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The DOL’s proposed rule would close the current regulatory loopholes to ensure that all investment professionals provide advice that is in retirement savers’ best interest and that any conflicts of interest do not taint their advice. This “best interest” standard would apply across the board: to any investment professional advising on retirement accounts for any recommended investment product.

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“Based on our initial review, the DOL has drafted a strong rule that would help bring millions of retirement savers much closer to a secure, dignified retirement. This rule aims to protect workers and retirees by closing significant legal loopholes, ensuring that the retirement investment advice they receive serves their best interests rather than the self-interest of financial professionals they turn to for advice.

Among other important protections, the proposed rule covers advice about rollovers to IRAs, the most important financial decision many people will ever make. It also covers advice to retirement plans, such as 401(k)s, where savers hold a significant portion of their retirement investments. The rule also covers advice about insurance products that are not currently protected under the securities laws or are covered insufficiently under weak and ineffective state insurance laws.

This rule promises to be a major improvement over the status quo, which allows too many financial professionals and firms to offer self-serving retirement advice at the expense of retirement savers. Given the financial stakes, it’s not surprising that certain Wall Street and insurance industry allies have immediately begun attacking the rule. Despite these attacks, there are many financial professionals who already meet these standards and want to see rules in place that require high-quality retirement investment advice that is not tainted by conflicts of interest.

As the comment process moves forward, we’ll continue to evaluate all aspects of the rule to ensure it is as strong as possible. And we’ll encourage all savers to share their views with the DOL so they can finally get the unbiased retirement investment advice they deserve.”

MEDIA CONTACTS:

AARP is the largest nonprofit, nonpartisan organization dedicated to empowering Americans age 50 and older to choose how they live as they age. With a nationwide presence, AARP strengthens communities and advocates for what matters most to the more than 100 million Americans 50-plus and their families. To learn more, visit www.aarp.org. Media Contact: Colby Nelson, (202) 706-8416, media@aarp.org.

The AFL-CIO is a federation of 60 national and international labor  unions that represent 12.5  million working people.  To learn more, visit https://aflcio.org/about-us. Media Contact: Liz Vlock, (202) 637-5034, LVlock@aflcio.org

Americans for Financial Reform Education Fund is a nonpartisan, nonprofit coalition of more than 200 civil rights, community-based, consumer, labor, small business, investor, faith-based, civic groups, and individual experts.  We fight for a fair and just financial system that contributes to shared prosperity for all families and communities.  To learn more, visit www.ourfinancialsecurity.org. Media Contact: Carter Dougherty, Carter@ourfinancialsecurity.org.

Better Markets is an independent, nonprofit, nonpartisan organization that promotes the public interest in the financial markets. Better Markets advocates for reforms that stabilize our financial system, prevent financial crises, and protect investors and consumers, ultimately so that our financial system serves all Americans more equitably.   To learn more, visit www.bettermarkets.org. Media Contact:  Madeline Tucker, Press Secretary, at 202-618-6433 or mtucker@bettermarkets.org.

Center for American Progress is an independent, nonpartisan policy institute that is dedicated to improving the lives of all Americans through bold, progressive ideas, as well as strong leadership and concerted action. Media Contact: Sarah Nadeau, 603-496-9417, snadeau@americanprogress.org.

Consumer Federation of America is a non-profit association of more than 250 national, state, and local pro-consumer organizations. It was formed in 1968 to represent the consumer interest through research, advocacy, and education. To learn more, visit www.consumerfed.org. Media Contact: Micah Hauptman, mhauptman@consumerfed.org.

Economic Policy Institute is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. EPI’s research helps policymakers, opinion leaders, advocates, journalists, and the public understand the bread-and-butter issues affecting ordinary Americans. To learn more, visit www.epi.org/. Media Contact: Monique Morrissey, 202-360-8526, mmorrissey@epi.org

The Pension Rights Center is a nonprofit consumer organization committed to protecting and promoting the retirement security of American workers, retirees, and their families. To learn more, visit www.pensionrights.org. Media Contact: Kate Pixley, (202) 296-3776, kpixley@pensionrights.org

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While the letter voiced support for proposed changes to the open-end fund liquidity risk management framework and urged the Commission to adopt those changes, the letter encouraged the Commission to go a step further to strengthen the proposal. Specifically, the letter advocated for lowering the 15% limit on illiquid assets to 10% or requiring funds that hold more than 10% illiquid assets to also hold at least 15% highly liquid assets to counterbalance the fund’s illiquid sleeve and the accompanying risk that such funds may have difficulty meeting redemption requests during times of stress without causing significant dilution of remaining investors’ interests in the fund.

In addition, the letter voiced strong opposition to a proposed swing pricing framework because it would create a two-tier market, putting investors who are able to structure their transactions so as to avoid being subject to swing pricing at an advantage relative to those who are unable to structure their transactions so as to avoid swing pricing. This would be particularly detrimental to retail investors saving for a secure and dignified retirement. According to the letter, “the proposed swing pricing framework cannot be operationalized without causing significant collateral damage to the open-end fund market and to retail investors. Furthermore, it is unlikely that the proposal would accomplish its objectives.” Accordingly, the letter urged the Commission to dispense with the proposed swing pricing framework and forego any regulatory approach that causes retail investors to disproportionately shoulder any costs and delays associated with liquidity risk management.

