Last week, the SEC’s Office of the Investor Advocate announced that it will host an “Evidence Summit” to discuss strategies for raising retail investors’ understanding of critical investment characteristics such as fees, risks, returns, and conflicts of interest. The summit also signals the launch of the SEC’s new investor research initiative, titled “Policy Oriented Stakeholder and Investor Testing for Innovative and Effective Regulation.” The idea is to include in future rulemaking the information obtained from surveys and specific testing projects. Accordingly, the Office of the Investor Advocate also has launched a study program to examine the effectiveness of disclosure to retail investors and to identify and test interventions that increase investor awareness of critical investment features and thereby improve retail investors’ investment results.
Around the same time, the Department of Labor was proposing a 60-day delay in implementing the fiduciary rule, which requires advisers handling retirement accounts to act solely in the best interest of their clients, so that the department can have more time to evaluate whether there will be negative impacts on consumers, such as limiting their investment options. While certain consumer groups are concerned that the delay will enable opponents of the rule to weaken or eliminate it, many financial services providers have long voiced concerns that the rule could result in fewer choices for investors with respect to their retirement savings. Other financial institutions have voluntarily modified their product offerings to retirement client investors and are unlikely to reverse course even if the fiduciary rule is postponed or eliminated.
In today’s markets, especially the equity markets which have seen popular market indices climb to record highs over recent weeks, the focus on protecting individual investors, including elderly investors and those planning for retirement, is, of course, critical. The leading edge of the baby boomer generation has now reached age 70 and, therefore, is required to take mandatory minimum distributions from retirement accounts. As the number of small investors has increased, with many of them relying on their investment activities to fund in large measure their retirement years, protection from carelessness, sharp practices and duplicity by unscrupulous practitioners is absolutely necessary. But at the same time, the rush to impose protections without careful consideration can result in requirements that are of questionable benefit at best, and at worst may have counterproductive results, such as limiting the available options for managing those precious resources and increasing the cost of doing so. The burden on those responsible for providing such protection is therefore great, and extreme prudence is demanded - but the burden on the small investor is great as well. A mistake in choosing what to do with retirement funds, or from whom to seek advice, can deeply tarnish the golden years.
At first glance, the Office of Investor Advocate’s research initiative might seem to be somewhat inconsistent with the concurrent proposal by the DOL to delay the implementation of the fiduciary rule. However, a deeper dive is required to understand whether certain intended protections actually may be counterproductive. Careful review of the fiduciary rule certainly can’t hurt. Irrespective of whether that review results in a change or withdrawal of the rule, or ultimately confirms its necessity and results in its implementation, the SEC’s enhanced focus on educating retail investors is an extremely positive parallel development. Clearly we are living in an age where investors are encouraged to “do it yourself,” whether through Internet and social media ads, television and radio ads, advice of friends or simply a latent mistrust of others. There clearly is nothing wrong with retail investors taking control of their finances and being pro-active in how their resources are handled, provided that such investors are armed with relevant and appropriate tools and knowledge to protect their own interests.
But for the term “investor protection” to truly mean that investors are reasonably protected to the greatest extent possible from all of the many pitfalls that await them, education is paramount. Studying “strategies for enhancing retail investors’ understanding of key investment characteristics such as fees, risks, returns, and conflicts of interest” (as the SEC states in its notice regarding the summit), and making available as much information as possible with respect to those characteristics, could well do as much good as any new regulations put in place by the SEC, the DOL or other agencies. Indeed, the rulemaking process may be as necessary and important as the rules which eventually emanate from that process.