On December 8, Stephen Hall, Legal Director for Better Markets, participated in the U.S. Securities and Exchange Commission (SEC) Investor Advisory Committee meeting. Hall took part in a “Panel Discussion on Account Statement Disclosure: Do client statements adequately serve investors?”, which focused on analyzing the content and format of information that is conveyed to customers through account statements and through account information available from firms online and through apps.

In his remarks, Hall argued that:

• A careful process for designing and testing disclosure requirements was necessary.
• Account statements are vital tools for informing and protecting investors, and the SEC can and should do more to ensure that investors are getting the information they need through those documents.
• The SEC should be skeptical of industry protests against regulatory reform, including resistance to improved disclosures, as those arguments tend to be self-serving, overstated, and lacking a credible factual basis.

You can find his full remarks below:

Introduction

Good morning, I’m Stephen Hall, the Legal Director and Securities Specialist for Better Markets. I’m happy to be here and I’m grateful for the invitation to participate on this important panel, which explores a topic that certainly gets less attention than it deserves.

Better Markets is a non-profit, public interest organization founded 12 years ago to fight for a more stable, fair, and transparent financial system.  A substantial amount of our advocacy is focused on improving the securities markets, and that includes fighting for important investor protections in addition to market structure reforms.

The benefits of a strong and constantly improving regulatory framework are many: it’s the law; it’s good for investors; and ultimately, it’s good for corporate America and our entire economy.  In fact, there’s little doubt that our securities markets remain the broadest, deepest, and most liquid in the world in large measure because of the laws governing those markets and the rules written by the hardworking staff of the SEC.  Investor confidence is critical to this success and that confidence hinges on ensuring honesty and transparency in the markets through a variety of disclosure mechanisms.

Today our focus is on disclosure in account statements.  My core points are these:   First, designing effective disclosure requirements is a hugely important yet challenging exercise, one that often calls for a careful and iterative process of design and testing.  Second, account statements are vital tools for informing and protecting investors, and the SEC can and should do more to ensure that investors are getting the information they need through those documents.  Third and finally, we—and especially the SEC—should be skeptical of industry protests against regulatory reform, including resistance to improved disclosures, as those arguments tend to be self-serving, overstated, and lacking a credible factual basis.   The guiding light for the SEC must always be on the public interest and investor protection, not protecting industry revenues or business models.

The Challenges

As to my first point, effective disclosure of material information is clearly essential for enabling investors to make informed investment decisions and to avoid or ward off predatory behavior.  Disclosure alone, of course, cannot adequately protect investors, and that’s why affirmative standards of conduct, such as a real fiduciary duty, are so important.  But the fact remains that disclosure is the bedrock principle of securities regulation.  Former SEC Chairman Arthur Levitt put it simply in his Introduction to the SEC’s plain English handbook over 20 years ago: “Investors need to read and understand disclosure documents to benefit fully from the protections offered by our securities laws.”

But designing effective disclosure documents is a challenging task indeed, as it requires a blend of judgments about human behavior, legal requirements, and the often complex products and transactions in the securities markets. Consider the list of attributes that disclosures must have to be effective.  They must be—

• Complete, but not overwhelming in complexity;
• Clear and understandable, but not imprecise;
• Comprehensible to a wide range of audiences;
• Prioritized to focus on the most important elements;
• Formatted to maximize the accessibility of information;
• Timely, so they are of real value, not merely compliance gestures; and
• Delivered through a convenient medium that will encourage investors to read the disclosures, whether it be in the form of paper documents or mobile apps.

As difficult as this task appears to be, disclosures can certainly be effective and serve investors well, as this Committee explained in its May 2020 Recommendations on Disclosure Effectiveness.

And without question, strong disclosure requirements are necessary and appropriate specifically in the realm of account statements.  Perhaps they receive less attention than other types of disclosure documents because they come after the fact, after investors have parted with their money.  But they remain immensely important.  Assuming they are clear, complete, and timely, they help investors detect fraud, identify errors in their portfolios, and assess the performance of their investments.  Thus, account statements aren’t just evaluative tools; they also serve as the basis for future decisions of real consequence, such as recalibrating investments or even choosing a different broker or adviser.

On a more subtle level, if account statements are poorly designed and too daunting, investors may shun them and disengage, in effect reducing their financial knowledge and autonomy.  Even worse, if account statements are misleading or misunderstood, tragic consequences may follow.  Recall the heart-rending case of Alex Kearns, a 20-year-old student with a Robinhood account who committed suicide in June of 2020 after receiving a statement ostensibly showing he had a negative balance of over $700,000 following his options trading.

The Current Landscape

Turning to the quality of account statement disclosures we see today, the bottom line is that account statements display considerable complexity and lack of uniformity, along with some important information gaps.  Ask Google to search the phrase “how to read a brokerage account statement” and the computer screen lights up with links to innumerable guides and samples issued by firms, regulators, and SROs.  Many of these documents are more than 20 pages in length.  That in itself is telling.  It’s positive in that it reflects an effort to inform and assist investors, but it’s troubling in that it also reflects the challenges facing investors struggling to understand their account statements.  Also telling is the variability in the account statements illustrated in these explainers, both in terms of format and content.  And featured prominently in many are large swaths of fine print and inscrutable terms and symbols.

