One of the more contentious aspects of the Securities and Exchange Commission’s advice standards package is the Customer Relationship Summary, or Form CRS, that lays out not only the standard of conduct that applies between the advisor/broker and client, but also potential conflicts of interest and the types of compensation to be charged.

Commenters have argued the new Form CRS is unnecessary — as advisors already provide a comprehensive Form ADV. Further, consumer groups had been pressing the agency to extend the Aug. 7 comment deadline to allow enough time for the securities regulator to test the new disclosures on investors and report the results, but that fell on deaf ears.

With their own investor survey in hand, consumer groups called on the SEC in mid-September to rework 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.

The Financial Planning Coalition — which includes the Financial Planning Association, the CFP Board and the National Association of Personal Financial Advisors — along with the Consumer Federation of America and AARP commissioned an independent survey of the Form CRS’ usability via Kleimann Communications Group.

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

Barbara Roper, director of investor protection at CFA, 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 from across the United States. The survey didn’t look for “statistically significant findings,” Kleimann said in defending the small pool of testers.

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. 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. The only feature of the accounts that was well understood by nearly all participants was the method of payment by transaction versus asset fees. But many could not translate that understanding into a determination of which model was the best match for them.

An SEC spokesman told IA in an 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 IA 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 public comment section on the SEC’s website includes a form requesting feedback on eight questions related to the relationship summary form, which states, in part:

“It is important to us at the SEC to understand what you, the investor, think so that we can make it easier for you to choose the type of investment services relationship that is right for you. We prepared sample Relationship Summaries to illustrate what they may look like.” The section also includes a sample Relationship Summary for a broker-dealer, for an advisor as well as for firms that are registered as both an advisor and a BD.

Questions on the SEC form ask, for instance, “How useful is each section of the Relationship Summary?,” Overall do you find the Relationship Summary useful? If not, how would you change it?” and “Are there topics in the Relationship Summary that are too technical or that could be improved?”

I probed Roper on whether this form is part of what the SEC is using to “test” investors. Her response: “It is my understanding that they’ve hired RAND [Corp.] to do something they are calling ‘testing,’ but I can’t get a straight answer about what that consists of or what the timeline is for completing it.”

The SEC, Roper continued, is “obviously putting a lot of weight on the feedback they are getting from this [form] and the roundtables. But asking investors whether they find the CRS ‘useful’ isn’t testing. It tells you exactly nothing about whether investors are able to use the document to make an informed choice.”

Lawmakers Weigh in Fifteen Democratic lawmakers also weighed in on the SEC’s advice plan in mid-September. The group, which included Rep. Maxine Waters of California and Sen. Elizabeth Warren of Massachusetts, criticized Reg BI in their letter to Clayton, 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 lawmakers urged the agency to revise its proposed Reg BI consistent with Section 913 “and require brokers to abide by the same high standard that currently applies to investment advisers so that their advice to retail investors is provided without regard to their financial or other interests.”

Reg BI also “relies heavily on disclosures to investors without any evidence suggesting that these disclosures would be effective,” the lawmakers wrote.

“At best these disclosure forms may further confuse investors; at worst they could lead to a false sense of security that the advice is in their best interest.”

The lawmakers note that while the various proposed forms summarizing the adviser-client relationship “will be subject to investor testing to ensure their understanding, this must be an iterative process and language changes should be retested and subject to public notice and comment.”

“These changes,” they said, “must inform and be incorporated into any final rule.”

Washington Bureau Chief Melanie Waddell can be reached at mwaddell@alm.com.