Investment and Securities Industry


As more and more traditional defined-benefit retirement plans are replaced with defined-contribution plans, stocks and other investments—either owned directly or through mutual funds, owned individually or in retirement plans—have become a critical component of an individual’s retirement assets. This gives individual investors greater control over their retirement, but it places greater responsibility on them to make appropriate investment choices. More than ever, investors need objective advice and information. They also need safeguards against abusive practices.

According to the 2013 Federal Reserve Board Survey of Consumer Finances, 49 percent of households directly or indirectly owned stock in 2013, a 1.1 percent decline from 2010. About 57 percent of households headed by someone age 55-64 owned stock, down 2.5 percent from 2010. According to a 2016 Investment Company Institute survey, 56 million households (44 percent of all households) own mutual funds or other similar investments. About 51 percent of households that own mutual funds have an annual income between $25,000 and $99,999. Almost 51.8 million households hold mutual funds through tax-deferred plans such as employer-sponsored retirement plans, individual retirement accounts, and variable annuities.

As the number of first-time investors grows and more people face greater decisionmaking responsibility, the need for expert advice increases. So does the potential for investor abuse or fraud. The variety and increasing complexity of investment products can be intimidating and confusing.

Prospectuses and other written materials, such as account statements, are often indecipherable or fail to disclose key information to help investors assess the risk and cost of investment products. Further, industry practices in areas such as broker compensation, mutual fund governance, and audit, accounting, and reporting standards have created actual or potential conflicts of interest. This makes it more difficult for investors to obtain objective advice and information. It can, subsequently, allow insiders to profit at their expense.

The rapid growth in investment activity over the past decade has severely taxed the resources of the Securities and Exchange Commission (SEC) and state securities regulators. The Dodd-Frank Wall Street Reform and Consumer Protection Act increased the amount that triggers SEC registration of an investment adviser, from $25 million to $100 million. As a result, there are now approximately 17,000 state-registered investment advisers and about 10,000 investment advisers registered with the SEC.

Under the National Securities Markets Improvements Act of 1996, states can address fraudulent activities that elude federal law enforcement. Fourteen states and the Virgin Islands have enacted the updated version of the Uniform Securities Act to advance consistency among states, clarify state and federal regulation (especially with regard to hybrid products such as variable annuities), and increase the efficiency of regulation and enforcement activities. The Financial Industry Regulatory Authority (FINRA), the securities industry’s self-regulatory body, has rules on recommending investment products, including variable annuities that are sold by entities subject to its regulation. In 2010, the National Association of Insurance Commissioners revised its model rule on recommendations of variable, index, and fixed annuities to track the FINRA rule. Forty-five states and the District of Columbia have adopted some form of suitability regulation for annuities.

Investment and Securities Industry: Policy

Informed choice

In this policy: FederalState

Disclosures of risks and costs should be comprehensive, accurate, timely, and easily understood.

Investor-protection laws

In this policy: FederalState

The nation’s investor-protection laws should be enforced strongly at the federal and state levels, with funding adequate to ensure the safety of securities markets and fairness in the sale and marketing of investment products.

Investors should have a greater ability to obtain adequate redress for violations of the law and recovery of irreplaceable assets lost because of fraud, negligence, incompetence, or other practices.

States should enact the Uniform Securities Act, including the provision defining “variable annuities” as a securities product.

Found in Investment and Securities Industry