The SEC has issued a staff study on what investors want to know about financial professionals and financial intermediaries and investment products and services and when and how they want to receive such information. The study was mandated by Section 917 of the Dodd-Frank Act, which directed the Commission to conduct a study identifying the existing level of financial literacy among retail investors as well as methods and efforts to increase the financial literacy of investors. Understanding the needs of investors is critical to carrying out the Commission's investor protection mission, said SEC Chairman Mary Schapiro, who added that the study provides important data and insights that will assist the Commission in its ongoing efforts to help retail investors make informed investing decisions.
The study identifies investor perceptions and
preferences regarding a variety of investment disclosures. The study shows that
investors prefer to receive investment disclosures before investing, rather
than after, as occurs with many investment products purchased today. The study
identifies information that investors find useful and relevant in helping them
make informed investment decisions. This includes information about fees, investment
objectives, performance, strategy, and risks of an investment product, as well
as the professional background, disciplinary history, and conflicts of interest
of a financial professional. Investors also favor investment disclosures
presented in a visual format, using bullets, charts, and graphs.
With respect to financial intermediaries, such
as brokers, investors consider information about fees, disciplinary history,
investment strategy, and conflicts of interest to be absolutely essential. With respect to investment
product disclosures, investors favor summary documents
containing key information about the investment product.
Investor preferences are mixed with respect to
the method of delivery. Some investors
prefer to receive certain documents in hard-copy, while others favor online
respect to the format of disclosure documents, investors prefer that disclosures be written in clear, concise, understandable
language, using bullet points, tables, charts, and/or graphs. Investors favor layered
disclosure and, wherever possible, the use
of a summary document containing key information about an investment product or
Layered disclosure is an approach to disclosure
in which key information is sent or given to the investor and more detailed
information is provided online and, upon request, is sent in paper or by
e-mail. This layered approach is intended to provide investors with better
ability to choose the amount and type of information to review, as well as the
format in which to review it.
The study suggested a number of ways to increase
the transparency of expenses in transactions involving investment services or
products including the providing of both a narrative explanation of fees and
compensation and a fee table and presenting the fee and compensation
information in table format only, in table, in table format with examples, in a
bulleted format with examples, or in bulleted format only.
Similarly, the study suggested ways to increase
the transparency of conflicts of interest in transactions involving investment
services or products including, providing specific examples that demonstrate
how a potential conflict of interest would operate in relation to the specific
advice furnished to the client and presenting the conflicts of interest
disclosure in a bulleted format or in a summary table format. In addition, the
conflicts of interest disclosure could be made brief and general, with more specific
information available upon request. The study also suggested disclosure of
whether a financial intermediary (the individual representative) stands to
profit if a client invests in certain types of products; whether the financial
intermediary would earn more for selling certain specific products instead of
other comparable products; and whether the financial intermediary might benefit
from selling financial products issued by an affiliated company.