The post CFA Offers Support for Proposed Changes to SEC’s Liquidity Risk Management Framework, Strong Opposition to Proposed Swing Pricing Framework appeared first on Consumer Federation of America.

Accordingly, financial professionals are increasingly being asked about investing in crypto assets and they are increasingly saying that they expect to recommend these assets to clients in the future. For example, according to a Cerulli survey, 80% of advisors surveyed said that clients of all ages have asked them about cryptocurrencies. While just 10% are using it because of client requests, 45% of advisors say they expect to use crypto in the future in response to client requests.

In addition to increasing investor interest in crypto, there’s also growing competitive pressure within the market as more firms, including traditional securities firms, are offering access to crypto-related assets to retail investors. At a certain point, firms and financial professionals are likely to ask themselves, “Investors seem to want crypto, other firms are offering it, maybe I should too?”

However, because of the unique risks that are inherent in the crypto market, firms should consider the following very carefully before doing so. Among other concerns, crypto-related assets:

• Can be speculative and volatile investments, with prices that can swing wildly and crash without warning – this volatility can be particularly devastating for investors who are approaching retirement;
• It can be extraordinarily difficult, even for expert investors, to separate the facts from the hype with regard to crypto assets;
• Crypto-related assets are not held like traditional assets in trust or custodial accounts, which can expose them to heightened risk of fraud, theft and loss – FTX’s recent failure illustrated these risks and the harms that can flow from them;
• Crypto-related assets raise valuation issues because they may not be subject to traditional, empirically-validated valuation methodologies;
• Crypto-related assets may be unregistered or otherwise offered by or through providers who are operating outside of or not complying with existing regulatory frameworks; and
• Crypto-related assets may be subject to additional regulation, which may evolve in unpredictable ways.

Recognizing these unique risks, it is important for financial professionals who recommend or advise investors to include crypto-related assets in investors’ portfolios to fully understand the implications of doing so. Principally, recommending crypto-related investments raises the potential for them to violate their standards or conduct,[1] specifically their care obligation under Regulation Best Interest (Reg BI), if they are a broker, and their Duty of Care under the Investment Advisers Act, if they are a registered investment adviser.

When an investor is being recommended a security:

• Reg BI requires a broker-dealer to exercise reasonable diligence, care, and skill to, among other things, to have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation.;
• Similarly, the Investment Advisers Act fiduciary duty requires to adviser to have a reasonable belief that the advice it provides is in the best interest of the client based on the client’s objectives. The formation of a reasonable belief would involve considering, for example, whether investments are recommended only to those clients who can and are willing to tolerate the risks of those investments and for whom the potential benefits may justify the risks.

With all of this in mind, here are some potential fact patterns regarding the recommendation of crypto-related assets that would likely raise concerns under Reg BI or the Investment Adviser’s Act fiduciary standards of care:

• If a financial professional recommends crypto to an investor despite the investor not having an appropriate risk tolerance of risk capacity for crypto. In other words, if either the investor would not be personally comfortable with the risk of losing a significant or even the total amount of their investment or they can’t objectively absorb the risk of losing a significant or the total amount of their investment, it would raise serious questions about whether the financial professional complied with their standard of care when recommending that the investor invest in crypto-related investments.
• If a financial professional recommends a larger allocation than is prudent for the investor, subjecting the investor to significant losses they can’t absorb.
• If a financial professional recommends a particular crypto-related asset without understanding that specific asset, its features, and its potential risks/rewards relative to other crypto-related assets that are reasonably available
• If the financial professional recommends a particular crypto-related asset without considering the costs associated with investing in that crypto-asset relative to other reasonably available assets.
• If the financial professional does not custody the crypto-related assets prudently, subjecting the investor’s investment to enhanced risk of theft/loss.
• If the financial professional isn’t clear about if or how they will monitor the crypto-related asset and as a result, the investor’s asset allocation (and portfolio risk) changes significantly because of volatility of that asset and changes in exposure to that asset.

As you can see, there are many risks regarding recommending crypto to retail investors and financial professionals must tread carefully. If they don’t, they may expose clients to significant harm and expose themselves to significant legal liability for doing so.

Update Dec. 1, 2022: On November 30, 2022 the Certified Financial Planner Board of Standards (CFP^® Board) published a Notice to CFP^® Professionals regarding financial advice about cryptocurrency-related assets. Consistent with this blog’s analysis regarding recommendations and advice by broker-dealers and investment advisers about crypto-related assets, the CFP^® Board Notice highlights the need for CFP^® Professionals to undertake careful analysis when providing financial advice about crypto-related assets in order to comply with the CFP^® Board’s Code and Standards, including the Fiduciary Duty and the Duty of Competence. In full disclosure, I am a member of the CFP^® Board’s Standards Resource Commission, which helped to develop the Notice.

