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From Securities Regulation Daily, May 3, 2018

SEC chairman continues focus on retail investors, investment advice

By Amanda Maine, J.D.

In remarks at Temple University, SEC Chairman Jay Clayton again expressed the importance of the retail investor market, an area he has focused on since the beginning of his tenure in May 2017. Retail investor participation in the capital markets has been a democratizing force in our society, he said. Clayton remarked that markets provide a deep pool of capital from which businesses can finance their growth, through both banking sector financing and retail investors. He also touted the Commission’s recently proposed rules on the standards of conducts for investment professionals.

Facilitating retail investor participation. According to Clayton, improving the U.S. markets to facilitate retail participation has been a decades-long endeavor between the SEC and the markets. He pointed out that in 1952, only 4.2 percent of the U.S. population owned stock and that such transactions were expensive because of fixed commissions and other factors that raised the costs and risks to retail investors. In contrast, 44 percent of all U.S. households own at least one mutual fund today, Clayton said.

Clayton praised the work of former SEC Chairman Arthur Levitt for his contributions in enhancing retail investor participation. In the 1990s, Levitt helped bring transparency to the markets through municipal securities reporting, enhancing the use and accessibility of EDGAR, putting in place Regulation ATS, and fostering the growth of ETFs, Clayton stated. During this time, industry participants also supplied competition and innovation, Clayton said, and retail investors started shopping around and demanding better, lower-cost products and services.

Planning for retirement is also integral because people are largely responsible for funding their own retirement, Clayton advised. Where in the past, those nearing retirement that had defined benefit plans (such as pension plans) outnumbered those that had defined contribution plans (such as 401(k)s), these numbers have flipped in recent years, Clayton said. He also noted that life expectancy has increased, emphasizing that it is more important than ever for people to invest in their own futures.

For this reason, "It troubles me that over half of Americans have no retirement savings," Clayton said. He acknowledged that one reason for the lack of savings is income-based, noting that according to a recent study more than half of Americans have under one thousand dollars in savings. Access to personal investment advice is of critical importance, he stressed. Professional investment advisors can "help cut through the jargon and patiently encourage people to put a little bit away here and there," according to Clayton.

Issues facing retail investors. Addressing the students in his audience specifically, Clayton said that there are several questions they should ask an investment professional and that the SEC should keep in mind in its role in regulating the market. It is the SEC’s job to ensure that investors can get clear, plain language answers to these questions from both investment advisers and broker-dealers. The SEC should also require that investment advice professionals follow standards of conduct that embody key fiduciary principles tailored to the client relationship, he said. In addition, the SEC should use its enforcement tools against investment professionals that do not follow prescribed standards of comment or make false or misleading statements about investments.

Clayton spoke about the confusion and lack of clarity when it comes to investment advisers, broker-dealers, and those who give themselves titles such as "financial advisor," "financial consultant," or "wealth manager." The relationship a customer has with an investment adviser is different from that of a broker-dealer/client relationship, including fees, services, and their general investment approach. "Most investors are not aware whether they are dealing with an investment adviser or a broker-dealer," Clayton said, and the confusion intensifies with "dual-hatted" individuals or firms that offer both types of services.

Clayton noted that neither investment advisers nor broker-dealers are required to give conflict-free advice. However, these conflicts should be disclosed to retail investors in plain language and in reasonable detail so an investor is fully aware of the financial incentives of his or her investment professional, Clayton said.

Another challenge is that "there are too many regulatory cooks in the kitchen," Clayton explained. Regulatory bodies looking investments include the SEC, FINRA, the Department of Labor, state insurance regulators, state securities regulators, state attorneys general, and federal and state banking regulators, Clayton mused. "It is incumbent on us as regulators to work together to ensure a seamless relationship from the perspective of the customer."

SEC proposals on investment advice. To address these issues, Clayton said that the SEC has developed a "pragmatic, multi-pronged solution." Referring to the recently proposed suite of amendments to the SEC’s investment advice rules, Clayton said that under the proposals, investment advisers and broker-dealers must disclose to investors the key aspects of their relationship in a form that is clear, short, and complete. According to Clayton, "some investors may hold expectations that have been fostered through slick marketing campaigns instead of honest, straightforward discussions." The proposed rules require transparency about the investment professional, the services provided, fees, conflicts of interest, and disciplinary history. Clayton said that, in addition to helping investors being educated and informed, the proposed rules will help the SEC identify and pursue the "bad guys" who victimize retail investors.

The proposed rules amount to a rigorous standard that can cover a range of relationship types and will produce high-quality advice while maintaining a range of options for retail investors Clayton said. However, he also implored the audience and all market participants to give their input on the proposed rules and whether certain aspects of the proposed rules could be "better calibrated."

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