Two SEC commissioners are examining investor testing as a way to improve the quality and effectiveness of disclosures.

As a decision regarding a fiduciary rulemaking hangs in the balance, two SEC commissioners are espousing “investor testing” as a way to help the agency better disclose broker and advisor standards of care.

At press time in early December, the industry was still awaiting clarity from SEC Chairwoman Mary Jo White on where she stands regarding a uniform fiduciary rule for brokers and advisors, but SEC Commissioner Kara Stein said in late November that the commission’s Division of Corporation Finance is “spearheading a very important project examining the effectiveness of disclosures.”

Also expected to be released early this year is the SEC’s economic analysis of a fiduciary rulemaking.

The Division of Corporation Finance’s disclosure project, Stein said in a speech at the Consumer Federation of America’s financial services conference in Washington, “presents an opportunity to holistically rethink the disclosure that we offer to investors.”

But the advisory industry maintains that disclosures are not enough to satisfy the fiduciary standard.

While the SEC has “at times varied the types of disclosures, summarizing or simplifying certain documents,” Stein said, “we still generally take a ‘one-size-fits-all’ approach to disclosure as investor protection. I think we can and should think about whether we can do better.”

Stein, a Democrat, said that the agency “should be smart about requiring disclosures that are genuinely meaningful and useful for different types of investors,” citing the “importance” of investor testing. “We know that the private sector is using [investor testing] to understand its consumers, frequently in a highly refined manner,” Stein told the CFA attendees. “The commission should seek to better understand its consumers as well” and consider ways to provide “different ‘layers’ of disclosure to different types of investors.”

Said Stein: “We should formulate a plan to incorporate thorough investor testing into as many of our projects as possible.”

Disclosure Testing, Then Fiduciary Rule?

When asked after her remarks at the CFA event if the agency should consider investor testing before moving forward with a uniform fiduciary rulemaking, Stein told reporters, “I think we should look at each rule we do and see where we benefit from it [investor testing].”

SEC Commissioner Michael Piwowar, a Republican, said in a late September speech that he has “not made a decision” about whether he would or would not support a uniform fiduciary duty. However, he said that a “fix” to such a rulemaking that the agency should explore is to consider “the value of a concise disclosure document” for broker-dealers and investment advisors. Such a document, he said, could “achieve the goal of improving investor knowledge of what can and should be expected of their broker-dealer and investment advisor.”

To decide what this document should look like and what information it would contain, Piwowar said that the commission should rely on its authority under Section 912 of the Dodd-Frank Act to start a “temporary testing program to determine what information investors find important and useful in selecting a financial advisor.”

The commission, Piwowar said, could then test “formats in which the information can be presented, and the effect on investor comprehension of the information.” That would allow the SEC to propose a disclosure document “firmly based on investor input, which is the best and most sensible way to solve the investor confusion issue.”

Piwowar said a possible example the commission could use in devising its investor testing includes a summary disclosure document similar to the mutual fund summary prospectus.

Commissioner Stein said that the adoption of a summary prospectus was “a great achievement,” as “it fundamentally changed the form of mutual fund disclosures and how they are delivered.” But since the prospectus rule is now more than five years old, the commission should be “thinking of ways to make it more useful to investors by asking them how it can be improved. Investor testing would, I expect, reveal helpful information in this regard.”

After declaring 2014 the year that the SEC would make a “threshold decision” regarding a fiduciary rulemaking, SEC Chairwoman White said in mid-November that she would provide “clarity” in the short-term as to her position regarding a uniform fiduciary rule despite the fact that the agency has not yet decided “whether to do something or what to do” regarding such a rulemaking.