Investor Protection

House Financial Services Committee Considers Anti-Investor Disclosure Bill

By: Micah Hauptman, Director of Investor Protection and Dylan Bruce, Financial Services Counsel

The House Committee on Financial Services is currently engaged in a comprehensive deregulatory agenda, including efforts to expand private securities markets at the expense of public securities markets. That this effort is happening at a time when deregulation in the financial system has led to a series of large bank failures should not be lost on the Committee.

As part of this effort, one bill they have offered is the so-called “Improving Disclosure for Investors Act of 2023.” Despite its Orwellian name, it is clear that the bill would do the exact opposite of improving investor disclosures and would instead diminish protections for investors in public markets. It is a gift to the financial industry, at the expense of retail investors, and is indicative of efforts to make private, under-regulated markets even more competitive with public markets.

Specifically, the bill would allow firms to default retail investors into receiving electronic delivery (e-delivery) of important regulatory documents required by our securities laws, including investment disclosures and account statements. It would do so when there is no evidence that investors who prefer e-delivery face any difficulties in exercising that choice—it is a solution in search of a problem—and would ignore extensive evidence that the change is likely to reduce investor readership of key disclosures.

Financial firms persistently seek to convert investors from paper to electronic delivery and they make it incredibly easy for investors to make this change. As a result, virtually all investors are aware that electronic delivery is an option for receiving investor communications. It’s clearly evident that investors who want communications by mail, and have up to now not chosen e-delivery, have made their choice. That choice should be respected; they should not be forced to jump through new hoops to make it again.

Under the current e-delivery framework, in order to encourage more investors to choose electronic delivery firms are incentivized to improve their users’ experiences with e-delivery and to present shareholder disclosures on their websites in more user-friendly ways. Unfortunately, most electronically delivered communications consist of email messages with a link to a login screen to access information that is presented in static PDFs. This multi-step process can frustrate and dissuade recipients from reading important disclosures and can be especially harmful to those with less tech savvy or limited access to email and internet.

Unsurprisingly, most electronic deliveries today from financial institutions result in very low click-through rates to the disclosures they provide. For example, the email click rate for the financial services industry is on average about 1%, meaning only 1% of people clicked a link within an email, relative to the number of emails that were successfully delivered.

Recognizing that investor account statements are incredibly important disclosure documents, on March 2, 2023, the SEC’s Investor Advisory Committee recommended that paper delivery continue as the delivery default, stating: “We recommend that account statements continue to be delivered to investors by paper as the default delivery method. For those investors who opt for electronic delivery of statements, the SEC and/or FINRA should encourage the use of technology to enhance disclosure and investor understanding of electronic account statements, such as the use of layered disclosure through embedded links, etc.”

But rather than heed that recommendation, this bill would do the opposite. First, it would allow a “notice and access equals delivery” approach, allowing firms to make disclosures available online and providing a notice (typically through a link) of the disclosure’s availability instead of directly mailing disclosures, including account statements, to investors. The bill would also allow another “electronic method reasonably designed to ensure receipt of such regulatory document by the investor,” giving firms the ability to decide how to effectuate disclosure delivery, which could further shift the burden onto investors to have to seek out and find the disclosures they are required to receive.

This bill would also apply to the delivery of investors’ personal account statements, even though there is strong evidence that many investors want to receive these disclosures in paper form. And to the extent investors have already decided to receive these documents in paper, this bill would override their decision and force them to reaffirm the decision they have already made.

In addition, the bill requires the SEC to review its rules and eliminate regulatory references to “in writing” requirements, thus impeding the Commission’s ability to require written disclosures, instead favoring oral disclosures. Importantly, oral disclosures are not subject to oversight, either by a firm or the SEC, and are also less likely to be salient and memorable for investors. In combination, the result would be less informed decision making and a host of quality control problems.

This bill would allow financial firms to deliver disclosures in a way that makes it more difficult for investors to access them and would establish a default that is contrary to many investors’ preferences. At worst, this bill could provide an avenue for financial firms to effectively hide information (e.g., fees and conflicts) from investors and provide vague, inaccurate, or misleading oral disclosures instead of accurate and reliable written disclosures, further undermining investors’ ability to make informed decisions.

For these reasons, CFA is fighting against this misguided bill, and we urge Financial Services Committee members to oppose it.