The SEC’s Division of Enforcement announced action against a whopping 27 investment advisers in connection with issues relating to the filing and distribution of Form CRS. According to the SEC announcement, the 27 investment advisers failed to timely file (even after being notified by the SEC to do so) and deliver their Form CRS documents to clients, and thereby engaged in violations of the federal securities laws. Fine amounts ranged from $10,000 to a hefty $97,523.
Form CRS, also known as Form ADV Part 3, is a short relationship summary that is intended to provide clients and prospective clients with a summary of the services an advisory firm [1] offers, its fees, general information about conflicts of interest and other details that the SEC views as important for a client to have about the business of an adviser. Form CRS is a mandatory document for SEC-registered investment advisers that work with retail clients (i.e., natural persons). Generally, Form CRS must be delivered to a client at the inception of an advisory relationship, when a new account is opened that is different from the client’s existing account(s), when a client rolls over assets from a retirement account, and when an adviser provides a new service.
The SEC did issue a Risk Alert devoted to Form CRS in April 2020, which makes this announcement of enforcement activity focused on Form CRS issues consistent with SEC’s overall approach to educate, examine and enforce.
This announcement serves as an important lesson to investment advisers that all parts of Form ADV are critical to the operation and administration of a proper regulatory compliance program. We encourage firms to review their regulatory filings and their processes to ensure timely delivery of all Form ADV documents, including Form CRS. Advisers should make regulatory compliance a priority. We can help.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Attorney Robert D. Conca can be reached in the firm’s San Diego office at (619) 696-9500.
[1] Certain registered investment advisors (“RIAs”) and broker-dealers have Form CRS obligations; this article focuses on RIAs.
On Wednesday July 7th, the White House announced President Biden intends to issue a Presidential Executive Order limiting the use of non-compete agreements in employment situations. While this anticipated Order will impact a broad swath of industries, it may have potentially have significant consequences for the financial services/brokerage industry.
As of now, the exact wording and scope of the Order is unknown, and it is unclear if the Order also will limit or eliminate non-solicitation clauses. Elimination of both, or either, may change the landscape of broker transitions in the same way the Broker Protocol reshaped the transition landscape when first adopted over 15 years ago.
President Biden’s Executive Order would direct the Federal Trade Commission to create and promulgate rules intended to “help to curtail” non-compete agreements, according to White House Press Secretary Jan Psaki. Psaki said, “Roughly half of private sector businesses require at least some employees to enter non-compete agreements, affecting over 30 million people. This affects construction workers, hotel workers, many blue-collar jobs, not just high-level executives.” Psaki said President Biden “believes that if someone offers you a better job you should be able to take it.”
Brokerage and financial services firms relied more heavily on non-compete clauses before the 2004 Protocol for Broker Recruiting, first signed by only a handful of the largest brokerage firms, to which now more than 1,500 firms of all sizes and types are signatories. The Protocol was a real game-changer, allowing brokers to leave one firm and join another taking their clients and certain client information to the new firm without fear of the usual aggressive litigation and threat of a dreaded Temporary Restraining Order by the firm they were departing.
Since the Protocol was adopted, many brokerage firms have withdrawn from it, including several of the early signers, who have created alternative protections intended to discourage defectors from taking clients, client information and soliciting those clients to change firms. For example, Morgan Stanley withdrew in 2017 and, the day it withdrew, insisted its brokers sign new, non-solicitation agreements. Both UBS and Citigroup withdrew in 2018. As alternatives to the Protocol, non-Protocol firms have instituted various devices to keep their brokers and client information hostage, including deferred compensation packages which brokers forfeit if they leave their firm, and non-solicitation clauses justified by firms as intended to protect clients’ privacy.
Several states have adopted their own restrictions on non-compete and non-solicitation agreements. For example, in May, the Illinois Senate and House of Representatives passed an amendment that changed the standards required to enter into and enforce employee non-compete agreements by imposing an annualized earnings requirement and by outlining restrictions and requirements that apply to non-solicit agreements.
We will continue updating once the formal announcement is made and the FTC promulgates its actual rules and applicability. As they say, the “devil is in the details.”
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Attorney Erwin J. Shustak can be reached in the firm’s San Diego office at (619) 696-9500.
