Should the SEC Conduct Investor Testing Before Issuing Rules & Regulations About Disclosures? (H.R. 1815)

What is H.R. 1815?

(Updated October 29, 2019)

This bill — the SEC Disclosure Effectiveness Testing Act — would require the Securities and Exchange Commission (SEC) to conduct investor testing before issuing any rule or regulation designating documents or information to be disclosed to retail investors under securities laws. This would cover documents provided to retail investors when they: select a broker-dealer or investment advisor; assess a broker-dealer or investment adviser’s securities recommendation; make a decision to purchase or sell a security; or other circumstances as the SEC deems appropriate. In particular, this bill would require the SEC and Investor Advocate to prioritize testing documents or information delivered to retail investors in the form of summary documents or summary sections of documents for the purpose of information investor decision-making.

The investor testing conducted by the SEC would be required to: 

• Include qualitative testing in the form of one-on-one cognitive interviews of retail investors concerning documents or information (either in whole or part as samples);
  
• Include any other forms of testing that the SEC and the Investor Advocate deem appropriate for determining retail disclosures’ effectiveness;
  
• Be published in the Federal Register;
  
• Be open for public comment once published in the Federal Register.

This bill would give the Investor Advocate authority to conduct testing on their own. The SEC would fund such testing and provide any necessary personnel. The Investor Advocate’s testing could qualify as the testing required under this bill, provided that the investor testing conditions are met. 

On an annual basis, the SEC, with input from the Investor Advocate, would be required to provide Congress with a report detailing: 

• The status of any investor testing required under this bill that is either ongoing or was initiated within the last year;
  
• The results of any investor testing completed within the last year;
  
• The SEC’s priorities for 1) revising any proposed or final rule or regulation based on the results of testing; 2) initiating any rulemaking or actions based on the results of testing; and 3) incorporating the Investor Advocate’s views based on matters arising from testing or testing results.

Disclosures made pursuant to certain pre-existing regulations (specifically, Regulations S-K and S-X, Regulation 14A, Form N-PX, Form 10-K, Form 10-Q, Form 8-K, Form SD, Form N-PORT, Form PF, Regulation SBSR, and disclosures mandated by or jointly with the Board of Governors of the Federal Reserve System or the Financial Stability Oversight Council) would be exempt from this bill’s requirements. 

Argument in favor

Before it makes rules governing disclosures to retail investors, the SEC should ensure that the rules work. This is only possible with thorough investor testing.

Argument opposed

The SEC already tests proposed rules regarding retail investor disclosures before implementing them. This bill would block already-tested SEC proposals on retail investor disclosures.

Impact

Retail investors; financial advisors’ and brokers’ disclosures to retail investors; SEC regulations regarding disclosures to retail investors; SEC testing of proposed regulations regarding disclosures to retail investors; and the SEC.

Cost of H.R. 1815

The CBO estimates that implementing this bill would lead to a net decrease in spending of $8 million over the 2019-2024 period because the SEC’s collection of fees would initially outpace spending on usability testing.

Additional Info

In-Depth: Rep. Sean Casten (D-IL) introduced this bill to require the SEC to conduct investor testing when developing rules and regulations about disclosures to retail investors and ensure that retail investors receive appropriate information when making investment decisions: 

“This bill has one intent and that’s that the SEC ensure that disclosures made to retail investors are clear and concise so that main street investors can make informed investment decision[s] that are right for them and their future[s].”

In a March 14, 2019 hearing before the House Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, witnesses from the Certified Financial Planning Board of Standards (CFP Board) and the Consumer Federation of America (CFA) expressed strong support for this bill. 

The CFA further expressed its support for this bill in a March 25, 2019 letter to House Financial Services Committee leadership and members:

“CFA supports H.R. 1815, the SEC Disclosure Effectiveness Testing Act, which would require the Securities and Exchange Commission (SEC) to conduct investor usability testing when developing disclosures that are used and relied upon primarily by retail investors. The SEC has had evidence at least since it conducted its financial literacy study in 2012 that many of the disclosure documents we currently rely on to inform retail investors about important decisions regarding their investments and investment professionals are not well understood by those investors. This legislation would address the SEC’s flawed approach to developing new retail investor disclosures by requiring the SEC to conduct investor usability testing when developing disclosures that are used and relied upon primarily by retail investors… Anyone who supports common sense, evidence-based regulation should therefore support this legislation. It would require the SEC to fundamentally rethink its current regulatory approach to retail disclosures which, while well-intended, is based more on hope, prayer, and unrealistic expectations than high-quality evidence. If the SEC were to fundamentally rethink its approach to retail investor disclosure to be more evidence-based, as required by this legislation, the long-term benefits to investors, in the form of improved investment decision-making, will be significant.”

SIFMA expressed its opposition to this bill in a March 25, 2019 letter to House Financial Committee leadership. While SIFMA expressed support for robust investor testing of retail investor disclosures, it contended that this bill would “unnecessarily delay” the implementation of already-tested proposals: 

“SIFMA appreciates and shares the interest of Representative Casten and the Committee in advocating for robust investor testing of retail investor disclosures. We agree that in many cases, investor testing is appropriate and makes good common sense. In fact, the SEC conducted extensive investor testing of the proposed Form CRS,2 which is an important disclosure of Reg BI… With respect to Reg BI, the investor testing has already been done, and while it may be appropriate to conduct further testing, we believe such testing should not hold up the implementation of the new best interest standard and the heightened duties and obligations that it would afford investors. Based on this concern, SIFMA respectfully opposes H.R. 1815 because we believe it could unnecessarily delay the implementation of important rules designed and intended to better protect those very same investors.”

