The Washington Post
By: Michelle Singletary
August 5, 2010
Within the massive financial reform package is a requirement for no fewer than seven studies intended to help protect individual investors.
They fall under a subsection of the act devoted to improving the regulation of securities. I'll be writing about various aspects of the new law in future columns, and now I'm focusing on the vast amount of research it requires.
Broadly defined, the law establishes an investment advisory committee, intended to "protect investor interest" and "promote investor confidence and the integrity of the securities marketplace." If the federal agencies charged with investor protection had been more watchful and had aggressively enforced existing laws before the financial crisis struck, we might not be in this mess. But there's no use grousing about money already lost.
The investment advisory committee will include a representative of state securities commissions, someone who will represent senior citizens, and 10 to 20 appointed members representing the interests of individual and institutional investors. The committee will also include the newly created investor advocate, whose office will be housed within the Securities and Exchange Commission. The position was established to argue for the interests of investors in securities and investor-protection issues.
But getting back to the studies. The collection of studies required of the SEC and the Government Accountability Office reminds me of those times when I reach into the fridge and throw everything in a pot for a stew. Here's what each study will examine:
-- Brokers, dealers and investment advisers. This study will assess the effectiveness of existing legal or regulatory standards for the people who provide personalized investment advice to retail investment customers. It will look at whether there are legal or regulatory gaps, shortcomings or overlaps in the protection of individual investors. There is supposed to be an examination of whether retail investment customers understand that there are different regulatory standards on how brokers, dealers and investment advisers should treat them. The SEC has already called for public comment on this study. You can submit your thoughts online at http://www.sec.gov/rules/other.shtml or by sending an e-mail to email@example.com. Include "File Number 4-606" in the subject line.
-- Investment adviser examinations. This study will look at the number and frequency of examinations of investment advisers by the SEC in the past five years. It will also examine the self-regulatory organizations that watch over advisers.
-- Financial literacy among investors. As if we don't already know what the finding will be, this study will look at the levels of financial literacy among investors. It will examine ways to improve the timing, content and format of disclosures to investors. The study will address the most useful and understandable information that investors need before making financial decisions, hiring an adviser or purchasing an investment product or service. It will also include recommendations to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products. The law specifically says this report should include strategies "to increase the financial literacy of investors in order to bring about a positive change in investor behavior."
-- Mutual fund advertising. The GAO is charged with looking at existing and proposed regulatory requirements for mutual fund advertising, including the use of past mutual fund performance data. The report will include recommendations to improve investor protections with regard to the marketing of mutual funds. The idea is to give people better and more reliable information so they can make better choices when purchasing mutual fund shares.
-- Conflicts of interest. The GAO will examine the potential conflicts of interest that exist between the investment banking and securities analyst divisions at the same firm.
-- Improved investor access to information. This study will look for ways to improve investors' access to information about registered and previously registered investment advisers, including disciplinary actions.
-- The use of financial designations by financial planners. Right now anyone can call himself a financial planner. There is an array of alphabet-soup designations from CFP (certified financial planner) to ChFC (chartered financial consultant) to PFS (personal financial specialist). With all these designations, it's hard for the average investor to tell which ones mean anything. The GAO will have to look into the effectiveness of state and federal regulations concerning financial planners.
Some of the reports are due in six months, others not for 18 months or two years. I just hope all this research won't merely rehash what we already know but will actually lead to what is supposed to be the law's goal -- better protections for investors.
Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.