Of particular concern is the opacity—some would say obfuscation—surrounding the disclosure of fees and other costs associated with the investments and transactions set forth in an account statement.  In some cases, those entries cannot be found; in many, they appear lumped together vaguely as “other costs” or “debits,” without being broken out or explained.  And seldom if ever are they prominently displayed in summary pages.  The SEC’s own investor education materials observe that “fees may not always be obvious to you from your account statement or confirmation statement” and urges the investor to spend time gathering additional information from the company on what the fees mean.

This approach to the disclosure of the fees and expenses facing investors is unacceptable.  A disclosure that generates more questions than answers is hardly optimal disclosure.  As FINRA’s guide to reading brokerage statements quite rightly explains in something of an understatement, “It isn’t possible to get a clear picture of your investment results without an accurate understanding of your fees.”

Nowhere is this basic principle more true than in the world of mutual funds.  This Committee’s 2016 recommendations on mutual fund cost disclosure make the case quite convincingly. They explain the huge impact that seemingly modest fees can have on an investment portfolio over time.  The SEC’s June 2019 Investor Bulletin further illustrated the long-term effects of fees.  As that Bulletin emphasizes, “Over time, even ongoing fees that are small can have a big impact on your investment portfolio.”  Thus, because mutual funds play such a significant role as long-term investments for so many Americans, the disclosure of mutual fund fees and expenses assumes even greater importance.

Yet the level of fee transparency surrounding mutual funds is shockingly low.  The fee tables and other disclosures mandated in mutual fund prospectuses and annual shareholder reports do not solve the problem. Retail investors are unlikely to read those documents, and in any event, they provide only formulas or hypotheticals, not concrete dollar amounts specific to the investor.  The evidence confirms that this approach has failed to give investors a clear understanding of the amounts they pay annually in mutual fund fees or the long-term impact of those fees on their investment returns. In a March 2022 speech, Division Director Birdthistle expressed his consternation about this basic lack of transparency:  It’s striking, he said, “that investors do not receive a uniform statement explicitly identifying the dollars they paid in the past year.”

Academic analysis has also advanced these concerns.  As Professor Stephen Brown has explained, “Dollar mutual fund fees are essentially invisible. Fees are automatically deducted from a fund’s assets. Investors never see an invoice and never have to write a check. Moreover, investors never know what actual dollar expenses are being subtracted from their investment balances.”  He goes on to assert quite correctly that “There is no plausible reason that investors should not know exactly and explicitly what expenses they are paying.”

The IAC’s 2016 solution to this problem was clear.  It explained that the best way to make investors more aware of mutual fund costs is through standardized disclosure of actual dollar costs in customer account statements. A core rationale for this proposal was simply that investors were much more likely to read their accounts statements than the other lengthy and complicated disclosure documents at their disposal.  The Committee further recommended that the account statement disclosures should clearly convey the impact of costs on total accumulations over the life of their investments.  And it urged that the disclosures provide context by indicating whether a fund’s costs are relatively high, low, or average.

The SEC should revisit these recommendations and pursue them.  And it should also consider the challenges presented by even more complex products with large and embedded fees that are exceedingly difficult to fathom without much stronger disclosure requirements.

More generally, the SEC can improve matters with a series of steps representing what one might call “best practices” in the area of disclosure reform. These are measures that investor advocates have been advancing for some time in various contexts. First, the SEC should take stock by conducting a study to assess the effectiveness of account statement disclosures at imparting clear, comprehensible, useful, and standardized information to investors.  The Office of the Investor Advocate is well-suited to the task given its mission.

Second, the SEC should enlist experts in disclosure design as it evaluates and implements necessary improvements in account statement disclosures.

Finally, the SEC should subject any new disclosure requirements and forms to testing.  And it must heed the results of those tests and redesign or refine any approaches that don’t promise to achieve their objectives—something the SEC conspicuously failed to do when it finalized Form CRS, a disclosure document that breeds as much confusion as insight.  With these steps, done right, the SEC is bound to substantially improve the disclosures in account statements for the benefit of investors.

The Opposition

My third and final point is intended as a counterweight to the relentless lobbying and criticism—not to mention litigation—that many members of the financial services industry—although not all—aim at the SEC, especially when the agency proposes reforms that may disrupt the status quo and eat into revenues and profits.  We are all familiar with the refrains insisting that a new rule is unnecessary, impractical, too burdensome, too costly, or even likely to harm investors by reducing choices and stifling innovation.

These dire predictions are seldom if ever borne out.  Recall just this one early example:  When the state and federal securities laws first emerged a century ago, they were greeted with howls of protest portraying them as attacks on legitimate businesses that would stifle capitalism.  Yet as I noted at the outset, it is precisely those laws that have created the environment in which our markets can thrive.  The SEC must view these attacks with skepticism, put them to the test, and adhere to its overarching mission, which is protecting investors and the integrity of the markets.

Conclusion

That concludes my opening presentation and I look forward to our discussion.