Alert September 11, 2012

SEC Issues Study Regarding Retail Investor Financial Literacy

The SEC issued a study (the “Study”) prepared by the staff of its Office of Investor Education and Advocacy (the “Staff”) designed to fulfill a mandate under the Dodd-Frank Act that it identify:

  1. the existing level of financial literacy among retail investors;
  2. methods to improve disclosures to investors with respect to financial intermediaries, investment products, and investment services;
  3. the most relevant information for retail investors to make informed financial decisions regarding financial intermediaries and investment products or services typically sold to retail investors, including mutual funds;
  4. methods to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products, including mutual funds;
  5. the most effective existing private and public efforts to educate investors; and
  6. in consultation with the Financial Literacy and Education Commission (“FLEC”), a strategy to increase the financial literacy of investors.

In preparing the Study, the Staff relied on a number of sources. It contracted with the Library of Congress to conduct a quantitative study on financial literacy of U.S. retail investors; the results showed that by and large, American investors lack basic financial literacy. The Staff also relied on responses to the Commission’s request for public comment, and on public opinion research conducted by a third party consultant on the usability and effectiveness of the following types of disclosures:

  • Form ADV Part 2A provided to advisory clients
  • Trade confirmations and account statements
  • Mutual fund summary prospectus
  • Point-of-sale disclosures for financial intermediaries

The Study’s findings include (i) methods to improve the timing, content, and format of disclosures; (ii) information for investors to consider when either selecting a financial intermediary or purchasing an investment product; and (iii) methods to improve the transparency of disclosures regarding expenses and conflicts of interest. The Study also outlines a collaborative strategy for the Staff and FLEC participants to develop targeted programs to improve financial literacy.