[1] As a primary matter, Reg BI only applies when there’s a securities transaction that’s recommended. To the extent that a broker recommends a crypto-related asset that is not considered a security, then Reg BI would not apply (notably, key regulators have indicated that most crypto-related assets are securities). However, because an adviser’s fiduciary duty applies to the entire advisory relationship and portfolio, an adviser’s fiduciary duty would apply if they provide advice to invest in a crypto-related asset, regardless of whether the asset is a security or not.

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According to the letter, markets have experienced significant changes in recent years, both with regard to the increased diversity of investment products in the marketplace and the new ways in which investment products are sold to retail investors. As a result, retail investors now have unfettered access to a variety of complex products and strategies that were largely unavailable to the retail market just a few years ago. While providing access to new and innovative products certainly can be beneficial to investors who fully understand those products’ essential characteristics and risks, doing so also increases the likelihood that investors who don’t fully understand those products’ essential characteristics and risks will misuse them. This issue has taken on increased importance as the number of accounts trading in complex products and options has increased significantly in recent years.

Recognizing the substantial risks to retail investors of investing in complex products and options through self-directed platforms and the current lack of regulatory safeguards to ensure that only those who understand these products’ essential characteristics and risks use them, CFA urged FINRA to update the framework for complex products and options to better protect retail investors by:

• updating existing options account approval rules to ensure that broker-dealers approve customers for options trading only if options trading is appropriate for their customers;
• applying the options account approval rules more broadly to other complex products that are purchased through self-directed platforms; and
• vigorously enforcing these options and complex products account approval rules to ensure firms comply with their regulatory obligations.

The goal of this project should be to ensure that investors who understand a complex product’s essential characteristics and risks continue to have access to such a product, while investors who do not understand a complex product’s essential characteristics and risks do not continue to have unfettered access to such a product, given the increased potential for these investors to suffer great financial and personal harm from the use of such a product. As key gatekeepers in the market, it is entirely appropriate for broker-dealers to have heightened obligations to ensure that their customers who do not understand complex products and options do not use them.

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The letter reiterates support for Gensler’s recent statement that “[i]t doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime.” In further support, the letter points to the longstanding regulatory framework that has for decades guided issuers, practitioners, and investors on what is and is not a security, extolling the clear yet flexible tests that have been established by the U.S. Supreme Court. The letter urges the Commission to refrain from creating new carve-outs for digital asset offerings – a “well-intentioned, but ill-advised” effort that risks “undermine securities regulation and its investor protections” – and instead simply continue to apply this durable framework to digital assets.

Specifically, the letter outlines several particularly concerning digital asset trends, including that there are currently “many existing digital assets [that] meet the definition of a “security” under these longstanding Supreme Court standards” that “are offered without registration with the Commission.” Accordingly, additional regulatory attention should also be directed at the “brokers, custodians, exchanges, and [those] providing other products or services related to those securities [that] are not registering with the Commission,” stressing the potential risks to “the basic investor and consumer protections that are ensured by the federal securities regulatory regime.” The letter further details alarming aspects of two of the largest “stablecoins,” calls for further regulatory scrutiny of digital asset-linked “lending services,” and finally, raises further questions following “recent press reports and studies [that] have established that several foreign brokers, custodians, and exchanges for digital assets are permitting trading activity by US investors and customers, again without complying with the federal securities regulatory regime.”

The letter commends recent regulatory action taken by the Commission, but notes that significantly more must be done. The letter concludes that: “Without significant regulatory guidance, the digital asset marketplace has been born and grown into a Wild West. It is urgent for the Commission and other federal financial regulators to enforce the law to better protect investors and improve the integrity and stability of the digital asset markets.”

The post SEC Urged to Review Certain Digital Assets for Compliance with Securities Laws appeared first on Consumer Federation of America.

“RILA sales have grown rapidly in recent years, with $9.2 billion in sales reported in just the first quarter of 2021. Currently, however, the lack of a tailored form for registering the products with the Securities and Exchange Commission (SEC) can result in disclosures that are long, dense, and incomprehensible to the typical purchaser. By directing the SEC to develop a tailored RILA registration form, your bill should help to ensure that disclosures are more focused on the information investors need to determine whether the product represents a good option for them,” the letter states. Additionally, the letter also emphasizes that “the bill requires the SEC to engage in investor testing and incorporate results of that testing in the design of the form, with the goal of ensuring that key information is conveyed in terms that purchasers are able to understand.” The letter concludes, “[b]ecause this legislation offers a model for how disclosures can and should be designed with the needs of investors in mind, CFA is pleased to offer it our strong support.”

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For 35 years Barbara Roper has served to protect consumers at the Consumer Federation of America.  “Her efforts to institutionalize a fiduciary responsibility in the financial marketplace is legendary and has served as the benchmark for those interested in a healthy, responsible and fair financial marketplace,” added Gillis.

