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Regulation and Compliance > Federal Regulation > SEC

SEC's New Customer Relationship Form Confuses Consumers: Study

By Melanie Waddell

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Consumer groups called on the Securities and Exchange Commission Wednesday to rework its proposed Customer Relationship Summary disclosure form, or Form CRS, which is part of the regulator’s Regulation Best Interest for brokers, as testing shows investors are confused — and may even be misled — by the form’s disclosures.

Meanwhile, Democratic lawmakers criticized Reg BI in a letter to SEC Chairman Jay Clayton the same day, arguing that “the best way for the SEC to protect investors and reduce confusion is require all brokers and advisers, regardless of their titles, to comply with the same fiduciary standard” as set out in Section 913 of the Dodd-Frank Act.

“Congress provided the SEC with the authority to do this so that the standard of conduct for a broker or dealer would be the same high fiduciary standard applicable to an investment adviser,” the lawmakers wrote.

The Financial Planning Coalition, Consumer Federation of America and AARP commissioned an independent survey of the Form CRS’ usability via Kleimann Communications Group.

The survey found that “participants had difficulties throughout the CRS discerning the differences between the broker and advisor services,” said Susan Kleimann, CEO of Kleimann Communications, on a Wednesday call to discuss the survey’s findings.

Barbara Roper, director of investor protection at the Consumer Federation, said on the call that “measured by the standard the commission itself has identified — does the CRS, as currently designed and drafted, reduce investor confusion and enable informed choice? The answer from our testing is clearly no, it does not. The good news here is that the CRS could be fixed, if the SEC has the will to fix it.”

The groups commissioning the survey “strongly support the creation of a summary document,” Roper said. “In criticizing the [proposed] CRS, we are not criticizing the idea behind it. We just want the SEC to take the time to get it right.”

The qualitative research included 90-minute interviews with 16 individuals  across the United States. The survey didn’t look for “statistically significant findings,” Kleimann said.

The “qualitative research is about the depth of the interviews,” added Roper. The 90-minute one-on-one interviews were designed “to figure out what they could and couldn’t understand.”

“We would love to see the SEC use this [survey] to do additional testing,” Roper said.

An SEC spokesman told ThinkAdvisor in a late Wednesday email message that the SEC “welcomes all feedback on its proposed Form CRS that will help us make decisions about ways to improve disclosure for investors.”

The SEC, the spokesperson said, “is currently engaged in investor testing. As Chairman Clayton indicated in his public statement on April 24, we anticipate making the results of that investor testing available in the public comment file.”

Roper told ThinkAdvisor that the SEC’s response fails to include “any description of the type of testing being conducted. Is it independent and rigorous usability testing? Or is it a survey designed to determine whether investors like the CRS or not, rather than whether they can use it to make an informed choice?”

Also missing, Roper continued, “is any timeline for getting that testing done or any assurance that the testing will be completed and publicized before they act on the regulation. Unfortunately, my strong impression is that Chairman Clayton is intent on forging ahead with this without conducting the kind of rigorous process needed to make sure these disclosures work.”

The independent survey results showed that the individuals polled:

  • Failed to understand disclosures regarding the differing legal obligations that apply to brokerage and advisory accounts. Most participants assumed the standards would be the same despite the different language used to describe them.
  • Did not understand the term “fiduciary standard”: Most participants had little or no understanding of the term “fiduciary duty.” They were more comfortable with the term “best interests,” although their actual understanding of its meaning was mixed.
  • Think different standards meant best-interest advice: Based on their understanding of the term “best interest,” some participants viewed the CRS as portraying brokerage accounts in a more favorable light than advisory accounts.
  • Did not understand critical distinctions between different payment models, fees and associated services: Participants struggled to articulate a clear distinction regarding the nature of services offered as part of brokerage and advisory accounts.

— Related on ThinkAdvisor:

Melanie Waddell

@Think_MelanieW

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