A key House committee moved forward on legislation to require the Securities and Exchange Commission to conduct “usability testing” prior to finalizing any new proposed disclosures for retail investors.
Originally introduced by Rep. Sean Casten (D-IL), the “SEC Disclosure Effectiveness Testing Act” (H.R. 1815) was approved, as amended, March 28 on a party-line vote by the House Financial Services Committee.
On the surface, it appears the legislation is targeted at what was believed by some policymakers to be inadequate “investor testing” by the Commission on the proposed Form CRS, issued as part of the Regulation Best Interest package of rulemaking in April 2018.
In introducing his legislation, Casten contended that his intent was not to further delay the SEC from moving forward, but to provide investors the information they need. “This bill has one intent and that’s that the SEC ensure that disclosures made to retail investors are clear and concise so that main street investors can make informed investment decision that are right for them and their future,” he explained.
Casten added that his amendment to the legislation narrows the retroactive lookback of existing rules, so that it only applies to disclosures that would have been subjected to the investor testing requirements for retail investors.
Rep. French Hill (R-AR) contended, on the other hand, that the legislation would “unnecessarily constrain the SEC from following its core mission which is already to have removed any unintended effect of bad disclosure and that delay would have the unintended effect of harming investors, particularly low income savers.” Hill noted that the bill would apply to numerous existing rules and would result in overreach and increased bureaucracy. He further cited a letter from three former SEC commissioners who contended that there is no evidence that a bill to require investing testing is necessary, and that investor outreach and testing is already in place at the SEC.
The committee’s ranking Republican, Rep. Patrick McHenry (R-NC), also argued that the SEC already conducts vigorous investor testing and suggested that the legislation just appears to be an attempt to derail the SEC’s proposed Reg BI package.
Background
Under the bill, the SEC – prior to finalizing any securities regulation that calls for disclosing information to retail investors – would be required to engage in investor testing to assess whether such information will achieve the purpose intended by the Commission. Such an analysis would include a nationwide survey and qualitative testing in the form of one-on-one cognitive interviews of retail investors about any such information to be provided.
If the Commission makes substantive changes in the period between engaging in investor testing and publishing a final rule that would have a significant impact on retail investors, the Commission would be required to again engage in investor testing. The legislation also would require the SEC to review and test the usability of its existing disclosures for retail investors and report to Congress on its findings and any issues identified for further action. It also would provide the SEC’s Investor Advocate with the authority to conduct investor testing and the ability to make the testing results and data public.
The legislation was the subject of a March 14 hearing held by the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, where several witnesses testified in support of the legislation.
Citing an earlier RAND Corporation study, committee Democrats contend that the results of the SEC’s investor testing on the proposed Form CRS have been mixed. They note that the Relationship Summary appears to be helpful for investors who already read the documents when choosing an adviser, and who have more investing experience, but less helpful for investors who would not otherwise read the documents.
H.R. 1815 will likely be passed by the House of Representatives, but it faces an uphill battle in the Senate. During the committee’s markup, however, several Republican members made overtures about working in a bipartisan manner to improve the legislation.