As the Federation looks to find a permanent successor for Barbara, Mike Canning will be joining CFA in a consulting capacity as Investor Protection Consultant. Mike has recently announced that he will be leaving the North American Securities Administrators Association at the end of September to form The LXR Group, a public policy consulting firm.  He and Dylan Bruce, CFA’s Financial Services Counsel, will be continuing Barb’s work in protecting American Investors.

Contact: Jack Gillis, 202-939-1018

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The groups lay out three concerns with the DOL information letter: 1) It fails to give adequate consideration to the capacity of the typical plan sponsor, offering a defined contribution plan to its workers, to conduct the required analysis. 2) It fails to present a balanced presentation of the potential risks and rewards of investing in private funds. 3) It contemplates permitting funds with a private equity component in certain types of investments – including collective investment trusts (“CITs”) and target date funds – without adequately weighing the particular risks they could pose to defined contribution plan participants.

The groups urge DOL to withdraw the June 2020 information letter, or at least suspend its implementation, while it takes the following three actions:

• Revise the information letter to incorporate a more complete and balanced analysis of the potential risks and rewards of private investments in order to support more informed decision-making by defined contribution plan fiduciaries with regard to the appropriateness of these investments for their employees.
• Include a warning to plan fiduciaries that, where they lack the financial knowledge and sophistication to assess the appropriateness of the investments and provide the necessary oversight, they must either get disinterested advice from a fiduciary who has the requisite expertise or refrain from including the investments on the plan menu.
• Study developments since the information letter was released to determine the extent to which funds with private equity exposure have been, or are anticipated to be, added to plan menus, what process is being used in their selection, whether those funds are being designated as QDIAs, and how any CITs with private equity exposure are structured.

“We believe these steps are necessary to help ensure that defined contribution plan fiduciaries base any decisions about whether to add funds with private equity exposure to plan menus on a balanced consideration of the benefits and risks. It would also help arm the Department with the information it needs to ensure that retirement plan participants are not being put at undue risk,” the letter concludes.

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The bad news, Roper wrote, is that Regulation Best Interest, the Investment Advisers Act fiduciary guidance, and the Customer Relationship Summary all have serious deficiencies. “The good news is that we do not believe it will be necessary to scrap these rules and start from scratch in order to deliver the protections investors expect and deserve when they turn to financial professionals for help with their investments,” she added. “Despite their many flaws, these regulations can provide a framework on which to build a more robust regulatory approach.”

“For decades, the Commission has failed to live up to its central investor protection mission when it comes to the regulation of broker-dealers and investment advisers,” Roper concluded. “You have an opportunity to correct that failure, and we urge you to do so. It is, in CFA’s view, the most important step you can and should take to protect the interests of millions of financially unsophisticated individuals who turn to the markets to save for retirement or other important life goals and desperately need advice they can trust to navigate those decisions. CFA stands ready to do whatever we can to assist you in this effort.”

The post CFA Urges Chairman Gensler to Act Quickly to Fix SEC’s Advice Standards appeared first on Consumer Federation of America.

“This legislation recognizes both the important role that investing plays in the financial lives of older Americans and their particular vulnerability to fraud and exploitation. By creating a special task force within the Securities and Exchange Commission to focus on these issues, and directing them to coordinate with other state and federal regulators, the Senior Security Act will help to ensure that our laws and regulations provide the protections that older Americans need when they turn to our capital markets to invest for, and to provide income and a hedge against inflation in, retirement,” the letter states. “We believe this approach will provide a sound basis for future policies to better protect vulnerable senior investors. We are therefore pleased to support this bill and urge its passage,” the letter concludes.

House Letter

Senate Letter

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“The main issue at stake here is opt-in vs. opt-out – what default works best to protect workers and retirees,” the groups wrote. “The notice-and-access rule adopted by DOL last summer abolishes the actual receipt standard, and replaces it with a rule structured to minimize the chances that workers and retirees will actually receive important disclosures. Under the new rule’s default, the plan’s obligations to furnish disclosures begins and ends with sending an email or text message to a consumer letting them know that a disclosure is available on a website. The entire onus of noticing the electronic alert, logging in and finding the document on the website, and printing it out for future documentation is shifted from the plan to the worker/retiree.

“Notice-and-access goes well beyond, and is far more anti-consumer than, simple electronic delivery of a document like receiving a PDF attachment in an email,” the letter continues. “Contrary to the body of research by behavioral economists to make defaults work to promote desired goals, the rule uses the force of inertia against the retirement security interests of consumers – “automatically enrolling” them in a disclosure regime that will discourage them from receiving, reading or preserving the documents.”

They called on DOL to “make it a priority to propose and adopt major revisions to this rule as soon as possible.”

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“Today’s vote is evidence of an agency that has abandoned its investor protection mission and shirked its responsibility to protect both investors and the health and integrity of our capital markets,” Roper said. “While the rules voted on today are technical, their combined effect is clear: they will make it easier for even very large companies to conduct their securities offerings in the opaque and poorly supervised private markets, thus avoiding having to provide the essential facts needed to value their securities, and they will make it easier for these private issuers to aggressively market those supposedly ‘private’ offerings to the general public.”

