Monday, May 10, 2010

Senator Akaka Includes Financial Literacy in All Its Elements in Senate Reform Legislation

The three vital components of financial literacy are education, consumer protection, and economic empowerment, and the legislation includes essential provisions in all three of these areas for consumers and investors. See remarks of Sen. Daniel Akaka, Cong. Record, Apr 30, 2010, p. S2996. With regard to education, the Senate reform legislation, S3217, requires a the SEC to conduct a financial literacy study and develop an investor financial literacy strategy intended to bring about positive behavioral change among investors. In addition, an Office of Financial Literacy is created within the new Consumer Financial Protection Bureau and is tasked with implementing initiatives to educate and empower consumers. A strategy to improve the financial literacy among consumers, that includes measurable goals and benchmarks, must be developed.

With regard to the second key component of financial literacy, consumer protection, the Act strengthens the ability of the SEC to better represent the interests of retail investors by creating an Investor Advocate within the SEC. The Investor Advocate is tasked with assisting retail investors to resolve significant problems with the SEC or the self-regulatory organizations. The Investor Advocate’s mission includes identifying areas where investors would benefit from changes in Commission or SRO policies and problems that investors have with financial service providers and investment products. The Investor Advocate will recommend policy changes to the Commission and Congress in the interests of investors.

The legislation also authorizes the SEC to effectively require disclosures to retail investors prior to the sale of financial products and services. This provision will ensure that investors have the relevant and useful information they need when making decisions that determine their future financial condition. The information to be disclosed by SEC rule must be in summary format and contain concise information about investment objectives, strategies, costs, and risks, as well as any compensation or financial incentive received by the financial intermediary in connection with the purchase of the retail investment product.

The measure authorizes the SEC to gather information from and communicate with investors and engage in such temporary programs as the Commission determines are in the public interest for the purpose of evaluating any rule or program of the SEC. In the past, the SEC has carried out consumer testing programs, but there have been questions of the legality of this practice. This legislation gives clear authority to the SEC for these activities.

In addition, the Consumer Financial Protection Bureau will have the ability to restrict predatory financial products and unfair business practices in order to prevent unscrupulous financial services providers from taking advantage of consumers.

The legislation modifies the Electronic Fund Transfer Act to establish remittance consumer protections. It would require simple disclosures about the costs of sending remittances to be provided to the consumer prior to and after the transaction. A complaint and error resolution process for remittance transactions would also be established.

On the third component, economic empowerment, the legislation intends to increase access to mainstream financial institutions for the unbanked and the underbanked. The legislation authorizes programs intended to assist low- and moderate-income individuals establish bank or credit union accounts and encourage greater use of mainstream financial services. What is currently Title XII of the legislation would also encourage the development of small, affordable loans as an alternative to more costly payday loans.


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