Sec Disclosure Effectiveness Testing Act
Floor Speech
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Ms. WATERS. 1815, and to insert extraneous material thereon.
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Ms. WATERS. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, I rise in support of H.R. 1815, the SEC Disclosure Effectiveness Testing Act crafted by Representative Casten from Illinois, a new Member of Congress and member of the Financial Services Committee.
H.R. 1815 requires the Securities and Exchange Commission to test its disclosure documents with retail investors through one-on-one interviews and surveys to ensure that these documents are actually understood by their target audience.
The SEC's approach to protecting retail investors from conflicts of interest and other risks has been based on informing them through disclosure. This is a problem when those disclosures are written in a way that retail investors don't understand.
Since at least 2012, when the SEC conducted a financial literacy study, we have known that many of the disclosures intended for retail investors are not well-understood by those investors.
While the public has the opportunity to comment on most rulemakings or new disclosures, these comments are largely from well-funded industry representatives, rather than the mom-and-pop investors who will be receiving these new disclosures.
H.R. 1815 ensures that the SEC gets the input it needs from retail investors on disclosure forms by requiring the SEC to test those forms and engage in qualitative one-on-one interviews and nationwide surveys.
Investor testing has been embraced by both Democratic and Republican commissioners at the SEC. In addition, the SEC itself has been engaged in investor testing in several instances, including most recently in 2018, when it tested a proposed disclosure for brokers and investment advisers to provide to retail investors known as Form Client Relationship Summary, that is, CRS.
This proposed five-page disclosure was intended to help retail investors understand the obligations owed and services provided by investment professionals, as well as the fees and costs that could affect their investment accounts.
To ensure that retail investors are able to use Form CRS as intended, the SEC conducted a nationwide online survey of 1,800 individuals and 31 qualitative, in-depth interviews in Denver and Pittsburgh. The mixed results of the SEC's testing of Form CRS showed that changes and possibly more testing were necessary.
Unfortunately, in that instance, the SEC did not engage in the robust, iterative investor testing that H.R. 1815 would require, and finalized a vague disclosure.
H.R. 1815 would require the SEC to go back and review and test existing disclosures like Form CRS and determine whether changes should be made. This review of existing documents is particularly important as the capital markets, investor behaviors, and investing trends change.
In addition to the SEC, other regulators like the Consumer Financial Protection Bureau and the Federal Trade Commission also engage in usability testing of their disclosures.
H.R. 1815 builds on the efforts of the SEC by requiring the Commission to engage in a similar iterative process for all existing or future disclosure, intended to help retail investors make informed investment decisions.
I thank Representative Casten for putting forth this commonsense piece of legislation that will help investors make better informed financial decisions regarding their hard-earned earnings.
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Ms. WATERS. Mr. Chair, I yield 4 minutes to the gentleman from Illinois (Mr. Casten), who will correct all the misstatements that were just made by the gentleman from Michigan. Representative Casten is the sponsor of the bill.
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Ms. WATERS. Mr. Chair, I yield the gentleman an additional 1 minute.
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Ms. WATERS. Mr. Chair, I yield 2 minutes to the gentlewoman from New York (Mrs. Carolyn B. Maloney), who is the chairwoman for the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.
Mrs. CAROLYN B. MALONEY of New York. Mr. Chair, I thank the chairwoman for yielding and for her leadership on the committee.
Mr. Chair, I strongly support H.R. 1815, which is just plain common sense, and I congratulate my colleague and friend for his leadership and hard work on this bill.
We want investors to understand the disclosures that companies, brokers, and advisers are required to give them.
What would be the point of requiring disclosures that the vast majority of investors don't even understand? If they don't understand the disclosures--or worse, if they haven't even read the disclosures-- then they are not making their investment decisions with all the information that they need.
The best way to ensure that investors understand the disclosures is actually to engage in investor testing of proposed disclosure forms.
Disclosures that a sophisticated institutional investor might understand or that the experts on the SEC staff might understand might not be clear and understandable to the average retail investor.
