SEC gives firms an "F" for Form CRS reports full of jargon, vague descriptions

Many Form CRS or Client Relationship Summary reports that brokerage and investment advisory firms provide to prospective clients are simply unreadable, filled with jargon and clogged with technical business terms, a Securities and Exchange Commission committee said last week.

And that is simply unacceptable, the SEC’s Standards of Conduct Implementation Committee said, following a review of many of the forms used by companies.

The committee, consisting of SEC staff, said it frequently observed disclosures that provided succinct descriptions of relationships and services, others failed to do so.

“When firms do not make more detailed disclosures readily accessible to retail investors, it can discourage retail investors from seeking out important information that could help inform their decisions when choosing a firm or financial professional,” the committee said.

Firms that operate a publicly available website must post the current version of their relationship summary prominently on their websites. In some cases, SEC staff could not locate the summary and in other cases, the statement was found only after an extensive search of the website was conducted.

“This undermines the goal of providing retail investors with ready access to the information as early as possible when deciding whether to engage the services of a firm or financial professional,” the report stated.

The SEC staff said that affiliated firms that decide to prepare a single relationship summary must provide the brokerage and investment advisory information with equal prominence. Failure to do so undermines the ability of retail investors to compare the range of options available to them, according to the report.

The SEC found myriad problems with the disclosure statements including:

• Statements that used small or text that is hard to read.
• Use of technical language, including terms such as “riskless principal,” “markups and markdowns” that laymen may not understand.
• Poor use of white space and other design features that could make statements easier to read.
• Use of marketing language that touts a firm’s abilities or used superlatives rather than providing objective disclosures.
• Boilerplate language that came from templates that are available. The language in some cases was not tailored to a specific firm.
• A lack of specific references to more detailed information. The report is designed to be a summary and should provide readers with an easy way to find more detailed information, the SEC said.
• Forms that fail to summarize the principal fees and costs that retail investors will incur, including how often the fees are assessed and the conflicts of interest they create. The SEC said that some relationship summaries only included vague descriptions of fees.
• Statements that fail to use the prescribed language for standards of conduct.
• Disclosures that fail to provide information about how financial professionals are compensated and any potential conflicts of interest. For instance, the report stated that some disclosures do not do an effective job of explaining incentives associated with cash sweep programs.