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Investor Ed Chief Outlines the SEC's Frank-Dodd Studies

Lori Schock, the director of the SEC's Office of Investor Education and Advocacy, gave a short address to at Money Smart Week: A Financial Literacy and Education Summit.  In her remarks, Schock provided a a refreshingly "plain language" precis of some of the studies the SEC is required to perform by the Frank-Dodd legislation.


Broker-Dealer and Investment Adviser Duties to Investors

The first study, which could lead eventually to Commission rulemaking, involves an issue that has been looked at repeatedly in recent years, but which remains unresolved. I'm talking about the different obligations for brokers and investment advisers and what that means for investors.


At present, brokers are regulated under one federal law, adopted in 1934, while advisers are regulated under another, adopted in 1940. Brokers must follow one set of rules, advisers another.

. . .

This system worked pretty well when brokers were brokers and advisers were advisers and everyone stayed within the boundaries set in 1934 and 1940. But in the last decade or so, the lines between brokers and advisers have gotten blurred, raising concerns about investor confusion and investor protection.

. . .


Now, Congress is asking us to revisit the matter and consider whether there are regulatory "gaps" or "shortcomings" in this system of regulation — that's their language, not mine — and if so, whether that should be addressed by new rules or laws. If the Commission decides that brokers should be subject to a fiduciary duty when they provide personalized investment advice to customers, the new law gives the Commission the authority to do so.


Merging Online Broker and Adviser Checking


Another study the SEC is required to conduct involves investors who want to check out their broker or adviser online. 


For brokers and brokerage firms, the information is available through BrokerCheck, which is owned and operated by FINRA, the Financial Industry Regulatory Authority, the self-regulatory organization for broker-dealers. For investment advisers and advisory firms, the information is available online through the Investment Adviser Public Disclosure system, or IAPD, which FINRA operates on behalf of the Commission. We have two separate databases, reflecting the fact that brokers and advisers are subject to different laws and are registered separately.


Most brokers, advisers and firms are either in one system or the other, but not both . . . While the current system works fine for regulatory purposes, it may not be as user-friendly as it could be, which is why Congress has asked us to consider ways to make the systems more accessible and useful.


Retail Investor Financial Literacy


Congress wants us to assess financial literacy among retail investors and subgroups of retail investors. It wants us to look for ways to improve the disclosure investors get before they hire a financial professional or buy a financial product. We've also been asked to consider ways to make expenses and conflicts of interest more transparent to investors. And, Congress wants us and to develop a strategy to raise financial literacy among investors and bring about a quote "positive change in investor behavior" unquote. This "positive change" wasn't defined in the law, but we think it should involve factors that are tangible and measurable, so that we can track them and see if we're on the right track. . . . You may be surprised to hear that financial literacy among investors is still largely uncharted territory.  . . . Our study likely will entail a mix of telephone surveys and focus groups, followed by an analysis of the findings and the development of a strategy to bring about that "positive change" in behavior. Look for all of this to be laid out in the report, which is due in July 2012.


Ms. Schock reminded her audience that these studies are in addition to the other mandates of the Frank-Dodd bill, as well as the business the Commission was engaged in prior to the bill's passage, including Rule 12b-1 reform, proposals for reforming marketing of target date funds, circuit-breaker rules, proxy process and disclosure reforms, etc. 


The full text of Ms. Schock's October 19, 2010 address is available at: http://www.sec.gov/news/speech/2010/spch101910ljs.htm