This isn't surprising. The SEC staff who designed these disclosures are typically lawyers and not disclosure design experts. That is why it is important to require the SEC to engage in investor testing of these disclosures. That way, they don't end up requiring a disclosure that simply does not work.
Quite frankly, I don't understand why anyone would oppose this bill, because that would be the equivalent of saying that you don't want investors to understand the disclosures. And if you think the SEC has the authority to do investor testing, then why would you oppose simply codifying that authority? Other agencies have done effective usability testing for disclosures.
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Ms. WATERS. Mr. Chair, I yield an additional 1 minute to the gentlewoman from New York.
Mrs. CAROLYN B. MALONEY of New York. The Consumer Financial Protection Bureau, under Director Cordray, engaged in extensive consumer testing of new disclosure forms that it was proposing for prepaid cards. It came up with two different proposed disclosure forms and then field-tested the two forms for months before finalizing the prepaid card rule. That is the kind of data-driven regulation that helps consumers, investors, and, ultimately, all market participants because it improves trust in the entire financial markets.
Mr. Chair, I urge my colleagues to support this bill.
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Ms. WATERS. Mr. Chair, I yield 2 minutes to the gentleman from Illinois (Mr. Foster).
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Ms. WATERS. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, H.R. 1815 is a commonsense bill that is supported by our Nation's seniors, investment advisers, and investor advocates. Here is what they have said about the bill:
According to AARP, they wrote: ``AARP, on behalf of our nearly 38 million members and all older Americans nationwide, is pleased to endorse H.R. 1815, which would require the Securities and Exchange Commission to conduct investor testing when developing rules and regulations about disclosures to retail investors. Robust investor testing of retail investor disclosures will assist investors in getting the information they need to make informed choices about their hard- earned savings.''
According to the Financial Planning Coalition: ``The coalition believes that H.R. 1815 would provide the statutory framework necessary for the SEC to ensure to Congress and Main Street investors that disclosures required under SEC rules have been thoroughly and adequately tested by the SEC and are reasonably effective in achieving their intended purpose.''
According to the Consumer Federation of America: ``Disclosure is both an important investor protection tool and a regulatory requirement that imposes significant cost on industry. We, therefore, have an obligation to make those disclosures as effective as possible. H.R. 1815 would help to achieve that goal by updating the SEC's approach to disclosure development. Anyone who supports commonsense, evidence-based regulation should support this legislation.''
Mr. Chair, before reserving the balance of my time, I include in the Record correspondence from the Financial Planning Coalition, the AARP, and the CFA, that is the Consumer Federation of America. Financial Planning Coalition, October 11, 2019. Re Support for H.R. 1815, the ``SEC Disclosure Effectiveness Testing Act''.
Dear Member of Congress: On behalf of the Financial Planning Coalition (Coalition), we are writing to express our strong support for H.R. 1815, the ``SEC Disclosure Effectiveness Testing Act.'' We encourage you to support the legislation when it is considered on the House floor in the coming week.
A fundamental public policy goal of the federal securities laws is to ensure full and adequate disclosure of ``material'' information to American investors. The expectation is that the disclosure will assist investors in making an informed investment decision. Given this, we appreciate the work the U.S. Securities and Exchange Commission's (SEC) Office of the Investor Advocate has done to identify and confront the challenges to improve investor disclosure.
Research conducted on behalf of AARP, Consumer Federation of America and the Coalition organizations, as well as separate research conducted by the SEC, all highlight the challenges and difficulties in developing clear, understandable investor disclosures. Information about financial issues and investments is often complex and technical in nature, and investor comprehension of this information typically is poor. All too often, mandated disclosures contain technical language and concepts that, as research confirms, are confusing to or misunderstood by investors. Indeed, research studies prove time and again how difficult it is to convey even the most basic financial and investment concepts in a way that typical Main Street investors understand.
