Saturday, September 01, 2012

SEC Issues Study on Financial Literacy Mandated by Dodd-Frank Act

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 disclosure. With 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 service.

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.

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