The SEC’s recent study on financial literacy asks whether retail investors are learning about, and knowledgeable about, financial products and services. At the end of August, the SEC’s Office of Investor Education and Advocacy issued a study required by Section 917 of the Dodd-Frank Act regarding financial literacy among investors, which is available here: http://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf. The study draws from a Library of Congress report on financial literacy among retail investors. Although the study focuses on disclosures in the context of mutual funds, many of the observations made in the study are likely to inform the views of regulators as they consider the adequacy and presentation of offering materials related to other types of securities offerings. As a general matter, the study concludes that retail investors in the United States lack basic financial literacy. The study had as its objectives seeking to identify methods to improve the timing, content, and format of disclosures to investors with respect to investment products and seeking to understand the type of information that is most helpful to investors.

Not surprisingly, the study finds that retail investors prefer to receive disclosures prior to making their investment decision about a financial product or a service. In terms of the content of disclosures, the study finds that investors identify the following information as the most important or useful to them: information about investment objectives and strategy, past investment performance, fees, expenses, conflicts of interest and principal risks. Investors strongly prefer to be presented with information in the form of graphs, tables, bullet points and charts. For those of us in the structured products market, this is useful information. Surprisingly, investors prefer that information be presented using a “layered” approach. From time to time, regulators considering structured products disclosure have expressed concerns regarding the layered approach of base prospectus, prospectus supplement or product supplement, pricing supplement and term sheet that is common to this market. Some comfort can be taken from the reactions of retail investors consulted during the financial literacy study. Of course, retail investors prefer that disclosures be written in plain English. The study also points to the need for more transparent disclosure of fees, including a narrative discussion, as well as a table or bulleted presentation, or examples illustrating fee calculations. Similarly, the study stresses the need for more robust and transparent disclosures regarding conflicts of interest.