Investment Management Newsletter: Business Continuity Plans & Form CRS
By: Caleb DuBois, Tom Sheehan, Ed Lawrence, and Dan McCue
The SEC’s Office of Compliance, Inspections, and Examinations (“OCIE”) is conducting sweep examinations this year that will focus on Business Continuity Plans (“BCPs”). We expect that OCIE will scrutinize the implementation and effectiveness of adviser’s BCPs and will focus on how firms have addressed the continuity of business operations during the COVID-19 pandemic. Firms should be thinking through these issues and should be prepared to answer questions and respond to information requests from OCIE concerning their BCP’s and the firm’s response to the pandemic. In addition, advisers should also be prepared to implement and file new Form ADV, Part 3, the Client Relationship Summary (“Form CRS”). This new Form will need to be prepared and filed with the SEC between May 1 and June 30 of this year. We discuss these compliance developments in more detail below. As always, we are happy to answer any questions that you may have or to help you implement any necessary changes.
Sweep Examinations of Business Continuity Plans
OCIE has announced that it will be conducting sweep examinations focused on adviser’s BCPs and the continuity of adviser’s business operations in light of the COVID-19 pandemic. Mindful of health and safety concerns, OCIE has announced that examinations will take place through off-site correspondence, unless it is absolutely necessary to be on-site. OCIE will be working with advisers to address the timing of requests, availability of personnel, and other matters to minimize disruption. The intended purpose of these examinations is to protect investor assets and the integrity of the market during this time of national health and safety concerns and other difficult circumstances.
Examples of the type of information that will be discussed during these examinations includes:
- Compliance with internal BCP procedures and any other relevant internal policies that may address the continuity of business operations.
- How the firm’s policies and procedures address vendor contracts that are under duress, as well as contracts with service providers and partners who may be operating at a diminished capacity due to the COVID-19 pandemic.
- Addressing unforeseen weaknesses that have been exposed by the COVID-19 pandemic.
- Cybersecurity policies and procedures around employee remote access.
- General inquiries into the current difficulties of operating critical firm operations and issues related to infrastructure integrity.
Firms need to be prepared to respond to each of these lines of inquiry and should be generally assessing how their current BCP focuses on maintaining business continuity and security when most or all of the workforce is remote. Lastly, OCIE has stated a desire for these examinations to not impose any undue hardship on registrants so examination continuations or extensions may be available to the extent that it is necessary to prevent disruption in normal business operations.
New Rule 204-5 promulgated under the Investment Advisers Act of 1940, requires all SEC-registered advisers with “retail investors” to prepare and deliver to their retail investors a brief relationship summary that provides information about all of the principal relationships and services the adviser offers to retail investors. A “retail investor” is a “natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” If you do not have retail investors, Form CRS doesn’t apply to you.
If you do have retail investors, you will be required to:
- File Form CRS (Form ADV Part 3) electronically through Investment Adviser Registration Depository (“IARD”) as an other-than-annual amendment. You must make this filing between May 1, 2020 and June 30, 2020. The relationship summary will be publicly disseminated through the Investment Adviser Public Database (“IAPD”).
- Deliver Form CRS to each existing retail investor within 30 days after the date you first file your updated Form CRS with the SEC.
- Deliver a relationship summary to each new retail investor before or at the time you enter into an investment advisory contract with the retail investor.
- Deliver to each retail investor who is an existing client your current Form CRS before or at the time you:
- Open a new account that is different from the retail investor’s existing account(s);
- Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or
- Recommend or provide a new investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account.
- If the relationship summary is delivered electronically, it must be presented prominently in the electronic medium, for example, as a direct link or in the body of an email or message, and must be easily accessible for retail investors. If the relationship summary is delivered in paper format as part of a package of documents, you must ensure that the relationship summary is the first among any documents that are delivered at that time.
- Post the current Form CRS prominently on your website, if you have one, in a location and format that is easily accessible for retail investors.
- Communicate any changes made to Form CRS to each retail investor who is an existing client within 60 days after the amendments are required to be made and without charge. The communication can be made by delivering the amended Form CRS or by communicating the information through another disclosure that is delivered to the retail investor.
- You must also deliver a current Form CRS to each retail investor within 30 days upon request.
In order to be in compliance with the new requirements, you will not only need to prepare and file Form CRS, but will also need to amend your Policies and Procedures to address these new requirements. According to the SEC Risk Alert, dated April 7, 2020, the SEC Plans to begin assessing adviser’s compliance with the new Form CRS requirements starting in examinations conducted this summer. Initial Form CRS examinations may include assessments of the following:
- Content. The SEC may review a firm’s relationship summary to assess whether it (1) includes all required information; and (2) contains true and accurate information and does not omit any material facts necessary in order to make the required disclosures not misleading.
- Form Filing & Delivery to Investors. Staff may (1) review whether the firm has filed its relationship summary and whether the relationship summary is posted on the firm’s public website, if any; (2) evaluate the process for delivering the summary to existing and new retail investors; and (3) review policies and procedures to assess whether they meet the required delivery processes and deadlines.
- Update Policies. Staff may inquire into a firm’s policies and procedures for how relationship summary information will be updated and delivered. Furthermore, staff may inquire as to how communications of these updates will be handled on a go-forward basis, including policies on when updates must be shared (generally within 60 days of an update) and what will constitute a triggering event that will require an update.
- Recordkeeping. The SEC may assess how the firm complies with applicable delivery and recordkeeping obligations.
- Formatting. The SEC may assess whether the relationship summary is in compliance with the required text features and particular wording requirements of the Form.
Initial examinations will focus on assessing whether firms have made a good faith effort to implement Form CRS, including assessing whether firms are meeting the delivery and recordkeeping requirements under Rule 204-5. Complete guidance on Form CRS and the Adopting Release is available here at the Small Entity Compliance Guide.
We are here to help if you need assistance with assessing your current business continuity and security planning or preparing Form CRS and implementing applicable Policies and Procedures related to Form CRS.