To determine whether proposed investor disclosures would be effective at achieving their regulatory purpose of informing investor decision-making, it is not enough simply to survey investors generally on their likes or preferences. Thorough and adequate investor testing must go beyond that and, more importantly, must assess investors' ability to integrate information and synthesize it into a rational evaluation. This involves a more complex and higher-level cognitive skill. Conducting thorough one-on-one cognitive testing is the only proven way to determine whether a proposed disclosure document will achieve its intended purpose.
For these reasons, we are particularly pleased that the proposed legislation includes a requirement for qualitative testing in the form of one-on-one cognitive interviews of investors. A deeper look into the way investors analyze and synthesize information is necessary to determine the usefulness and effectiveness of any disclosure document in an investor's decision-making process.
The Coalition believes that H.R. 1815 will provide the statutory framework necessary for the SEC to ensure to Congress and Main Street investors that disclosures required under SEC rules have been thoroughly and adequately tested by the SEC and are reasonably effective in achieving their intended purpose. The legislation to be considered on the House floor appropriately clarifies that the scope of testing is limited to those disclosures that are intended to be used by retail investors in choosing a financial professional or investment product. The modified legislation to be considered on the House floor makes additional important clarifications that the Coalition supports.
We urge a ``Yes'' vote when the legislation comes up for a vote on the House floor. Sincerely, Kevin R. Keller, CAE,
Chief Executive Officer, CFP Board. Lauren Schadle, CAE,
Executive Director/CEO, FPATM. Geoffrey Brown, CAE,
Chief Executive Officer, NAPFA. ____ AARP
Dear Chairwoman Waters: AARP, on behalf of our nearly 38 million members and all older Americans nationwide, is pleased to endorse H.R. 1815, which would require the Securities and Exchange Commission (SEC) to conduct investor testing when developing rules and regulations about disclosures to retail investors. Robust investor testing of retail investor disclosures will assist investors in getting the information they need to make informed choices about their hard-earned savings.
AARP has a long history of fighting for investor protections and is especially eager to provide clarity and transparency to the often confusing and overly complicated investment world. AARP has experienced firsthand the value of investor testing to provide individuals with meaningful information needed for financial decision-making. In response to the SEC's proposed Client Relationship Summary (CRS) disclosure forms, AARP commissioned two, independent rounds of research and testing to gauge retail investor understanding. The findings provided valuable information that helped guide our recommendations for design and content modifications to improve consumer understanding. AARP believes that such retail testing should be utilized extensively by the SEC for the development of effective, consumer facing disclosures.
AARP appreciates that creating effective disclosure is often a difficult and daunting task. We also understand that the price of ineffective disclosures can be poor investment decisions and inadequate levels of retirement savings. We believe testing is imperative for facilitating informed decision-making on the part of consumers trying to save and invest their hard-earned money.
We look forward to working with you and your colleagues to increase transparency and access to critical and understandable information, as well as facilitate informed decisionmaking for older Americans making investment decisions and saving for their retirement. If you have any questions, please feel free to contact me. Sincerely, Bill Sweeney, Senior Vice President, Government Affairs. ____ Consumer Federation of America.
Dear Representative: We understand that H.R. 1815, the SEC Disclosure Effectiveness Testing Act, will soon be brought to the House floor for a vote. We are writing to urge you to vote yes on this pro-investor bill, which would help to ensure that the disclosures retail investors rely on convey as effectively as possible the key information needed to make an informed choice about decisions that are critical to their financial wellbeing.
The sad reality is that the disclosures investors receive when choosing investment professionals or evaluating investment options often do a poor job of conveying critically important information in a way that typical retail investors can understand. This includes cost disclosures that don't clearly convey costs, risk disclosures that don't clearly convey risks, and conflict of interest disclosure that do not clearly convey the nature or impact of those conflicts. Evidence of this can be found, for example, in a 2018 SEC proposal to create a summary prospectus for variable products that, while sound in concept, is long, dense, poorly organized, and full of technical jargon.
