SEC Report Is Relevant To Litigators Presenting Financial Information

The Securities and Exchange Commission (SEC) recently released a report required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The study’s legislative mandate includes addressing:

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…”

The report in summarized in this article.  The SEC study demonstrates that investors have a weak grasp of elementary financial concepts, and lack critical knowledge of ways to avoid investment fraud. Additional details are included in this article, including the supporting study presented by the Library of Congress literature survey.

The SEC’s study included testing of investors regarding their ability to read and understand basic investment statements and confirmations. The approximate 1200 study participants were probably more sophisticated than the typical person because the participants had to (i) have specified amounts of direct investments outside of retirement plans provided by their employers, and (ii) be currently paying a broker, investment advisor, financial planner or other professional for financial advice or assistance. This group was given investment transaction confirmations and account statements, and asked basic questions about the information on the documents. Generally speaking, no more than around half of the study participants were able to answer correctly basic questions about the information shown on these statements.

The SEC’s report directly suggests altering the manner of presenting financial data in financial reports to investors to make them more helpful. The same advice applies in a courtroom setting. Specifically:

With respect to the format of disclosure documents, investors prefer that disclosures be written in clear, concise, understandable language, using bullet points, tables, charts, and/or graphs.”

This conclusion probably will not strike readers as revolutionary, yet the existing financial disclosures made to investors have a shocking lack of effective graphics. Similarly, litigators also will almost uniformly state that graphics are valuable in their courtroom presentations, yet we continue to see other financial experts present their findings using detailed spreadsheets without meaningful graphical support


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