Morningstar says it has found various instances of financial services companies failing to meet the basic disclosure requirements of the Securities and Exchange Commission’s Regulation Best Interest, particularly when it comes to fees and conflicts of interest.
The Customer Relationship Summary disclosure form, or Form CRS, is intended to clearly and succinctly explain to clients whether they are dealing with a broker or an advisor, the duties they are owed by the financial professional, how these professionals get paid and any conflicts of interest arising from that.
Morningstar says it analyzed the Form CRS of 100 firms, including broker-dealers, registered investment advisor firms and dual registrants, and learned that “few firms exceeded the minimum requirements to provide investors with all the necessary information.”
But some companies “struggled” to explain their conflicts of interest, and most firms had “inadequate descriptions” about their financial professionals’ compensation, how that led to conflicts of interest and how that conflict was being addressed, Morningstar found.
“While firms satisfactorily defined the structure of their fees, few detailed the actual cost to the investor, making it difficult for investors to compare firms based principally on the Relationship Summary,” the company says.
The SEC may have to revamp instructions for Form CRS and be less flexible about the information required. the study's authors argued.
“The SEC can use enforcement to motivate firms to produce better Relationship Summaries but should also consider amending the rule to ensure investors are receiving sufficient and comparable information,” Morningstar wrote.
Form CRS has also attracted scrutiny from regulators in recent months.
In April, the Financial Industry Regulatory Authority said it found instances of inaccurate information about some firms' registered representatives’ disciplinary histories, as reported.
And in July, the SEC charged 27 firms with missing the July 30, 2020, deadline to send out the form to new and existing clients, as reported.
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