Top Investment Fraud Attorney, Jake Zamansky, Analyzes SEC Disclosure Readability
- SEC Form CRS Describes the Broker-Customer Relationship
- Form CRS Does Not Address Investment Risk or Broker Background
- Investors Need to Do Their Own Due Diligence
Note: This post was featured in Seeking Alpha on 10/31/2019.
I’ve worked as an investment fraud attorney representing harmed and wronged investors for several decades. The one thing that I have learned is that most investors don’t understand the risk of the investments that they are buying.
I’ll go one-step further – financial advisors fail to fully describe the risks of the products they are selling to their clients.
Most of the blame goes to Wall Street, which creates opaque, complex, and high-fee products. In turn, these products are rarely understood by individual retail investors and advisors are seldom trained sufficiently on how to sell the products and explain the risk.
Part of the blame goes to investors who rarely spend the time and effort to learn about the risk of the products they are purchasing.
Many investors are what Jason Zweig of the Wall Street Journal in a recent article called “blazy,” or busy and lazy.
“In a world where information is almost infinite, but time and attention are limited, none of us want to think harder than we have to,” Zweig writes.
I have observed that most investors spend more time doing research on which car to buy than which advisor to put their trust in and the products that they recommend.
New Rules for The SEC: Apply Client Relationship Summaries
That brings us to the SEC’s new rule which requires that Wall Street firms deliver a “Form CRS” – or “client relationship summary” — which purports to describe the services, fees, costs, conflicts of interest and required standards of conduct that apply to relationships with broker-dealers or SEC registered investment advisors.
Most investors believe that the financial professional they work with is looking out for their best interest or owes them a fiduciary duty of some sort. Unfortunately, that is not the case.
It is one of the most confusing aspects of the landscape for retail investors that only Securities and Exchange Commission registered investment advisors – under regulations – owe a fiduciary duty to investors. In contrast, a financial advisor at a typical Wall Street brokerage firm owes no such responsibility and need only make a recommendation as to what is “suitable” for the investor at the time of purchase.
While investors are concerned about the fees and costs that they are being charged, what is not disclosed on the new Form CRS is the risk of the investment product.
Is it a conservative or a high risk investment? That main issue is not dealt with in Form CRS and is the key to investors understanding what they are buying.
The so-called plain English of the Form CRS also does not address another key issue – the background of the financial professional making the sale.
For example, a financial advisor at a Wall Street firm has a regulatory record under the CRD system. A customer can check with the FINRA website on Broker Check at FINRA.org to learn about the advisor’s background.
The CRD Broker Check report will let the investor know if the broker has filed for bankruptcy, has been sued for investment fraud, or is subject to regulatory proceedings with the SEC, FINRA or state securities regulators.
Regarding investment advisors, investors need to check more carefully and obtain an ADV Report from the SEC’s website at SEC.gov to learn about the background of their investment advisors.
The Role of Congress in the SEC Disclosures
Congress is also trying to get into the act of helping investors obtain meaningful disclosures. The House recently approved the SEC Disclosure Effectiveness Testing Act, which would require the SEC to incorporate qualitative testing for new disclosures to retail investors.
That bill appears to be inspired in part by the Democrats’ doubt about the efficacy of Form CRS.
As is the case in Congress, the House bill is not even scheduled to be brought up in the Senate. It will likely die a quiet death like many such investor disclosure proposals have.
It appears that the SEC and Congress have missed the mark and have not taken steps to inform investors about the risk of the investments they are buying or the background of their investment advisors in a simple, one-page document.
Part of the Form CRS complexity appears to be due to lobbying by Wall Street firms to avoid disclosing these two issues.
The new plain English disclosure form is not enough to inform the average retail investor. Unfortunately, it looks like investors will still be in the dark.
Time to stop being busy and lazy – investors should take the time to do a little research into their adviser and be informed and educated about the products they are purchasing.