In its letter, SIFMA also expressed concern about this bill’s broad interpretability: 

“[A]s written[,] H.R. 1815 could be interpreted to subject all current investor disclosure requirements applicable to broker-dealers under the federal securities laws (not just Reg BI) to retroactive review and investor testing.4 While we understand and appreciate that this was likely not the Committee’s intent or purpose, we believe that imposing such a requirement would likely result in an unprecedented, costly, resource intensive undertaking by the SEC. It would also be highly disruptive to financial services firms and their retail clients.” 

In their minority views report, House Financial Committee Republicans called this bill a deliberate effort to delay the SEC’s proposed rulemaking package, comprising of Regulation Best Interest (Reg BI) and a new short-form client relationship summary disclosure (Form CRS). This bill’s opponents argued that it’s too broad, applying to too many types of information that may be provided to retail investors: 

“H.R. 1815 would apply to virtually any investor disclosure, report, or form under the SEC's 
jurisdiction. In a March 2019 letter written by former SEC Chairman Harvey Pitt and former SEC Commissioners Paul Atkins and Dan Gallagher, the signatories noted that ‘all of the SEC's corporate disclosure rules' and many rules issued by self-regulatory organizations (SROs) overseen by the SEC would be subject to investor testing under this ‘overly broad’ bill. As such, these former SEC officials warn that the bill ‘underestimates the sheer number of rules' relating to disclosures for retail investors.” 

While they expressed support for investor testing, Committee Republicans concluded that the SEC’s proposed rulemaking package — which has already been subjected to investor testing — is preferable to this bill. They urged the new rules’ enactment over this bill: 

“The SEC was forward thinking in conducting investor testing for Form CRS. Committee Republicans are confident the SEC will devote the necessary attention and consideration to the findings of their investor testing, the input from the seven retail investor roundtables, and the feedback from the 6,000 comment letters as they work to finalize Reg BI and Form CRS. Thus, [this bill] is completely unnecessary. Reg BI and Form CRS are significant improvements on the status quo for Mom and Pop investors. Any delay to this important rulemaking package—an all but certain result under [this bill]—is problematic, as it would only hurt retail investors by not providing them with a heightened standard of care for broker-dealers as well as not providing them with an informative Form CRS.”

House Financial Services Committee Democrats contend that the SEC’s investor testing results for the new rules have been mixed. In particular, they note that while the Relationship Summary appears to be helpful for more experienced investors who already read the documents when choosing an advisor, they aren’t as helpful for investors who wouldn’t have otherwise read the documents.

Rep. Casten denies obstructionist intentions. He says: 

“The intent here is not to delay the [SEC’s rulemaking] process. The important thing here is to do it right and provide retail investors with the information they need. It is clear there is more work to be done, and that is why this bill is so important."

This bill passed the House Financial Services Committee by a 33-26 party-line vote. 

Of Note: The SEC requires certain financial professionals, such as broker-dealers and investment advisors, to disclose a variety of documents and information to retail investors (individuals without advanced investment knowledge who buy and sell securities, exchange traded funds, or mutual funds). These disclosures are meant to educate retail investors about financial choices, standards of care, fiduciary relationships, and other aspects of investing.

On April 18, 2018, the SEC proposed a three-part regulatory package to improve retail investor disclosures. This package consists of: 

1. A “best interest” standard of conduct for brokers (Regulation Best Interest, or Reg BI);
2. Guidance on the fiduciary standard of conduct for investment advisers; and
3. A relationship disclosure document for brokers and investment advisers (Form CRS).

The SEC has since engaged in investor testing of the proposed Form CRS. It conducted a nationwide online survey of 1,800 individuals and 31 qualitative in-depth interviews in Denver and Pittsburgh. Rep. Casten criticized this methodology in a House Financial Services Committee hearing, asking, “Does anyone here believe that only 31 qualitative interviews is enough?”

The SEC tests’ results were announced in a report released on November 7, 2018, which stated, “[n]early 90 percent of survey respondents opined that the [Form CRS] would help them make more informed decisions about investment accounts and services.’” However, the report also noted some confusion remained. Specifically, it observed, “interview discussions revealed that there were areas of confusion for participants, including differences between types of accounts or financial professionals.”

In 2018, a number of consumer and advisor groups, including the AARP, Consumer Federation of America, and the CFP Board, paid for their own investor testing to test the SEC’s proposed disclosures. Their tests showed that the SEC disclosures confused, rather than helped, consumers. 

In a September 11, 2018, letter to SEC Chairman Jay Clayton, the AARP, the Financial Planning Coalition, and Consumer Federation of America detailed their tests’ results. After conducting 90-minute one-on-one interviews with 16 investors from three geographically diverse locations, the organizations concluded that: 

• Participants’ overall comprehension of the information in Form CRS was poor;
  
• Participants didn’t understand key differences between services;
  
• Most participants didn’t understand disclosures regarding legal obligations;
  
• There was deep confusion about fees and costs; and
  
• While participants understood the existence of conflicts of interest, they didn’t understand their import (or, by extension, their implications).
  

Media:

• Consumer Federation of America Letter (In Favor)
  
• SIFMA Letter (Opposed)
  
• House Financial Services Committee Report
  
• National Association of Plan Advisors (NAPA)
  
• Financial Advisor
  
• AARP, Financial Planning Coalition, and CFA Letter to SEC Chairman Jay Clayton (Context)