As a result, retail investors, and particularly the least sophisticated retail investors, are too often flying blind when making investment decisions that will affect their ability to afford a secure and independent retirement or fund other long-term financial goals. There are several reasons for this. One is the inherent difficulty of the Securities and Exchange Commission's task of developing clear disclosures of complex topics for a non-expert retail audience. But the other is the SEC's failure to adopt best practices widely used by industry and some other government agencies to develop more effective disclosures, including incorporating qualitative testing of disclosure effectiveness early in the development process.
This bill would help to correct the second of these two problems. It would do so, first, by requiring the SEC to incorporate qualitative disclosure effectiveness testing in the development of new disclosures designed for retail investors. Importantly findings of the testing would have to be made available for public comment. This would both hold the SEC accountable for addressing those findings in any rulemaking subject to the testing requirement and provide all stakeholders with an opportunity to weigh in.
Second, the bill would require the SEC, with input from the Office of Investor Advocate, to develop a plan for testing existing retail disclosures, without imposing a rigid timeframe for completing that review. Appropriately, disclosures primarily relied on by institutional investors, analysts, and other sophisticated market participants would not be subject to the testing requirement. This, along with the involvement of the Office of Investor Advocate in determining which existing disclosures are priorities for testing, would help to ensure resources are devoted to testing the disclosures most important for retail investors.
Disclosure is both an important investor protection tool and a regulatory requirement that imposes significant costs on industry. We, therefore, have an obligation to make those disclosures as effective as possible. H.R. 1815 would help to achieve that goal by updating the SEC's approach to disclosure development. Anyone who supports common sense, evidence-based regulation should support this legislation. Respectfully submitted, Barbara Roper,
Director of Investor Protection. Micah Hauptman,
Financial Services Counsel.
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Ms. WATERS. Mr. Chair, I am prepared to close.
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Ms. WATERS. Mr. Chairman, I yield myself such time as I may consume.
Mr. Chairman, I must admit that I am a bit surprised at this opposition. I am a bit surprised at this opposition because, first of all, everyone must understand that the SEC is our cop on the block. This agency has, as its basic mission, to protect investors.
Who best to be protected than the small, retail investors? We have so many schemes, so much fraud that we witness every day that is being brought forth to basically take advantage of the most vulnerable people in our society, many of them who don't have a lot of resources, who don't have money that they could lose. So, we believe that they must understand in what they are investing.
This is not about the big, institutional investors. This is about your retail investors. This is about the little guy. This is about those people who are depending on the information that they get and their investment advisers to help guide them so they can have enough money in retirement, for example.
Why is it we would have any elected official coming to represent the people from their districts who would be opposed to making sure that these small investors are represented, that they are protected, that they are cared about?
So, I am surprised at this opposition, and I don't know why there would be so much time spent saying that the SEC does not need to do additional kinds of testing, that they don't need to be concerned about these disclosures.
What is it you need to protect about the SEC from doing its basic job? I don't understand that.
But, however, let me just say that H.R. 1815 is a commonsense bill that benefits mom-and-pop investors by putting a process in place to ensure that the SEC's disclosures are clear and comprehensible for those investors.
A disclosure is only useful if it can be understood by its audience, and this legislation ensures that disclosures are tested in a robust way so that they are clear.
This bill is supported, again, by groups such as the AARP, our seniors; the Financial Planning Coalition; and the Consumer Federation of America, looking out for consumers.
I, again, commend Representative Casten for putting forth this important legislation, and I thank him for his work. But, more than that, I thank him as a new Member of Congress who understands that his job, his responsibility, is to look out for his constituents and for the small investors, the little people, those people who need some protection, those people who don't need to be ripped off, those people who need to have clear information and disclosure about what they are getting into.
I thank Representative Casten for his vision, for his foresight, and for understanding the responsibility of the SEC.
Mr. Chair, I urge all Members to vote ``yes'' on this bill, and I yield back the balance of my time.
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Ms. WATERS. Mr. Chairman, I claim the time in opposition to the amendment.
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Ms. WATERS. Mr. Chair, this amendment is unnecessary and could undermine the investor understanding of how retail investors relate to brokers.