“As usual, SEC Chairman Jay Clayton is promoting these rules as beneficial for small company capital formation. But, as he has with increasing frequency in recent months, Chairman Clayton chose to move forward with these rules without any evidence or meaningful analysis of their likely impact on either capital formation or investor protection. With this vote, he cements his reputation as the most partisan, deregulatory, and anti-investor SEC chairman in recent history,” Roper added.

Democratic Commissioners Allison Herren Lee and Caroline Crenshaw both opposed the rules and issued strong statements voicing their dissent. “We greatly appreciate Commissioners Lee and Crenshaw for continuing to champion investor protection at an agency that has clearly lost sight of, or lost interest in, its central investor protection mission,” Roper concluded.

Contact: Barbara Roper, 719-543-9468

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The comment period on the SEC’s sweeping concept release on exempt securities offerings closes today.  In the name of “harmonizing” the complex web of securities law exemptions, the SEC lays out a framework that would actually further expand the ability of companies to raise capital from the general public without meeting the basic transparency and accountability requirements of the federal securities laws. As such, it threatens to recreate conditions that led to the stock market crash of 1929 and contributed to the 2008 financial crisis.

Consumer Federation of America (CFA), Americans for Financial Reform (AFR), Better Markets, the Center for American Progress (CAP), and AFL-CIO called on the SEC to:

• Call a halt to any expansion of the private offering exemptions, such as those outlined in the Concept Release, until the Commission can conduct a careful analysis of the impact of the proliferation and expansion of exempt offerings on the health of our public markets, investor protection generally, and other impacts on the economy and the public interest.
• Identify gaps in the Commission’s knowledge of private markets, including the significant lack of data regarding the Regulation D market, that prevents it from analyzing the impacts of its policy proposal and develop a plan for closing those information gaps before proceeding with further rulemaking.
• Re-issue the Concept Release disclosing the information learned from the above and provide an additional, ample comment period of no less than 90 days to allow for thoughtful public input into the Commission’s policy proposals.

“Despite mounting evidence of declining public markets and increased problems in private markets, the Commission hasn’t given serious attention to either issue in its concept release,” said CFA Director of Investor Protection Barbara Roper. “With its focus on harmonizing the existing exemptions, the Commission is rearranging deck chairs on the Titanic instead of fixing the hole in the boat. Worse, its proposals to expand retail investor access to private markets threaten to make that hole much, much bigger.”

“While the SEC bemoans the size and vitality of the public markets, it continues to enable the expansion of dark private markets, bleeding public investors of opportunities, transparency and accountability, and our economy of much-need capital formation,” said Dennis Kelleher, President and CEO of Better Markets.  “Many of these problems are of the SEC’s own creation.  Jamming through this far-reaching and ill-considered release will just make them worse.  The SEC should hit the pause button, collect and analyze the data, and provide the public with a meaningful opportunity to comment.”

“Under the original New Deal mandate of the SEC, the U.S. system of public markets became the deepest, most liquid, and most efficient securities markets the world had ever seen,” said AFR Policy Director Marcus Stanley. “But in recent decades, rather than building on this success, regulators have created a system of exemptions that has allowed the private offering market to expand to the point where it now accounts for much more capital than the public markets. Private markets do not have the disclosure requirements, corporate governance features, or liquidity of public markets, and their expansion has been harmful to both investors and the broader economy. But instead of re-examining and limiting private markets, the SEC concept release appears to point the way to still further ill-considered expansion of private markets. The Commission needs to turn back from this path, do the research to measure the actual effects of private markets, and act to limit their risks.”

“Why the SEC would aim to make corporations even less transparent and accountable to shareholders and the public is hard to fathom,” said Andy Green, Managing Director of Economic Policy at the Center for American Progress. “The yawning gap between corporate profits and worker wages, along with enormous challenges like climate change, shows that working families need companies to be paying more attention to environmental, social and governance matters. Instead of deregulating, policymakers should be boosting transparency, accountability, and oversight across all large companies.”

Contact:

Barbara Roper, CFA, 719-543-9468

Christopher Elliott, Better Markets, 202-618-6433

Marcus Stanley, AFR, 202-466-3672

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Office of the Corporate Secretary

FINRA

1735 K Street, N.W.

Washington, D.C. 20006-1506Save

Re:      Regulatory Notice 12-10

Increasing Investor Use of BrokerCheck Information

Dear Ms. Asquith:

I am writing on behalf of the Consumer Federation of America[1] in response to FINRA’s request for comment regarding methods to improve the utility of BrokerCheck for investors and to increase investor use of BrokerCheck information.  BrokerCheck has made great strides since it was first established in 1988 both with regard to the content of the reports and with regard to ease of access for investors.  However, many investors remain ignorant of this valuable resource.  By focusing on how to improve the content, format, and promotion to the public of BrokerCheck, this initiative has the potential to significantly improve investors’ ability to make an informed decision among investment professionals. We appreciate the opportunity to provide input on this important topic.

