September 02, 2020

Jim Lundy Comments on Report Showing Firms’ Failure to Report Disciplinary Histories on Form CRS

In the article “Firms Failing to Report Advisors’ Disciplinary Histories on Form CRS: WSJ,” ThinkAdvisor reports on a recent Wall Street Journal analysis that found at least 1,300 brokerage and financial advisory firms incorrectly stated on Form CRS that neither they nor their financial professionals had legal or disciplinary histories. The industry publication turned to partner Jim Lundy for his takeaways from the Journal’s report.

According to the Journal’s report, it identified “about 2,300 individual employees with disclosures that their firms failed to reflect on the new form. About 70% of those had customer complaints. Roughly 300 had disclosures of regulatory actions against them. A similar number had criminal histories, and about as many had left previous employers amid claims of misconduct.” Advisors and broker-dealers are required to file Form CRS.

Lundy told ThinkAdvisor that the Journal’s analysis failed to address the fact that not all disciplinary actions must be disclosed. He added that “firms not disclosing disciplinary history that is already disclosed in the firm’s ADV can be viewed as a lack of controls and a lack of diligence.”

The Journal analysis appears to reveal “the numbers are so high due to the lack of disclosure being driven by the disciplinary history at the individual representative level,” Lundy continued. “That is also disappointing, but that would need to entail much more work and would be subject to a greater likelihood of errors or oversights in the process. If there are firms who overtly tried to cover this up, then they will likely be faced with referrals to the [SEC] Division of Enforcement.”

Also, Lundy added he’s “not surprised” that the paper “revealed information indicating that investors are not reading these new [Form CRS] disclosure documents.”

Lundy expects the SEC to share information at an upcoming roundtable regarding the agency’s initial exams of Form CRS, which took place just after the June 30 compliance date.

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