SEC’s Proposed Disclosure Form Confuses, Misleads Investors
Investors are confused – and may even be misled – by disclosures proposed by the Securities and Exchange Commission (SEC) to help investors choose an investment professional, according to independent testing conducted by Kleimann Communications Group on behalf of AARP, Consumer Federation of America (CFA), and the Financial Planning Coalition. In a letter to SEC Chairman Jay Clayton last week, the groups said the results of this testing clearly indicate the need for the Commission to revise and retest the content, language, and format of the proposed Customer Relationship Summary (CRS) in order to ensure that it serves its intended purpose.
The CRS is a central component of the SEC’s proposed “Regulation Best Interest” rulemaking package. The CRS is intended to clear up investor confusion regarding key differences between broker-dealers and investment advisers, including differences in the legal standards that apply. The research found, however, that the disclosures not only failed to dispel investor confusion about these differences, they actually contributed to investor misinformation in key areas.
As the groups described in greater detail in a news release outlining key findings:
- Most investors who carefully reviewed the CRS – indeed reviewed it far more carefully than most would under real world conditions – came away without a clear understanding of the key differences in services offered by broker-dealers and investment advisers.
- While they generally understood how they would pay for those services, either through transaction fees or asset-based fees, many indicated that they did not have sufficient information to determine which option would be best for them.
- They were completely in the dark with regard to legal obligations that would apply, including how those obligations might differ between a brokerage and advisory account. Instead, they assumed the standards would be the same.
- And, while many seemed to glean a rudimentary understanding of conflicts of interest from the CRS, most did not sufficiently understand the scope or severity of those conflicts to understand how they might be harmed as a result or how the legal standard would address those conflicts.
- Worse, in area after area tested, participants didn’t just fail to fully grasp the information produced; time and again they walked away with a false understanding of the issues.
“In short, measured by the standard the SEC itself has identified – does the CRS, as currently drafted and designed, reduce investor confusion and enable an informed choice between different types of financial professionals and different types of accounts – the answer is clearly no, it does not,” said CFA Director of Investor Protection Barbara Roper.
The CRS could be fixed, “if the SEC has the will to fix it,” Roper said. “But that’s not going to happen if the SEC simply turns industry lose to experiment with possible approaches or tinkers with the current approach,” she added. “The SEC will only arrive at a satisfactory outcome – one that supports its proposed regulatory approach – if the SEC undertakes a rigorous, iterative process of testing and revision needed to develop a disclosure that works. Unfortunately, the Chairman seems dead set on rushing this through without taking the time to get it right.”
Resigning Student Loan Watchdog Alleges Compromised Oversight of Student Loan Market
The United States’ top advocate for student loan borrowers resigned in protest last month. In his resignation letter, Seth Frotman, the Consumer Financial Protection Bureau (CFPB)’s Student Loan Ombudsman, accused CFPB Acting Director Mick Mulvaney and his leadership team of hollowing out the CFPB for the benefit of the financial services industry, sabotaging the Bureau’s mission, and endangering consumers.
In creating the CFPB in the wake of the financial crisis, Congress charged the agency’s Student Loan Ombudsman with protecting consumers in the $1.5 trillion student loan market.
“Assistant Director Frotman has been a champion of the 44 million Americans who owe student debt. His work at the CFPB has curbed industry abuse and reclaimed hundreds of millions of dollars for student borrowers,” said CFA Director of Financial Services Christopher Peterson in a press release. “When student loan borrowers mail their payment checks in each month, they should bear in mind that the Trump administration is turning its back on ensuring their rights are protected.”
Frotman’s resignation comes on the heels of Mulvaney’s decision to close the CFPB’s Office for Students and Young Consumers, the only federal entity dedicated entirely to protecting student borrowers and young adults from abusive financial practices. Under Frotman’s leadership, the Office for Students and Young Consumers helped to return over $750 million to student borrowers and end a variety of financial schemes that preyed on young people.
“As student loan borrowers suffer widespread abuses at the hands of a runaway student loan industry, the Trump Administration has taken a series of aggressive actions to pull back consumer protections, obstruct independent oversight, and ensure that the largest student loan companies are never held to account for predatory practices,” said Peterson. “These actions come as the Administration readies the rollback of rules to hold the for-profit college industry accountable, deny debt relief to defrauded student loan borrowers, and bar the courthouse doors to students and consumers ripped off by predatory actors.”
CFA Warns Consumers to Prepare Property Damage Claims from Hurricane Florence
With Hurricane Florence battering the Carolinas last week, CFA warned consumers to prepare to file claims for damage resulting from the storm and offered tips on how to get all they are entitled to out of the insurance company.
“Our thoughts and prayers go out to the wonderful people of the Carolinas and other states who face the aftermath of this huge storm,” said CFA Director of Insurance J. Robert Hunter. “Families will have to dig deeper into their own pockets because, sadly, only about one family in four who had flood damage from this storm in North Carolina and about two families in five in South Carolina with flood damage have federal flood insurance.”
Because so many consumers experienced severe claims problems in the wake of Hurricanes Katrina and Superstorm Sandy, CFA urges homeowners dealing with losses caused by Hurricane Florence to be vigilant with their insurance companies, including the insurers settling National Flood Insurance claims, to ensure that that they receive a full and fair settlement. That starts with remembering that, if they’ve paid their premiums, they are entitled to coverage. Consumers with a legitimate claim should not hesitate to file it.