Introduction

At a time when investment decisions have become both more complex and more important to Americans’ financial well-being, most investors investing outside a workplace retirement plan choose to do so through some sort of financial intermediary, such as a broker-dealer, investment adviser, or financial planner.  Moreover, research has shown that many such investors will rely very heavily if not exclusively on the recommendations they receive from these financial professionals, making the selection of whom to rely on for recommendations among the most important investment decisions most people will ever make.  With this in mind, investor education materials on the topic typically warn investors to exercise care in making that selection and to take the time to carefully check out any firm or individual with whom they are considering working.

The following are among the key questions investors are typically advised to consider with regard to the firm and the individual provider with whom they are considering working:

• What services do they offer?
• Are they appropriately licensed and registered to offer those services?
• What qualifications or special expertise do they have?
• Are there red flags in their employment or disciplinary record that could suggest a history of abusive sales practices or even fraud?
• How are they compensated?
• Are they subject to conflicts of interest that could bias their recommendations? What is the nature and magnitude of any such conflicts?
• What is their legal obligation to the customer?
• How and how much can you expect to pay?

For a number of these issues (e.g., licensing, registration, work history and disciplinary record), BrokerCheck as it is currently conceived is a valuable tool that can provide investors with the background they need.  For BrokerCheck to provide the full range of information deemed by most experts to be essential, however, it would have to be expanded to include a pre-engagement disclosure requirement comparable to Form ADV for investment advisers.  We applaud FINRA for taking steps in that direction with its 2010 concept release[2] and recognize that this initiative is on hold while the Securities and Exchange Commission (SEC) considers whether and how to move forward with fiduciary rulemaking. Ultimately, however, we believe the most beneficial change FINRA could make to BrokerCheck would come from incorporation of such a document, since it would ensure that investors get the information they need in an easily comparable format without having to know what questions to ask or where to go to seek out that information.

In the interim, the short-term recommendations by the SEC in its Section 919B Study and the middle-term changes being considered by FINRA in this concept release should result in significant improvements to the system.  CFA strongly supports all three of the short-term recommendations made by the SEC staff:

• Unifying search returns for BrokerCheck and the IAPD database will address a major disconnect between how the current system is configured and how investors actually select investment service providers.  While some investors may shop exclusively for a broker or an investment adviser, many do not.  Indeed, research shows that most investors do not understand the differences between the two and cannot distinguish between them even after the differences are explained.  The current system makes it reasonably easy to move back and forth between the two databases where individuals or firms have information in both systems, but it is less clear for individuals with information in just one of the databases.  For example, entering the name of an investment adviser representative who is not dually registered in BrokerCheck produces a No Results Found message rather than a referral to IAPD, let alone the actual IAPD report an investor would receive with unified search returns.  Although that issue is addressed in the BrokerCheck FAQ, not every investor will know to turn to the FAW.  An unsophisticated investor who is not familiar with the systems may misinterpret those results and conclude that the individual is not appropriately registered.  Unifying the search returns will address that problem.  Moreover, if as we have suggested, a pre-engagement disclosure form is adopted for brokers that is roughly comparable to Form ADV, that would address the concern raised by SIFMA that there will be significant discrepancies between the types and quantity of information provided in the two databases.  In the meantime, this and other discrepancies between the two disclosure regimes could be addressed through some form of explanatory text or disclosure.

• Adding a ZIP code or other location search function will also significantly improve the functionality of BrokerCheck for individuals who are just beginning their search for a broker or adviser.  We have examined the arguments put forward by SIFMA in its comment letter for delaying this step, and we do not find them persuasive.  SIFMA suggests that a wealth of information is already available through standard Internet search.  In fact, however, it can be extremely difficult to get a reasonably comprehensive listing of the brokers, investment advisers and financial planners offering investment services to retail customers in a particular community.  In both print and online “yellow pages” listings, investment service providers are listed under a variety of headings, with some listed only under one or two headings and others listed even under headings that do not appear to match their business model. An unsophisticated investor attempting to find their way through this maze is likely to end up confused and frustrated or with only a partial list of candidates based on the heading they happened to use in initiating their search. Moreover, in our experience these listings, and Internet listings in particular, are likely to include individuals who are incorrectly categorized as well as out of date information.[3] Adding a location search function to BrokerCheck, when combined with unified search returns for BrokerCheck and IAPD, would greatly reduce that problem.  SIFMA also suggests that there may be privacy concerns for brokers who are required to list their home address as a branch office.  We don’t have access to the data that would allow us to determine how extensive an issue this is (i.e., how many brokers list their home as a branch office but don’t actually conduct business with the public out of their home or publicize that contact information).  If this home address information is already provided in BrokerCheck, it is not clear to us how adding a ZIP code search function would increase the privacy risk for these individuals.  If the information is not currently provided in BrokerCheck, there is no reason that adding a ZIP code search function would have to change that.  Whatever the case, it ought to be possible to address any legitimate privacy concerns through other means.[4] Finally, SIFMA expresses concern that adding a ZIP code search function could lead to abuse by encouraging third parties to extract data from BrokerCheck for sale to investors.  As discussed in greater detail below, we believe increasing the channels through which investors receive this information – and allowing for innovation in how the information is presented – is one of the most effective tools FINRA has at its disposal to increase investor use of BrokerCheck information when selecting an investment services provider.  We therefore consider this a benefit of, rather than a problem with, the proposal to add a ZIP code search function.

