Sec Disclosure Effectiveness Testing Act

Floor Speech

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. Mr. Chair, I rise in support of my bill, H.R. 1815, the SEC Disclosure Effectiveness Testing Act. I thank Chairwoman Waters and Subcommittee Chair Maloney for their leadership on the Financial Services Committee and their unwavering dedication to protecting investors.

That is exactly what this bill does. It is a pro-investor bill that has one goal: that the SEC ensures disclosures made to retail investors are clear and concise so that Americans can make informed investment decisions.

We are not here to relitigate the proper duty that brokers owe to investors. Instead, this bill is about making sure that disclosure documents convey information to investors effectively. We would never let companies post warning labels in ancient Greek, yet we too often allow disclosure documents--say, for conflicts of interest--to be written in jargon that is unintelligible to anyone without a law degree. Merely providing information to investors is not enough. We have also to make sure that information is understood.

Whether it is buying a house, sending your kids to college, investing in your retirement, or just saving for a rainy day, the American Dream depends on our ability to invest in our future. This bill protects Americans by doing pretty basic market research to ensure that legally required disclosures can be understood by the average investor. Disclosures are already legally mandated to disclose information about fees, comparisons of investment advisory services, conflicts of interest, and much more, but just because those forms are provided to investors doesn't mean that investors understand them.

As we all know, the biggest lie on the internet is that ``I have read and understand the terms and conditions.'' So we should not assume that just because an investor has been provided a disclosure agreement means that they understand it.

Now, in point of fact, the RAND Corporation--this was what my colleague referred to--conducted this investor testing--we agree--with 1,800 individuals, 31 qualitative, in-depth interviews. This is what they concluded: ``Nearly 90 percent of respondents opined that the relationship summary would help them make more informed decisions about investment accounts and services . . . but interview discussions revealed that there were areas of confusion for participants, including differences between types of accounts or financial professionals.''

There were no changes made after that. Yes, they did the surveys, but many did not know and still do not know the difference between account types or financial professions. Others didn't appear to have synthesized the information in ways that they could apply it.

In other words, consumers want these disclosures. Qualitative testing shows that what they are getting is not informing them properly, and that is why this bill is so important.

The SEC Disclosure Effectiveness Testing Act would build on SEC's investor testing efforts and require the agency to engage in a robust iterative process for any existing or future disclosures intended to help retail investors make investment decisions.

Specifically, the bill anticipates that the SEC will test those documents used by retail investors when selecting an investment professional to work with, assessing an investment recommendation, or deciding to purchase or sell a security. This would include testing of, for example, brokers' trade confirmation statements and investment advisers' brochures that detail business practices, fees, conflicts of interest, and disciplinary information.

In short, if we are going to rely on disclosures, we need to make sure the disclosures work.

We use market research to convey simple and important messages. Take an example: We don't put warnings on a box of cigarettes that says that in multiple peer-reviewed papers, scientists have found that prolonged exposure to cigarette smoke increases your risk to certain types of cancers, and those results are less than 5 percent likely to have been the result of sampling error.

Nobody would understand that. We say, ``Smoking kills,'' because our job is to communicate. We would be delinquent if we weren't equally clear in this case.

We are talking about disclosures like Form CRS that would require financial professionals to deliver to their retail customers a short and simple disclosure form to clarify the scope of their customers' relationship and companies who offer them financial services.

A consumer disclosure has to do more than just protect the discloser. If an investor doesn't understand what is being disclosed, then we cannot say that anything was truly disclosed. We must make sure that investors know what is being disclosed, and that is what the bill does.

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. This isn't a mandate on high to dictate to the SEC what the disclosures should say but rather says that it must do qualitative interviews to confirm that investors understand the disclosure. That is why the AARP has endorsed the bill, as well as the Financial Planning Coalition, the Consumer Federation of America, and the Certified Financial Planner Board of Standards.

This is a narrowly tailored bill that applies to a number of disclosure statements that Main Street retail investors rely on. It does not apply to disclosures that are relied on primarily by sophisticated institutional investors.

When I was growing up, there was an ad on television for a discount menswear store called Syms. At the end of every commercial, their president, Sy Syms, would say, ``An educated consumer is our best customer.'' We owe nothing less to the American people, and I urge my colleagues to vote ``yes.''

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. Mr. Chairman, I rise in opposition to the Huizenga amendment, and I want to clarify a couple of points.

The bill gives the SEC Office of the Investor Advocate a larger role to prioritize which disclosures to test. The bill also says that once testing is completed and is found to be clear, there is no need to do further testing unless there are substantive changes.

To argue that every single bill is going to have to be reviewed every single time is not an argument that is made in good faith. The question here on the amendment is simply: Should we exempt one single form from the broad discretion given to the SEC in this rule? It is not clear to me why you would exempt Form CRS from investor testing, unless you don't want investors to understand the fees, costs, or conflicts of interest of investment professionals.

We know, through the testing that was done, that Form CRS appeared to be helpful for investors who had already read similar documents and who had more investing experience. And we know from the testing that was done that Form CRS, as currently written, is not that helpful for investors who haven't otherwise read similar documents.

We can't tie the SEC's hands in determining which disclosure documents need further investor testing. But if we are sitting here and believe that we have an obligation to look out for the best interests of the American people, for investors, for Main Street investors, then the only choice before us is to vote ``no'' on this amendment, and I encourage all of my colleagues to do so.

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. Mr. Chairman, I rise in support of the Gottheimer amendment. I would like to thank my friend, Representative Gottheimer, for his amendment and for his longtime support for seniors and their financial health.

This amendment rightfully highlights that the SEC should take into account the unique circumstances that seniors face in making investment decisions when they do their investor testing.

The financial health of seniors is critically important, and I am delighted that this bill has the support of the AARP and the 38 million seniors who they represent across our country. I stand with them in making clear that effective disclosure testing is imperative for facilitating informed decisionmaking for Americans trying to save and invest their hard-earned money.

I urge my colleagues to vote ``yes'' on the Gottheimer amendment.

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. Mr. Chairman, I rise in strong opposition to the Wagner amendment. The wealth that Americans hold in their retirement accounts, in their 401(k)s, in their IRAs, all the places that they hold their wealth, the fees they pay on that wealth, the returns they earn on that wealth do not care when the law was written, or the form was processed.

We know, we have evidence, that many of the existing disclosure documents intended for retail investors are not well understood by their target audience. So I would ask you: What is the cost to your wealth of another percent a year in asset management fees? What is the cost to you, to your wealth, of another percent a year compounding in the growth of your wealth? Multiply that by all the Americans who make their investments. Billions, trillions of dollars.

This amendment was offered as a way to protect people. It is protecting people, but it isn't protecting investors. I strongly urge my colleagues to vote ``no'' on this amendment.

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. Mr. Chairman, I rise as the designee for the gentleman from New York (Mr. Sean Patrick Maloney) to offer amendment No. 4.

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. Mr. Chair, H.R. 1815 was drafted specifically for SEC disclosures that are required to be delivered to or intended or substantially likely to be materially relied on by retail investors, but not by sophisticated institutional investors like mutual funds or hedge funds.

Representative Sean Maloney's amendment clarifies that this bill is intended to protect retail investors. That is a commonsense amendment, which allows the bill to achieve our goal, which is to ensure that mom- and-pop investors are able to use the disclosures intended specifically for them.

BREAK IN TRANSCRIPT

Mr. CASTEN of Illinois. Mr. Chair, I encourage my colleagues to vote for the amendment, and I yield back the balance of my time.

BREAK IN TRANSCRIPT

Source