or broader standard. That firm was joined by only two of the 12 independent RIAs properly describing the fiduciary standard. The November analysis provided a similar result, with 93% percent of those firms omitting descriptions about their fiduciary duty on CRS, Rostad said.
“We found that RIAs are confused based on the directions provided by the SEC as to what they’re allowed to say about their fiduciary status,” Rostad said. “They blame investors for not understanding what they’re being told. It’s not the investors’ fault, but it’s the communication and messages that they’re getting. But we’re not just talking about retail investors. We’re talking about professional advisors, and they’re being confused about what the SEC is saying. “It should make a lot of people ask questions about why investment advisors themselves seem to not understand the instructions from the SEC on this.”
The Plain Language Group review included CRS forms from Ameriprise, Commonwealth, Equitable Advisors, Royal Alliance, Sage Point Advisors and Wells Fargo. According to the report, all six firms need improvement, and five of the six firms failed a readability test.
Plain Language Group Founder Deborah Bosley said a significant number of the documents she reviewed used jargon that the average investor would not understand.
“I’ve spent most of my career in plain language, much of it in the financial sector. And frankly, I don’t understand these words neither as an investor nor as someone who has trained people to write in plain language. So that indicated a big problem,” Bosley said.
But the problems extend to the very formatting of the documents. Bosley said the summaries were full of crammed content and difficult-to-read text. She mentioned documents that used 8-point font for primary text, stating that the standard is a minimum of 10-point font and that anything below begins to approach fine print. Bosley added that while the summaries often did a good job with simple pronouns or introductory statements, they would immediately veer back into needlessly complex, jargon-heavy territory.
“So on the one hand, they met the criteria for the use of pronouns, and on the other hand, that’s nothing compared to the vast number of plain-language strategies that are avoided,” she said. Bosley also looked at whether the documents are written in a manner that is “friendly and helpful” as that is part of the SEC guidelines.
“But the tone of these six that I looked at we’re anything but friendly because you can’t be helpful and friendly if people can’t understand what they’re reading,” Bosley said. “I can’t presume that they did anything intentionally, but what they did produce was poorly done if the intention is for readers to truly understand the differences between RIAs and broker-dealers, but even more importantly just to understand the content that they were given in those two or four pages.”
Bosley said the issue with jargon and complexity is not exclusive to the financial industry. She gave an example of a recent trip to the ophthalmologist and being asked how her vision was when her eyes were in “a superior position.” When Bosley expressed confusion at the statement, the ophthalmologist clarified and asked how her vision is when she looks up.
“I think every industry thinks they have to use the jargon of the industry without understanding the lack of the ability for the audience to understand it,” Bosley said. “Every sector thinks that their sector is so complicated that there’s no way to explain it without using the complex language of the sector, which is, in fact, a fallacy.”
The irony, Bosley continued, is that the SEC created a Plain English Handbook in 1998 that she believes can easily solve the problems being created by the commission and firms in 2021. “That handbook, in my mind, has been ignored by the industry. It also needs to be updated,” Bosley said. “At that point, the SEC was so ahead of the game, and yet that handbook has just sort of languished.”
Along with the statement, the SEC Standards of Conduct Implementation Committee encouraged firms to improve by reviewing the Form CRS Adopting Release, the Small Entity Compliance Guide, the Form CRS FAQ and the SEC spotlight page on Regulation Best Interest, Form CRS and Related Interpretations.
Firms with interpretive questions regarding Form CRS were also urged to submit questions to [email protected].“The staff stands ready to continue assisting firms as they prepare, update, file and deliver relationship summaries that will improve the quality and transparency of their relationships with retail investors,” said the committee statement.