H.R. 1815, the SEC Disclosure Effectiveness Testing Act, simply requires the Securities and Exchange Commission to test its documents with retail investors through one-on-one interviews and surveys to ensure that disclosure documents intended for retail investors are actually understood by their target audience.
H.R. 1815 is in no way intended to repeal Regulation Best Interest, a rule adopted by the SEC in June to change the standard of conduct for brokers when providing retail investors with personalized investment advice.
And, to be clear, the bill does not require testing of the standard imposed by the SEC under Regulation Best Interest. Instead, it requires testing of how well retail investors understand the standard and how it impacts the advice they receive, along with any other disclosures.
In addition, the bill contemplates that the SEC, in consultation with the investor advocate, would develop a schedule of disclosures that it intends to test and report to Congress. There is nothing in the bill that requires investor testing of disclosures related to Regulation Best Interest on day one of enactment.
But this amendment would say that the SEC should never test these disclosures, regardless of changes to the markets, investment product offerings, investor behaviors, and investment trends. This makes little sense, particularly considering the rise of riskier products like cryptocurrencies that are being targeted to retail investors.
I would also point out that, to the extent that the SEC, in consultation with the investor advocate, determines that it should make substantial changes to the disclosures that would have a significant impact on retail investors, H.R. 1815 would simply require the SEC to test new and existing disclosure forms to ensure that they are actually understood by the intended audience.
Mr. Chair, I oppose this amendment, I ask all of my colleagues to do so, and
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Ms. WATERS. Mr. Chairman, I would like to inquire how much time I have remaining.
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Ms. WATERS. Mr. Chair, I yield the balance of my time to the gentleman from Illinois (Mr. Casten), the sponsor of this important legislation.
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Ms. WATERS. Mr. Chairman, I yield back the balance of my time.
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Ms. WATERS. Mr. Chairman, I claim the time in opposition to the amendment.
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Ms. WATERS. Mr. Chairman, I yield myself such time as I may consume.
First, let me just say, no matter how many amendments the opposite side can come up with, no matter how many ways they try to explain why they are not speaking for the retail investors, the small folks, the people with not a lot of resources, the people who depend on good information to be disclosed to them, they can come up with all the amendments they want, but no one thinking clearly about this will understand why they are trying to protect the SEC, our cop on the block, from doing everything they possibly can do to protect our seniors and our most vulnerable people.
So H.R. 1815 seeks, again, to ensure that disclosures specifically designed for the most vulnerable investors, including mom-and-pop retail investors, can actually be used and understood by their intended audiences. Isn't that a simple request in this bill, that our most vulnerable retail investors understand what they are investing in, that that information should be disclosed to them? I don't get the arguments against it.
This amendment, however, directly conflicts with the scope of the bill, which covers new as well as existing disclosures. Requiring existing disclosures to be subjected to investor testing makes good sense. Evidence has shown many existing disclosures are not understood. The evidence is there that tells you that we have discovered that the disclosures are not understood by these vulnerable people. We have information that documents that, that the investors, the small investors, these seniors, don't understand. This bill is about helping them to understand what they are signing on the dotted line for.
Mandatory disclosures that are unused or not understood impose unnecessary costs on the companies making those disclosures, and importantly, fail to inform retail investors of key risks that they should know when making investment decisions.
However, this amendment that is before you would treat disclosures that are put forth before the next Presidential election as perfect, without need for further investor input through testing. Such an exemption is inconsistent with the object and purpose of this bill.
This undermines H.R. 1815 and its value to retail investors. So I could say this another 100 ways, they can come up with all the amendments they want to come up with; the fact of the matter is, this bill that is put forward by Mr. Casten is to protect the citizens who need the information the most, because they are vulnerable. And so having said that, I would urge my colleagues to join me in opposing this amendment.
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Ms. WATERS. Mr. Chairman, I yield such time as he may consume to the gentleman from Illinois (Mr. Casten), the author of this bill, to continue to tell the public why we must protect the most vulnerable in our society.
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Ms. WATERS. Mr. Chairman, I yield back the balance of my time.
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