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News October 8, 2018 Issue

Study from AARP and Other Groups Finds SEC’s Proposed Form CRS Confusing

The SEC proposed Form Customer Relationship Summary (CRS) to make the differences between advisers and broker-dealers easier for retail investors to understand – but it may not be passing that test. Three major consumer groups – the AARP, the Financial Planning Coalition and the Consumer Federation of America – in their comment letter to the SEC revealed that an independent study of investors “indicate the need for the Commission to revise and retest the content, language and format of the CRS.”

Form CRS, proposed by the Commission in April, was part of a “fiduciary” package, along with, among other parts, Regulation Best Interest and a new interpretation of an advisory firm’s standard of care. The proposed package was designed, in part, to raise the standard of care that broker-dealers would be required to meet, and clarify and simplify for retail investors the differences among the services that advisers and broker-dealers offer.

Yet, ironically, the study from the three organizations has found that the proposed Form CRS, rather than relief confusion among retail investors as to these differences, has only exacerbated them. The organizations retained communication firm Kleimann Communication to conduct the testing, which took the form of 90-minute, one-on-one interviews with 16 investors from three different geographic areas this past July. The investors were asked to review the Commission’s mock-up for Form CRS for dual registrant firms, which was available in the proposed CRS.

“We urge the Commission to reexamine the CRS and postpone steps to finalize the Regulation Best Interest regulatory package until the issues identified with the CRS have been resolved,” the three organizations say in their comment letter. “Disclosure plays too central a role in the proposed approach for the Commission to dismiss evidence that its proposed disclosure does not fulfill its intended function. Investors will be better served if the Commission take the time to get this right.”


“The CRS document is a document that nobody loves,” said Shearman & Sterling partner Nathan Greene. “The industry views it as duplicative with customer statements and with Form ADV. Consumer advocates say that it does not work in bridging the gap in explaining the difference between services provided by advisers and broker-dealers.”
As for the effect the letter is likely to have, he said that it is likely to prompt some changes from the SEC. “The SEC had a vision they came up with in creating Form CRS. They want to achieve that vision but not with more paper that no one can understand.”

Investment Adviser Association President and CEO Karen Barr, in a recent op-ed, said that while the IAA “appreciate[s] the Commission’s focus on increasing transparency around the services provided and fees charged by financial professionals, we have serious concerns that the relationship summary (Form CRS) the SEC has proposed to achieve this goal will not provide investors with an accurate and understandable snapshot of their relationships with such professionals.”

The findings

Following are excerpts from the summary of how the investors responded to proposed Form CRS, as commented on by the three organizations in their comment letter:

  • Overall level of comprehension was poor. “Few participants were able to consistently comprehend the information within a single section of the CRS,” the organizations said. “Fewer still were able to integrate and synthesize the information provided in the document as a whole.” The results also showed that the formatting of the form, as well as the language used, “contributed to the confusion and would need to be substantially revised for investors to be able to use the disclosures to make an informed choice between the two types of accounts,” advisory or broker-dealer.
  • Key differences between advisory services and broker-dealer services not understood. “Many participants in the testing struggled to articulate a clear distinction with regard to the nature of services offered between the brokerage and advisory accounts,” according to the comment letter. “The only feature of the accounts that was well understood by nearly all participants was the method of payment by transaction versus asset fees.” But even in that case, the organizations said, investors still were not clear from the information provided on Form CRS as to which option was best for them, “and later disclosures regarding costs and fees undermined their understanding of this point.”
  • Legal obligation disclosures not understood. Regulation Best Interest, if adopted, would impose on broker-dealers a standard of conduct that is similar, but not identical, to the standard for advisers. Form CRS disclosures were intended to alert investors to those differences. Unfortunately, the organizations said, those disclosures “were not sufficient” to alert investors to those differences. “Instead, we found that most participants assumed the standards would be the same despite the different language used to describe them.” Part of the problem, according to the comment letter, lies in the terminology used on the form. “Most participants had little or no understanding of the term ‘fiduciary duty.’ They were more comfortable with the term ‘best interest,’ although their actual understanding of its meaning was mixed. Most equated ‘best interest’ with them making more money.”
  • Confusion on fees and costs. While participants in the study understood the need for advisers and broker-dealers to get compensation, “nearly all expressed surprise at the types and number of fees described in Form CRS. . . . Both the content and the terminology in this section left participants confused and overwhelmed. . . . Few understood the descriptions provided of the different types of fees and some indicated that they wanted those terms clarified. Others indicated that they wanted clearer information about the relative costs of the two types of accounts. They did not feel that the information provided enabled them to determine which account would cost them more.”
  • Missing the importance of conflicts. While most of those taking part in the study understood that conflicts of interest occurred in both advisory and broker-dealer accounts, and that most of these involved incentives to recommend certain products in the way of payments, “this is where their understanding ended,” according to the comment letter. “Many came away with the mistaken belief . . . that investment advisers were required to get pre-trade approval for all transactions involving conflicts.” In addition, according to the organizations, few of those taking part understood the connection between the conflicts described and the possibility that they could result in recommendations that were not in their best interests. “Many saw the practices as benign, or even as offering potential benefits to them, in the form of getting a discount or a better deal.”

The comment letter also noted that, since the participants were tested using only the SEC’s CRS mock-up for dually-registered firms – and not separate mock-ups written specifically for advisers and for broker-dealers – “it is impossible to tell . . . how investors would weight disclosures regarding different types of conflicts.” As a result, the organizations recommended the SEC conduct additional testing to answer these questions.