CFA offered the following additional tips to consumers:
- Once a claim is reported, get the claim number and write it down.
- Maintain receipts for any expenditures related to immediate repairs or any living expenses (hotel, meals).
- If the insurance company uses independent adjuster to assess damage, find out if they are authorized to make claim decisions and payments on behalf of your insurance company and ask for the name of the in-house company adjuster to whom the I.A. is sending your information.
- Many insurance companies have repair programs in which they offer to send out one of their approved contractors to estimate your property damage. The insurance company may encourage their use, as it is to their advantage. You may wish to obtain an estimate from their contractor, but you are not under any obligation to use them.
- If the claim is denied or the offer is too low, demand that the company identify the language in the homeowners’ policy that served as the basis for denying the claim or offering so little.
- Beware of fly-by-night contractors who might approach you to repair your home. Make sure the contractor has good references and is insured in case of errors in construction or a worker is injured on your property.
“Flood insurance claims after both Katrina and Sandy were handled very badly,” said Hunter. “This sad history should not deter consumers from seeking fair compensation for losses caused by Hurricane Florence.” In fact, insurers face greater scrutiny by state regulators and FEMA because of the serious claims problems that occurred after those earlier storms, Hunter explained, and FEMA has been under pressure from Congress to improve its oversight of its insurance company contractors in order to get them to do a better and fairer job in settling flood insurance claims.
CFA called on state regulators to prevent insurers from using Hurricane Florence as an excuse to raise homeowners’ insurance rates and to limit coverage. It urged state insurance departments to create websites tracking insurer progress in settling Hurricane Florence claims.
FAA Reauthorization Act Provision Would Help Check Unreasonable Airline Fees
In a letter to Senate Majority Leader Mitch McConnell (R-KY) and Minority Leader Charles Schumer (D-NY), eight consumer advocacy organizations, including CFA, urged the Senate leadership to support the bipartisan FAIR Fees provision that was included in S. 1405, the Federal Aviation Administration Reauthorization Act of 2017. This provision would help ensure that the ancillary fees which airlines are increasingly adding to the base cost of a ticket are reasonable.
“Airlines often claim that the unbundling of fees for services like baggage and cancellation has reduced the cost of flying,” the groups wrote. “However, an independent analysis by the Associated Press has found that base fares have increased by 5% once adjusted for inflation since 2010. Likewise, the Government Accountability Office has found that the cost of flying has increased, once fees for checked baggage are included.”
Under the FAIR Fees provision, section 3129 of the reported bill, airlines would be prevented from charging flight change and cancellation fees that are unreasonable and disproportionate to the cost of providing the service. The Department of Transportation would also develop standards for helping assess the reasonableness of other common airline fees.
“It’s time to stop the airlines from gouging the flying public with fees that are much higher than the actual costs of services such changing tickets,” said CFA Director of Consumer Protection and Privacy Susan Grant.
CFA to Food Safety Regulators: Listen to Your Peers!
The U.S. Department of Agriculture’s (USDA) Food Safety and Inspection Service (FSIS) needs to go back to the drawing board and perform a new hog slaughter risk assessment, CFA argued in comments submitted to FSIS earlier this month. CFA urged the agency to update its microbiological performance standards for pork and develop data-driven reforms aimed at actually improving food safety, rather than just industry profits.
Before soliciting the peer review, FSIS used the risk assessment to justify a proposal to expand its controversial “HIMP” pilot program, currently in place at five large hog slaughter facilities. Three out of five reviewers concluded that the agency’s risk assessment was fatally flawed, but FSIS maintains that its original determination in favor of the proposed rule nevertheless holds.
“By first issuing a proposed rule on the basis of the hog slaughter risk assessment, and only then subjecting the risk assessment to peer review, FSIS has violated Office of Management and Budget requirements,” wrote CFA Food Policy Institute Director Thomas Gremillion. “The peer reviewers’ comments demonstrate the folly of ignoring those requirements.”
“We do not dispute that the agency could improve hog slaughter inspection,” Gremillion concluded. “Under the current regime, however, FSIS lacks a reliable, objective means by which to measure different plants’ performance in controlling foodborne pathogens, particularly Salmonella.”
FSIS’ refusal to withdraw the original determination on hog slaughter facilities follows on the heels of the agency’s announcement earlier this year that it would begin considering waiver requests from individual young chicken plants to permit these establishments to operate at faster line speeds than permitted under current Department regulations. The agency outlined “criteria,” such as that plants not be in violation of Salmonella performance standards, that it has said will factor into decisions of whether to grant a waiver request.
The agency’s “criteria,” however, are less comprehensive than the underlying regulatory requirements they purportedly interpret, said Gremillion. Granting line speed waivers under the criteria would therefore violate the Administrative Procedures Act.
In July of this year, CFA joined organizations representing poultry workers, occupational safety experts, workers’ rights advocates, and other consumer groups in opposing three requests made by chicken processors to FSIS that would allow the companies to increase line speeds at slaughter to up to 175 birds per minute. For its part, the proposed hog slaughter rule would abolish line speed limits altogether, requiring only that companies maintain “process control.”