U.S. Rep. Sean Casten (D-Ill.) has drafted a bill requiring the Securities and Exchange Commission to conduct usability testing of any new and existing disclosures intended for retail investors. The draft was introduced during a House Financial Services Committee hearing on the SEC’s Regulation Best Interest proposal.
“I’m a huge fan of competitive markets,” Casten said during the hearing. “I still remember the first chapter of my freshman economics textbook about how for competitive markets to work, you need no barriers to entry, no barriers to exit and a whole lot of transparency.”
During the hearing, Casten expressed concern about the SEC’s usability testing of Reg BI’s Customer Relationship Summary, conducted in conjunction with the RAND Corporation. The study included a survey of 1,800 American adults, as well as 31 in-depth interviews with investors in Denver and Pittsburgh. The vast majority of the 1,800 adults believe form CRS would help them make more informed decisions, while the interviews found areas of confusion, including on the differences between types of accounts and financial professionals.
“I’m concerned that they overrelied on surveys as opposed to in-depth interviews,” he said.
Casten said he was also concerned that the SEC’s testing was not iterative, meaning it would periodically retest the disclosures.
Industry groups and investor advocates have been calling for rigorous testing of the CRS, a disclosure document that’s part of the proposal. In fact, the AARP, Consumer Federation of America, the CFP Board, Financial Planning Association and National Association of Personal Financial Advisors hired Kleimann Communications Group to conduct usability testing of the form. That study was more qualitative.
Barbara Roper, director of investor protection at the Consumer Federation of America, one of the hearing’s witnesses, said the SEC’s form CRS needs to be rewritten, retested and reproposed.
“Investors routinely answer on surveys that they like disclosures; the testing of the kind that RAND did indicates that they don’t understand,” she said. “If [the SEC] were required to conduct real qualitative usability testing of those disclosures, they could get information on whether the disclosures work or not, what changes are needed to make them more effective, and they could work with disclosure design and drafting experts to get the disclosures right.”
In fact, Casten’s draft requires the SEC to conduct qualitative testing “in the form of one-on-one cognitive interviews of retail investors about documents or information, or samples of such documents or information, to be provided.” It would also require a nationwide survey of investors. The results would be published in the Federal Register, allowing the public to comment.
In addition, if the commission makes “substantive changes” to a proposal before publishing a final rule, it must conduct further testing. Under the bill, the SEC would have to submit an annual report to Congress on the status and results of any investor testing.
“The average investor doesn’t understand very much,” said Dina Isola, an advisor with Ritholtz Wealth Management. “They don’t understand the difference between a broker and a fiduciary. They don’t understand that the person giving them advice isn’t representing their best interest.
“Anything that is done that keeps that murky and unclear is just going to create confusion and leave the door wide open for gross abuses.”