Regulatory Outlook | 09.19.18
SEC's Proposed Disclosure Form Comes Under Fire
The Securities and Exchange Commission's (SEC’s) proposed financial advice rule-set, known as "Regulation Best Interest," would require investment advisors and bank broker-dealers (B/Ds) to provide prospects with a Client Relationship Summary disclosure. It’s being called “Form CRS.”
Add confusing and misleading to the expanding list of things it’s being called.
While a standardized four-page document revealing services, costs and potential conflicts would seem straightforward on paper, the Form CRS has officially become a mess.
This past week, a slew of investor advocacy groups released the findings of tests they ran to evaluate CRS’ effectiveness. The form flopped.
"In area after area tested, participants didn't just fail to fully grasp the information provided," said Barbara Roper, director of investor protection at the Consumer Federation of America, speaking on a recent conference call with members of the media. "Time and again they walked away with a false understanding of the issues."
If the disclosures fail, then "the entire regulatory approach fails," she added.
In a letter to SEC chairman Jay Clayton, Roper’s organization, as well as the Financial Planning Coalition and AARP, jointly said that they found that investors, despite using Form CRS, still did not comprehend differences in services, legal obligations, fees and costs, and conflicts of interest.
Survey: CRS Upside Remains Unclear
In its proposal, the SEC describes Form CRS as an additional disclosure that is to be no more than four pages with a “mix of tabular and narrative information.” The form would contain the following eight sections:
- Description of relationships and services offered
- Statement of the applicable conduct standard associated with the services
- Fees and costs
- A comparison of brokerage and investment advisory services for firms that are not dually-registered
- Conflicts of interest
- Where additional information is available, including whether the firm or its registered representatives have reportable legal or disciplinary events and a contact for complaints
- Key questions clients should ask
Whether the form will result in reducing investor confusion and enhancing informed decision-making — or result in merely more disclosure — is still to be determined, said Beth Miller, an attorney at Spencer Fane in Overland Park.
However, the early reviews are not boding well for the nascent disclosure form.
While there is interest among investors in reading the proposed four-page document, those investors who have been with their financial professional for many years say that they are less inclined to see the benefits of the document, according to the Center for Capital Markets Competitiveness, part of the U.S. Chamber of Commerce. The CCMC recently commissioned a poll of more than 800 investors to examine their perspectives on working with financial professionals and to gauge their priorities regarding new regulatory requirements.
Those interested in reading the document say it will boost transparency, but do not necessarily think it will have an impact on how much they trust their financial professional, said Tom Quaadman, executive vice president, CCMC.
More than half (56 percent) of investors say the new form won’t have any impact on how much they trust their own financial professional.
However, two-thirds of investors would be interested in reading this document, and nearly three fourths of investors believe this will improve transparency, Quaddman said, in a letter submitted to the SEC.
‘Missing A Vital Opportunity’
More disclosure does not necessarily result in better disclosure, said Dale Brown, president and CEO of the Financial Services Institute.
Writing a blog in Investment News last month, Brown encouraged the SEC to further simplify its CRS to a one- or two-page document.
Brown said on top of this, ideally, there could be further instructions directing those clients who are interested to more robust disclosure information on how to find them.
SEC chairman Jay Clayton, anticipating the Form CRS could meet glazed-over eyes and fail to achieve its desired effect, suggested earlier this summer that there could be a series of videos in connection with the new disclosures, so that terms and phrases are conveyed in a way that average people can grasp easily. The concern is that even after reading it, investors would still be perplexed about the differing standards of care advisors and brokers must meet, and would still struggle to understand terms such as "fiduciary duty" and "best interest."
A number of FINRA rules have discrete disclosure requirements. But FINRA rules do not have a comparable, express broad-based disclosure requirement, said FINRA officials responding to inquiries from Congress.
In a comment submitted on Aug. 23, Joseph P. Borg, president, North American Securities Administrators Association (NASAA), said the proposed disclosure regime is insufficient.
"Separate and apart from a broker-dealer’s standardized disclosure obligations under the separate Form CRS rulemaking, the Commission should require that broker-dealers disclose under Regulation Best Interest all material facts and conflicts associated with the specific transaction being recommended.
“Only a transaction-by-transaction disclosure obligation will ensure that broker-dealers are meeting their best interest duties and provide investors the level of protection they deserve. Any contrary standard would conflict with the underlying purpose of the proposal of leveling the playing field between investment advisors and broker-dealers, thereby holding broker-dealers to functionally inequivalent legal duties,” Borg said.
With respect to the types of fees that must be disclosed and the standardization of such disclosures, the SEC should consider mandating the use of a version of the Schedule of Miscellaneous Account and Service Fees (the “Model Fee Table”).
Morningstar, in its comments, said it supports the expansion of disclosures, but believes that publicly available disclosures with a standard taxonomy work best. That's because they empower third parties such as “fintech” and “reg-tech” firms to analyze and contextualize critical information and amplify a call to action for ordinary investors.
"The Commission is missing a vital opportunity to require more disclosure on key potential conflicts of interest such as load-sharing (data which will be unavailable once the N-SAR is phased out) and revenue-sharing about which little data is available,” the company said.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.