• Adding educational content to BrokerCheck can help investors to better understand the disclosures and their relevance to the selection process.  Because FINRA asks specific questions about this in the concept release, we provide our views on the appropriate content and presentation of that material below.

Our detailed comments on the issues addressed in the Request for Comment follow.

Information Displayed

On the topics that it currently covers, BrokerCheck generally provides a good quantity and mix of information.[5] If anything, the reports for brokerage firms include too much rather than too little information.[6] That said, there are tweaks to the content that we believe would be beneficial.  As a guidepost for what additional currently available information could be added to BrokerCheck, FINRA would do well to look to its own educational materials on selecting an investment professional.  To the degree that there is information that FINRA believes it is appropriate for investors to evaluate that could easily be incorporated into the current BrokerCheck configuration, we encourage you to add that information.

Information on educational background and professional designations would clearly fit within this category.  If FINRA decides to include information on professional designations in BrokerCheck, it should consider revamping its current Professional Designation Database to make it more user-friendly.  In addition, any designations listed in a report could include a direct link to a description of that particular designation so that investors would not have to seek it out on a long list of credentials.  That would make it easier for investors to evaluate the significance of a particular designation.

Adding educational content could greatly enhance investors’ ability to use and understand the information contained in BrokerCheck.  One way to approach that would be for FINRA to develop a document for prominent display on the BrokerCheck home page on how to get the most out of the database when selecting an investment professional.  For each category of information provided in BrokerCheck (e.g., registration, licenses, employment history, disciplinary record), the document could explain why that information is relevant to the selection process and how the investor can best evaluate that information. In addition to displaying the explanatory document on the BrokerCheck home page, FINRA could link to relevant sections of the document from headings in the BrokerCheck report, or alternatively display the relevant content as hover text when the cursor hovers over a particular report heading.

FINRA already has a good base text for providing this content in its own investor education materials. Although that educational information is currently available through a tab on the BrokerCheck home page, it is not terribly prominent.[7] And it is not directly incorporated into BrokerCheck in a way that puts relevant information at the investor’s fingertips as they are preparing to launch a search or reading a particular BrokerCheck report.  By customizing the information to the investor’s immediate experience, our suggested approach offers greater potential benefit in our view than more generic “how to” information. That said, nothing about this approach would preclude FINRA from also linking to other relevant investor education material, which we support so long as that material is free from any particular product or provider bias.  The SEC, state securities regulators, and other independent investor education organizations are likely to be the best source of such information.

Report Design, Format and Content

CFA supports continued use of a two-tiered approach in which investors initially receive a summary report that includes one-click access to a more detailed report.  In general, we think the overall presentation of the summary report is appropriate and that the highlighted bars directing the eye to questions about the availability of more detailed information are useful.  We are not experts in graphic presentation of information, however, and would defer to experts in this area on the best way to present the information visually.  Our own reaction was that the access “button” for the detailed report could be made more prominent if, for example, it were placed directly next to the broker’s name, rather than at the far right of the screen.

We also believe investors would benefit from some additional information about disciplinary events on the summary report.  The yes/no indicator of additional information is useful, but it doesn’t distinguish between an individual with numerous regulatory actions, arbitration awards, and customer complaints and the individual with a single event unrelated to their activities as a broker-dealer.  A brief description of the number and types of events might be useful in providing that distinction.  In presenting this information, it might be appropriate to distinguish between types of regulatory actions along something like the following lines: regulatory actions and non-regulatory events; sales practice violations and more technical violations; court awards, arbitration awards, and customer complaints; and events not directly related to practice as a broker.  If FINRA were to adopt our suggested approach of incorporating investor education material as a link or hover text with the report, this could further assist the investor to draw reasonable conclusions based on the information presented.

The need for summary information on disciplinary events is particularly urgent with regard to reports for broker-dealer firms.  The mass of undifferentiated information presented for a large, full-service firm is likely to be impenetrable for the vast majority of users.  Dividing the information into categories (along the general lines suggested in the previous paragraph for individuals) based on the nature of the event, grouping all related complaints into a single entry, and eliminating duplicative reporting could make the information easier to digest.  Even with this more user-friendly presentation of the information, however, we are concerned that many investors will not know how to assess the information provided.  As discussed in greater detail below, this is an area where we believe commercial and other third-party users may be able to provide significant added value, by digesting the information and presenting it in a format that enables investors to make reasonable comparisons among firms.

Investor Awareness of BrokerCheck

While use of BrokerCheck has grown significantly over the years, we suspect that many if not most investors are not aware of the availability of this resource.  A variety of relatively simple steps could help to increase awareness:

• Brokers could be required to provide information on how to access BrokerCheck prominently in appropriate locations on their company websites, on new account documents, and on monthly account statements.  When information is provided to investors electronically, they could be required to include a direct link to BrokerCheck.  This would help to ensure that investors are reminded of the existence of the database at appropriate times and in appropriate contexts.

