Who Do You Know? Identifying Relationships Behind Investment Firms

Welcome to the November 2021 edition of our newsletter!  In this issue, we’ll examine the fairly recent implementation of investment firm customer relationship summaries, and how they can be used to better inform investment decisions.

Mutually Beneficial Relationships or Conflicts of Interest

In June 2019, the U.S. Securities and Exchange Commission enacted Form CRS, the customer relationship summary, as an addendum to Form ADV – the latter being the most detailed public disclosure of an investment firms’ fund structure, custodian, assets under management and other important information.  Form CRS was intended to provide, in the commission’s words, “conversation starters” for potential clients to engage with potential advisers.  The commission, in its guidance about completing the Form, indicates that this conversation should begin with a candid discussion of an adviser’s disciplinary history – not the greatest icebreaker in human history, but one about which your client can educate themselves in advance.  In addition to the FINRA BrokerCheck service, which contains such a history for advisers, the National Futures Association’s BASIC service provides employment and registration histories – including regulatory and arbitration actions – for brokers engaged in the commodities space, including many types of hedge funds.

Form CRS is also meant to be a window into a firm’s other relationships, to be delivered to a new investor “to inform them about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events,” according to another commission filing.  On its face, this all sounds helpful, but caveats abound; the requirement to provide the latest Form CRS exists by default only when a new client relationship is being considered, leaving existing clients with the burden of requesting it from the firm directly (if they even know it exists.)  Currently there is no repository of Form CRS filings, only a requirement that a firm post the filing to its website, in addition to making it available to individual investors upon request.  It is unclear how strictly the online publication requirement has been or will be enforced.

To date, enforcement of detailed Form CRS disclosure has been wanting, and traditional public records due diligence remains a critical tool in evaluating an adviser or their firm.  Context matters more than ever, as investment options proliferate and grow in complexity.  Regulatory efforts to increase disclosure are often a welcome evolution for most investors, but they do not take the onus off of individuals or firms to do their own homework.