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.”