The Securities and Exchange Commission’s Office of the Investor Advocate (OIAD) has released its report on activities for the fiscal year 2023.
The report, which highlights the work of the OIAD during the year, was published and submitted to Congress last week. It included details of the office’s research and recommendations on mandatory arbitration and registered index-linked annuities research. (RILAs)
With regards to RILAs, the OIAD said it had rarely encountered a more complex retail investment product. When the researchers gave 2,500 consumers who read RILA disclosures a true-and-false test, the consumers answered only 58% of the questions correctly, only slightly better than what would be expected if they were randomly guessing.
“Congruent with the complexity of the product, we believe an enormous level of effort on the part
of providers, regulators, and investors is needed to ensure RILAs are purchased by investors
who can benefit from them,” said Cristina Begoña Martin, the SEC’s investor advocate. “More broadly, we are concerned that the Commission’s historical approach to disclosures may prove insufficient, not just for RILAs, but for many highly complex financial products.” She said the SEC’s approaches to investor protection would need to innovate to keep pace with the advances in financial products and services.
In addition, the investor advocate recommended in its report that the SEC consider temporarily suspending the use of mandatory arbitration clauses in advisory agreements until further exploration of the associated costs and benefits to advisory clients is undertaken. The report expressed concern that a number of characteristics of these clauses are not in the best interest of retail investors.
“We believe precluding advisers from using restrictive terms in mandatory arbitration clauses that negatively affect investors would help create a fairer, more balanced framework for arbitrations between advisers and their retail clients,” the report concluded. “We further believe that establishing arbitration-related disclosure requirements for SEC-registered advisers would better enable investors and regulators to evaluate advisers’ prior conduct, and to prevent recidivist adviser misconduct.”
The office said advisors who use contract clauses to force client disputes into arbitration could be violating their fiduciary duty to look out for their customers’ best interests.
Martin said the OIAD’s most important function is to address problems that retail investors may have with the SEC or self-regulatory organizations. She said the office managed 2,605 matters and responded to 2,828 additional contacs during the fiscal year, an over 500% increase in matters initiated by investors, and a more than 1,000% increase in contacts since the establishment of the Ombuds’ Office in 2015.
The Office of the Investor Advocate is an independent office within the SEC, created by Congress, to provide investors with a voice inside the Commission, to assist retail investors, to study investor behavior, and to support the SEC’s Investor Advisory Committee.
Click here to read the full report.
The attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.
