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Regulation and Compliance > Federal Regulation > SEC

SEC's Crenshaw Wants Investor Testing on Reg BI, Form CRS

By Melanie Waddell

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What You Need to Know

  • Reg BI and Form CRS rely heavily on disclosures.
  • SEC has never performed investor testing on the effectiveness of these disclosures, Crenshaw said.
  • SEC hasn’t done any testing of Form CRS forms to see whether they are working as intended, according to Crenshaw.

The Securities and Exchange Commission needs to conduct investor testing on Regulation Best Interest as well as its Customer Relationship Summary, or Form CRS, to ensure the disclosure-based rules are working, SEC Commissioner Caroline Crenshaw said Friday.

Speaking at the agency’s 8th Annual Conference on Financial Market Regulation, Crenshaw, a Democrat, said that the SEC’s advice standards package finalized in June 2019 — which included Reg BI and Form CRS — “relies heavily, though not exclusively, on disclosure.”

Reg BI, Crenshaw said, requires broker-dealers to “make disclosures about the nature of the relationship between the broker-dealer and the customer; the fees and costs the customer will incur; the type and scope of the services to be provided; and conflicts of interest.”

However, she noted, “the SEC has never performed investor testing on the effectiveness of these disclosures. The materials provided to investors are often lengthy and technical, using industry terms that may be unfamiliar to retail investors.”

Crenshaw maintained that whether disclosure “truly enables informed decision-making is a crucial question in terms of the effectiveness of our regulatory approach,” adding that the agency needs to “engage in investor testing of the actual forms and disclosures that investors receive in order to determine whether or not they are effective.”

This, in turn, will allow the securities regulator “to improve the disclosures and make them more useful for, again, all investors,” she said.

“If there are areas in which even the best disclosures do not appear to provide a full understanding of key information, we should consider other ways to protect investors. This could potentially include eliminating certain practices that create conflicts of interest — particularly if conflict mitigation measures are not sufficiently protecting investors,” Crenshaw stated.

As to Form CRS,  while the agency commissioned some investor testing on a sample Form CRS before finalizing the rule, Crenshaw stated, the SEC “did not follow up on indications that key aspects of the disclosures were not well-understood by investors: specifically, the distinction between a relationship with a broker-dealer and one with an investment adviser.”

Crenshaw stated that she “very much support[ed] the idea behind Form CRS,” which is “a disclosure that is intended to provide investors with information about the nature of their relationships with their investment professionals.”

The SEC, she continued, “provided significant flexibility to financial professionals in designing their forms. There is a lot of variation and the forms can look quite different from the sample that was tested. But the SEC hasn’t done any testing of real forms to see whether they are working as intended. And reports from industry experts and others seem to indicate that they may not be.”

SEC Chairman Gary Gensler told House lawmakers on May 6 that while the agency plans to “vigorously get the most” out of Reg BI, the agency will “constantly evaluate” how the rule is serving investors and it could be modified.

Melanie Waddell

@Think_MelanieW

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