Word to the wise: when a regulator kindly reminds you on multiple occasions that you need to comply with its rules, you should probably heed those warnings. On July 26, 2021, the SEC announced settlements with 21 investment advisers and 6 broker-dealers that apparently did just the opposite. In particular, the settlements covered alleged failures to timely file and deliver to retail investors the required client/customer relationship summaries, also known as Form CRS. These settlements are the first since the Form CRS requirements kicked in on June 30, 2020.
The SEC noted that none of the firms filed or delivered its Form CRS, or posted it to its website, until being twice reminded of the missed deadlines by the SEC and/or FINRA. This initial tolerance by the SEC appears consistent with the April 2020 Risk Alert from the EXAMS Division (known then as OCIE) in which SEC staff indicated that initial examinations surrounding compliance with Form CRS requirements would “focus on assessing whether firms have made a good faith effort to implement Form CRS.” In other words, the staff signaled that they would not come after firms that attempted to comply with the new requirements, even if they fell short of perfection. But failing to heed the regulators’ multiple prompts for compliance is objectively inconsistent with that standard. However, the settlements are not particularly detailed and, for example, make no mention of whether the firms contested whether the Form CRS requirements even applied to them in the first place (e.g., based on an argument that the firms do not have retail customers).
The SEC imposed fines ranging from $10,000 to $97,523. Given such an odd number at the high end of the range, it appears that the SEC may have utilized a sliding scale for penalties, allotting higher fines to firms with larger client bases and higher AUM compared to the rest of the group. This implies either (A) that the SEC thinks larger firms should have greater resources for compliance in this area, and, therefore, that their non-compliance was all the more egregious, such that larger fines were merited, or (B) because the non-compliance by the larger firms affected greater numbers of retail investors (i.e., those that did not receive the required Form CRS but should have), the fines should correlate to a similarly higher amount. Interestingly, there are no claims of investor harm in any of the settlements.
Needless to say, the SEC will remove the kid gloves for future exams surrounding Form CRS. Firms should be mindful of the requirements in this area. And it may even be prudent to revisit steps taken to comply with the Form CRS requirements, just to be reasonably certain that there are no gaps or weaknesses lingering from the mad dash most firms made to reach the initial compliance deadline back in June 2020.
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