Another registered investment advisor failed to file its Form Customer Relationship Summary by its regulatory deadline, according to the SEC. It’s the second firm to be charged with such a lapse in two weeks.
According to the settlement order, Lexion Capital Management, a New York-based RIA with $81 million in managed assets, was required to file its Form CRS to the SEC by June 30 of last year, and deliver it to existing retail clients by the end of July 2020. But the firm did not meet those deadlines, and did not become compliant until May of this year.
The SEC passed its regulatory mandates on Form CRS along with Regulation Best Interest in June 2019, with both rules going into effect in June 2020. The SEC intended the form to offer brokerage and advisory clients a streamlined understanding of the customer/advisor relationship with "plain English" language and disclosures.
But according to the order, the SEC's Division of Examinations initially reached out to the Lexion's CCO in October of last year about the firm's failure to file on time and then again in May of this year, alerting the firm then that they were about to investigate why it had yet to file. Lexion filed its form with the SEC several days later and began delivering it to existing clients and posted it on its website the same month.
Lexion did not respond to a request for comment.
The chronology of the SEC's actions mirror the charges against Disciplined Capital Management, a Syracuse, N.Y.-based firm with $391 million in managed assets. The commission charged the firm last week with failing to file their Form CRS and deliver it to clients on time, with the commission arguing it did not get into compliance until March of this year. The DOE even contacted Disciplined and Lexion Capital Management on the same day (Oct. 14, 2020), to question why they hadn’t filed on time. In July, the commission also brought charges against 21 investment advisors and six broker/dealers for similar lapses.
While some firms included in July’s actions like Dallas-based Paratus Financial and Boston-based Minot DeBlois Advisors, had AUMs of $1.8 billion and $1.7 billion, respectively, most of the firms had regulatory AUM under $1 billion.
Smaller firms may struggle with keeping up-to-date on regulatory developments, lacking the robust compliance staff of a larger RIA, according to Max Schatzow, an attorney at the law firm Stark & Stark. But he suspected that these enforcement actions were primarily aimed at firms who failed to comply even after being contacted, rather than focusing on the initial rule violation.
“We’re talking about small firms with limited resources, and (the SEC) doesn't want to be vindictive and looking like they’re out to get smaller firms,” he said. “But at a certain point, if you’re not going to comply with a request from regulators, they kind of have to act.”
As a part of the settlement, the RIA did not admit or deny the order’s contents, but agreed to a cease-and-desist, censure and agreed to a civil penalty totaling $10,000.
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