Moronic Study Forced Upon SEC By Dodd-Frank Yields Meaningless 212 Page Report

August 31, 2012

Here's the catchy front-page title of a just-published 212-page Securities and Exchange Commission report:

Study Regarding Financial Literacy Among Investors

As Required by Section 917 of the  Dodd-Frank Wall Streeet Reform and  Consumer Protection Act

This is a Study by the Staff of the U.S. Securities and Exchange Commission

August 2012

This is a Study by the Staff of the Office of Investor Education and Advocacy of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein.

Okay, so, did you get that? The SEC just spent about two years producing a 200-plus-pages report as part of a study by its staff but the SEC expresses "no view regarding the analysis, findings, or conclusions contained herein." Now there's a vote of confidence. It's also a far more comical punchline than anything that I could think up. Only in government would an agency invest the time and resources to pursue a study but then, that same agency, would decline to express any view about the resulting report.

And what's the reason that the SEC is foisting this report upon us???  Oh yeah, Dodd-Frank ordered it!  Wonderful, absolutely wonderful.

Lest I be accused of spinning this silliness, I'll cite to the opening of the SEC Report:


On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act" or "Act").1 Section 917 of Title IX of the Act ("Dodd-Frank Act Section 917") requires the Securities and Exchange Commission (the "Commission" or "SEC") to conduct a study (the "Study") to identify the existing level of financial literacy among retail investors as well as methods and efforts to increase the financial literacy of investors.

Specifically, Dodd-Frank Act Section 917 directs the Commission to conduct the Study to identify:

(1) the existing level of financial literacy among retail investors, including subgroups of investors identified by the Commission;

(2) methods to improve the timing, content, and format of disclosures to investors with respect to financial intermediaries, investment products, and investment services;

(3) the most useful and understandable relevant information that retail investors need to make informed financial decisions before engaging a financial intermediary or purchasing an investment product or service that is typically sold to retail investors, including shares of open-end companies, as that term is defined in Section 5 of the Investment Company Act of 1940  that are registered under Section 8 of that Act;

(4) methods to increase the transparency of expenses and conflicts of interests in transactions involving investment services and products, including shares of open-end companies described in paragraph (3);

(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 (including, to the extent practicable, measurable goals and objectives) to increase the financial literacy of investors in order to bring about a positive change in behavior.

Lemme recap that for you. The President signed a law that ordered a federal commission to undertake a study in consultation with another commission to find out the degree of financial literacy among the investing public and what to do about it.  And all along I thought that the folks in Congress and those appointed to the SEC and those hired by the SEC had some familiarity with investments and the investing public and sort of figured out from the disaster of the Great Recession that:

  1. the public is pretty ignorant about Wall Street;
  2. too many investors watch too many televised business programs and think investing is a game;
  3. too many investors don't take the time to understand the mechanics and economics of investing;
  4. Wall Street has had a tendency to obfuscate the truth in its dealing with the public; and
  5. Wall Street's regulators have been asleep at the switch for too long.

Then again, I've only been working on the Street for 30 years, so what the hell do I know?

What do we learn from this voluminous SEC Report? According to the official press release trumpeting this grand achievement: SEC Issues Financial Literacy Study Mandated by the Dodd-Frank Act (August 30, 2012):

The study identifies investor perceptions and preferences regarding a variety of investment disclosures. The study shows that investors prefer to receive investment disclosures before investing, rather than after, as occurs with many investment products purchased today. The study identifies information that investors find useful and relevant in helping them make informed investment decisions. This includes information about fees, investment objectives, performance, strategy, and risks of an investment product, as well as the professional background, disciplinary history, and conflicts of interest of a financial professional. Investors also favor investment disclosures presented in a visual format, using bullets, charts, and graphs.

Now, mind you, I have actually read the entire SEC Report and the press release. Fact is, the squib above pretty much captures the essence and the gist of the study. Which prompts me to froth at the mouth and scream: Of for godsakes!  Two years of wasted SEC staff time on a project seeking answers to questions that any idiot who has worked in the biz for a few years or who has represented consumers already knows the answers to?

Seriously? This is a revelation: investors have differing "perceptions and preferences."

Wow, now there's something I never knew (he says with dripping sarcasm that burns through the floor and dampens the room below).

Wasn't it obvious before starting this historic study that most investors would prefer to learn about what they're buying before entering the order? And if there are morons out there who truly believe that disclosure documents are most effective months after the broker had touted a stock and convinced them buy Zynga or Facebook, why the hell are we wasting time worrying about such idiots?  Let them be quickly parted from their cash so that we don't have to waste precious regulatory resources protecting those who won't even engage in the most basic of due diligence. READ a more detailed version about my call for Wall Street Eugenics.

Then there are all those granular findings in the SEC Report about what investors would find "useful and relevant." Hmmm…let's see what we learned after two years: fees, investment objective, performance, strategy, risks, background, disciplinary history, conflicts of interest. Once you've ticked off all those factors, what else is actually left - or would you prefer that I not bother you with such obvious questions?

I could launch upon one of my famous diatribes and jeremiads about bureaucratic make-work, incompetent triaging of limited government resources, and endless rounds of useless investigations and reports but why bother? It's just not going to matter. This stupidity seems self procreating.  The Flash Crash, MF Global, Knight Capital, Facebook and NASDAQ, JP Morgan, Citigroup - problem after problem bedevils the markets and investors but the SEC allocates staff to meaningless studies and scrivening obvious reports. At some point, maybe some SEC Chair or Commissioner will stand up and scream:  Stop the insanity!

READ about my earlier takes on this foolishness:

The SEC's Dodd-Frank Fruminous Workstream Implementation Plan for Regulatory Infrastructure

Securities and Exchange Commission Issues 5 Page Report Announcing 1 Word Change