By Suzanne Cosgrove
The SEC’s Investor Advisory Committee has submitted a series of recommendations aimed at standardizing and enhancing monthly and quarterly customer account statements, noting Commission rules governing the statements’ form and contents have remained largely unchanged for almost 30 years.
The committee approved the recommendations at Thursday's meeting, and they were published on the IAC’s public website on Friday, opening them up to consideration by the Commission.
In introducing its proposal, the IAC said regulators see the review of account statements as a key component of smart money management. The ability of an investor to review their securities account statements is “a critical tool” in the identification of inaccuracies, fraud and financial exploitation.
In addition, registered investment advisers – a rapidly growing industry group that was the focus of another panel session of the IAC’s meeting on Thursday -- are not currently required to send their clients account statements. “Even when accounts statements are provided, the rules do not require that the information that must be included on a brokerage account statement be presented in any particular format or with any minimal level of clarity,” the committee said.
Regulators, industry associations and firms have published guides for investors puzzled by their account statements, “but these guides are lengthy and often are overly general because of the potential variations in client account statements,” the committee added.
Gensler on custody. In a pre-session statement, SEC Chairman Gary Gensler did not directly address possible changes in customer account rules but highlighted a recently proposed safeguarding rule for investment advisers that would expand the current 2009 custody rule.
The SEC’s current custody rule covers a significant amount of crypto assets, Gensler said. “Advisers, in complying with the current custody rule, are required to safeguard investors’ crypto funds and securities with qualified custodians.”
However, “based upon how crypto trading and lending platforms generally operate, investment advisers cannot rely on them today as qualified custodians,” Gensler said. “To be clear: just because a crypto trading platform claims to be a qualified custodian doesn’t mean that it is,” he said.
“When these platforms fail—something we’ve seen time and again—investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court,” Gensler said.
Supporting innovation. In presenting the recommendations to IAC members, Christine Lazaro, professor of clinical legal education at St. John's University School of Law, said it became evident to the committee that the rules governing account statements needed review. The recommendations were intended to support innovation, she said. But while there is room for enhancement, “we need to understand what investors are looking for,” she added.
In fact, the first of the nine recommendations from the IAC’s Disclosure Subcommittee advises the SEC or FINRA to survey investors to better understand the utility of account statements, including how investors use them and what information they view as important in their decision-making process.
Following the survey, other recommendations included determining what amendments to the current FINRA Rule 2231 are needed to align account statement requirements with what investors see as important content, and with respect to the formatting and presentation of the statements.
The SEC and FINRA also should consider standardizing certain core terminology and the use of a standardized table that highlights information such as fees paid and returns for the period and year-to-date, the subcommittee said.
In addition, because there is no direct requirement for registered investment advisers to provide account statements, the SEC should propose and adopt a rule requiring advisers to provide either directly or through their custodians account statements, no less frequently than quarterly, to advisory clients and prescribe the content of such statements. The latter recommendation is consistent with the SEC’s recent proposal to require private fund advisers distribute a quarterly statement of performance and fees that follows a standardized format, the subcommittee noted.
Finally, the subcommittee recommended continuing to offer paper as a default statement delivery method – on the assumption that elderly account holders would prefer it, although that point was subject to committee debate. For investors who opt for electronic delivery, the committee said the SEC and FINRA should encourage the use of embedded links and other technology to enhance disclosure.
Commissioner comments. In prepared comments on the committee’s recommendations, SEC Commissioner Hester Peirce said she was “generally supportive of efforts to enhance the utility and value of account statements in helping investors make informed decisions,” but she had a few reservations. In particular, she said a paper default for the delivery of account statements seemed “anachronistic.”
Another consideration, Peirce said, is how to achieve greater consistency across firms’ account statements “without impinging on firms’ ability to develop effective and unique ways of presenting information.”
“More generally, I would like to encourage firms to experiment with electronic delivery methods that facilitate greater investor understanding of the information,” Peirce said. “Doing so will be easier absent a paper-delivery mandate.”
The committee approved the recommendations at Thursday's meeting, and they were published on the IAC’s public website on Friday, opening them up to consideration by the Commission.