Do investors really know the difference between a broker and registered investment advisor?

As the Securities and Exchange Commission pushes ahead with investor roundtables to ask consumers what they think of the agency’s recent best-interest proposals—ostensibly designed to inform and protect investors—that question looms large.

Clouding the horizon is the fact that the regulator still isn’t saying what experts it has hired for its plan to formally test the proposals on consumers as the August 7 deadline for comments on the proposals loom.

As a result, the securities industry, their lobbyists and a powerhouse consortium of 24 organizations of state securities regulators, financial planners and consumer advocates—who are being called upon to comment on what is arguably the most important sales conduct regulations in decades—have no idea if the proposed best-interest regulation or the consumer relationship summary actually work.

SEC Investor Advocate Rick Fleming has been charged with conducting the formal testing, but he isn’t saying who has been hired to conduct the testing, what tests will look for or when results may be released. “Rick appreciates the interest, but is declining the opportunity to comment,” SEC spokesperson Judith Burns said.

To question consumers informally, the SEC has announced four investor roundtables beginning July 9 in Miami. SEC Chairman Jay Clayton and staff are scheduled to hear first-hand form investors about their experiences working with financial professionals at each roundtable. The first SEC investor roundtable was held in May in Atlanta.

But informal investor testing and roundtables isn’t going to satisfy the consortium of securities regulators, financial planners and consumer groups that asked Clayton in May for a 90-day extension of the comment period on the best interest proposals, pending public results of expert testing.

“Asking investors whether they like the disclosures is virtually meaningless,” said Barbara Roper, director of investor protection at the Consumer Federation of America, a lead player in the consortium asking for the delay.

“You have to do real usability testing to learn whether investors are able to use the disclosures to make informed decisions. And it is particularly important to find out whether the financially unsophisticated investors most in need of enhanced protections can understand the disclosures. That needs to be done by disclosure testing experts who know how to design the tests and interpret the results,” said Roper, who is also a member of the SEC’s Investor Advisory Committee.

The real issue, she said, is whether the SEC will conduct rigorous usability testing, release the results to the public and provide an opportunity for public comment before moving forward with a vote on either its regulation or customer relationship summary rulemaking. 

“I’d be fine with their reopening the comment period once the testing has been completed,” Roper said. “But they cannot reasonably adopt a regulatory approach that relies on disclosures to ensure investors are adequately protected without first conducting that testing, particularly when none of the testing the SEC has conducted over the last decade or so supports the assumption that disclosure works.”

The AARP, another member of the consortium, is also awaiting results of expert testing on the best-interest proposals. While the SEC’s investor roundtables give retirement savers a “value opportunity” to voice their opinions, they won’t take the place of rigorous testing, AARP Legislative Counsel David Certner said.

“AARP believes that the SEC’s final rule should clearly define the standard of conduct for investment professionals as a ‘fiduciary standard,’ and provide investors with unambiguous, effective disclosure forms that have been rigorously tested,” Certner said.

“We know through many years of working on this issue and consumer feedback that investors do not understand the different legal standards, or the disclosure forms that apply to different types of financial professionals, so we need to ensure that the forms have clear language,” he added.

The SEC has made no formal announcement regarding the release of formal investor testing results and has not, as yet, extended the August 7 comment period on its best interest proposals.

The SEC’s four investor roundtables kick off next week, as follows:

• Miami - Monday, July 9.
• Washington, D.C. - Thursday, July 12.
• Philadelphia - Tuesday, July 17.
• Denver - Wednesday, July 25.