Dear SEC, No one wants to read 4-page disclosures

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After a bruising years-long battle over the Department of Labor's fiduciary rule, battle lines are being drawn anew over the SEC's best interest regulation. Yet there's one thing former fiduciary combatants can agree on: No client wants to read a four-page disclosure document.

New disclosure provisions are a major component of the SEC's proposed package of regulations for broker-dealers and investment advisors. The commission is looking to compel registrants to provide a synopsis of the services they offer clients in a four-page form called the Customer Relationship Summary, or CRS for short.

While much of the information in that form would no doubt be of value to some investors, producing a dense, four-page document has the potential to bury the most pertinent details about the advisor-client relationship.

"This may be oversimplified, but more disclosure does not result in better disclosure," Dale Brown, president and CEO of the Financial Services Institute, said at a recent meeting of the SEC's Investor Advisory Committee.

Instead, Brown suggests a two-tiered disclosure framework, in which brokers and advisors would offer a short, one-page relationship summary that would include salient points like a statement that the advisor is working in the client's best interest, information about conflicts and compensation and a description of the nature and scope of the relationship.

Then, for the investors who want to delve into the fine print of the relationship — likely a small minority — Brown envisions that advisors could furnish an expanded disclosure document upon request.

The AARP similarly calls for a simplified disclosure document, but that's in large measure because the other aspects of the SEC's rule proposal don't go far enough to establish meaningful investor protections, according to David Certner, the retirement group's legislative counsel and director of legislative policy for government affairs.

The rule fails to harmonize standards for advisors and brokers under a common fiduciary responsibility, and leaves the operative term "best interest" undefined, creating a potential for investor confusion that might even be exacerbated by the new disclosure requirements, Certner said.

Fiduciary advocates lament the absence of the term from the SEC's rule, which they say fails to move beyond FINRA’s existing suitability standard, while the brokerage sector sees the proposal as a welcome jump in oversight.
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"Because of this lack of clarity, we're concerned that the relationship summary will just further confuse investors," he said.

"Or actually worse — it could provide them with a false sense of security," Certner added. "Disclosure may even have unintended effects, such as making a consumer more confident that a financial professional is meeting a higher standard than he or she is actually meeting."

For any disclosure to be effective, Certner says it must be short, avoid technical jargon and adhere to design elements shown to improve cognition, such as white space on the page, text boxes and side-by-side comparisons.

But Certner would also like the underlying rule to have more teeth and explicitly bar business practices that create conflicts of interest such as sales competitions and certain bonuses and rewards.

As far as the substance and design of the proposed CRS form, Charles Schwab is cautioning that in addition to the potential to further confuse investors, it also could saddle advisors with duplicative and unnecessary compliance challenges.

"For independent RIAs who only offer advisory relationships, it may not make sense to require comparison to a brokerage relationship," said Joe Carberry, Schwab's senior vice president of corporate communications. "We also think Form CRS on top of everything in the Form ADV disclosure brochure is unnecessary."

Carberry called for a shorter-format, one-page disclosure document that would have a stronger digital component, offering links to guide investors into more detailed explanations about particular aspects of their advisory relationship.

While the Form CRS "heads in the right direction," Carberry said, "we're concerned it may not be brief or layered enough to overcome people's overwhelming tendency to ignore or overlook information they think might be too complex or lengthy."

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Fee disclosures SEC regulations Regulation Best Interest RIAs Broker dealers Fiduciary standard SEC FSI AARP Charles Schwab