• Given widespread use of the Internet as a research tool, significant expanded use would likely be achieved if basic BrokerCheck information popped up prominently in a standard Internet search on a broker’s or brokerage firm’s name.  It wouldn’t be necessary to include much more than the broker name, firm name, location, and a link to BrokerCheck, along with a note that further information on licensing and registration status, employment history, and disciplinary record is available through BrokerCheck.

• State securities divisions could be encouraged to provide access to the BrokerCheck/IAPD search results on their website.  A quick (and far from scientific) review of several state websites indicated that, if this information is currently available on state securities division websites, it is not always readily apparent where to find it or how to conduct a search.

• FINRA could conduct periodic media campaigns to encourage personal finance writers to publicize the availability of BrokerCheck and to encourage investors to make use of the database when selecting an investment professional.

Commercial Use

If the goal is to promote informed investor decision-making by expanding access to the data contained in BrokerCheck (as opposed to simply increasing use of BrokerCheck itself) then permitting third parties to access BrokerCheck data for repackaging and distribution to investors could contribute significantly to that goal.  While some of the third parties interested in using the data would likely be for-profit companies, others such as personal finance writers and not-for-profit services might also be interested in using the data.[8] This has the potential to promote new and innovative approaches to presenting the information, which could be extremely beneficial in enhancing both the use and the usefulness of the data.  For example, as noted above, the third party might come up with a way to present firm-level disciplinary information in a way that allows for a more meaningful comparison across firms than is possible using just the raw data.

This is consistent with administration policy to promote “smart disclosure.”  As outlined in a September 8, 2011 memorandum from Office of Management and Budget Administrator Cass R. Sunstein to heads of executive departments and agencies, “the term ‘smart disclosure’ refers to the timely release of complex information and data in standardized, machine readable formats in ways that enable consumers to make informed decisions.”  The memorandum specifically notes as a leading benefit of smart disclosure that it “enables third parties to analyze, repackage, and reuse information to build tools that help individual consumers to make more informed choices in the marketplace … These tools can … help individuals search efficiently based on very specific criteria that would be burdensome and time-consuming to extract from traditional print disclosures.”  While FINRA is not bound by this policy, and BrokerCheck is in and of itself a form of “smart disclosure,” we believe additional benefits can be achieved by expanding this concept further and allowing third-party access to the data for further distribution.

We are frankly surprised by the strong industry opposition that has greeted this proposal.  Good brokers and advisers only stand to benefit from broader availability of information that helps investors to weed out the bad apples.  Similar types of data have been used to good effect in other markets.  Perhaps most comparable are Internet sites that combine car crash test, reliability, and fuel economy data to assist consumers shopping for an automobile to identify vehicles with certain characteristics. In the financial services arena, organizations like Morningstar, Lipper and Yahoo! Finance have shown how private services can add value when presenting information, much of which is taken from public sources.  To the degree that there are concerns about possible misuse or misrepresentation of the information, FINRA should be able to address any such concerns by applying appropriate limitations on use of the information.  While such concerns can and should shape FINRA’s approach to providing third parties with access to the data, they do not in our view justify foregoing or even delaying this initiative.

Conclusion

CFA applauds FINRA for undertaking this timely evaluation of its BrokerCheck system.  We believe the suggestions we have offered can help to enhance investor use of this valuable tool and thereby promote better informed decision-making when it comes to the all-important task of selecting an investment services provider.  Please feel free to contact us if we can offer any assistance in achieving this worthwhile goal.

Respectfully submitted,

Barbara Roper

Director of Investor Protection

[1] Consumer Federation of America (CFA) is a nonprofit association of approximately 280 national, state and local pro-consumer organizations founded in 1968 to advance the consumer interest through research, advocacy and education.

[2] FINRA Regulatory Notice 10-54, Disclosure of Services, Conflicts and Duties.

[3] CFA conducted initial work on a (never published) “mystery shopper” survey in the late summer and early fall of 2010 using listings from an online yellow pages service.  We found that a large percentage of the listings were incorrectly categorized or included out of date information.  As a result, they were not useful in narrowing down a population of investment service providers in a particular town or city.

[4] For example, it might be possible to exclude any such home offices not actually used for conducting business with the public from the ZIP code search where there is an official office location outside the home that is used for that purpose.

[5] As discussed above, we believe the content of BrokerCheck would benefit greatly from the additional of a pre-engagement disclosure requirement for brokers comparable to Form ADV for investment advisers.  For the purposes of this discussion, however, we are focusing on BrokerCheck as currently configured, consistent with the existing disclosure requirements for brokers.

[6] We discuss that issue in greater detail under Report Design, Format and Content.

[7] In evaluating the website, we didn’t notice it until we specifically looked to see if it was there.

[8] For example, we can imagine that Consumer Reports, some of the major personal finance magazines, and even local newspapers might be interested in using the data as part of some sort of guide to brokers and advisers.

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