The Fragmented Regulation of Investment Advice: A Call for Harmonization

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Vol: 4, Issue: 1, Page: 47-92

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Lazaro, Christine; Edwards, Benjamin P.
Securities regulation; Insurance regulation; Financial advisers; Regulation; Federal agencies; State agencies; Annuities; Enforcement; Law reform; Securities and Exchange Commission; Investors; Investments; Financial literacy; Financial Industry Regulation Authority; Consumers; Stocks; Administrative Law; Legislation; Securities Law; State and Local Government Law
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Decades of short-term thinking and regulatory fixes created the bewilderingly complex statutory and regulatory structures governing the giving of personalized investment advice to retail customers. Although deeply flawed, the current systems remain entrenched because of the difficulties inherent in making radical alterations. Importantly, the current patchwork systems do not seem to serve retail customers particularly well. Retail customers tend to make predictable and costly mistakes in allocating their assets. Some of this occurs because many investors lack basic financial literacy. A recent study released by the staff of the Securities and Exchange Commission (the “Commission”) on financial literacy among investors (the “Literacy Study”) highlights some frightening findings. The Literacy Study documents that many investors struggle to protect themselves against fraud and do not understand basic concepts such as diversification, investment costs, inflation, or compound interest. Certain subgroups, “including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the general population.” Much has been said about the role of financial literacy in protecting investors. Investors may also be protected through legislation and regulation. Following the Great Depression, the federal securities laws were enacted for precisely this purpose. But over time, the distinctions that once existed between the different professionals offering different forms of investment advice have disappeared, blurring the lines between existing regulatory structures.