# ABOUT THIS REPORT AND DISCLAIMER

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A0ef9409e08d24acc

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

FISCAL YEAR 2023

Report on
Activities

ABOUT THIS REPORT AND DISCLAIMER

Section 4(g)(6) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78d(g)(6), requires the
Investor Advocate to file two reports per year with the Committee on Banking, Housing, and Urban Affairs
of the Senate and the Committee on Financial Services of the House of Representatives.1 The two reports
are the mid-year Report on Objectives covering the forthcoming Fiscal Year and the end-of-year Report on
Activities covering the preceding Fiscal Year.
A Report on Objectives is due no later than June 30 of each year, and its purpose is to set forth the objectives
of the Investor Advocate for the following Fiscal Year.2 A Report on Activities is due no later than December
31 of each year.3 The Report on Activities describes the activities of the Investor Advocate during the
immediately preceding Fiscal Year.
Disclaimer: Pursuant to Exchange Act Section 4(g)(6)(B)(iii), 15 U.S.C. § 78d(g)(6)(B)(iii), this Report on
Activities is provided directly to Congress without any prior review or comment from the Commission,
any Commissioner, any other officer or employee of the Commission outside of the Office of the Investor
Advocate or the Office of Management and Budget. This Report on Activities expresses solely the views of
the Investor Advocate. It does not necessarily reflect the views of the Commission, the Commissioners, or
staff of the Commission, and the Commission disclaims responsibility for this Report on Activities and all
analyses, findings, and conclusions contained herein.

CONTENTS

MESSAGE FROM THE INVESTOR ADVOCATE. . . . . . . . . . . . . . . . . . . . . . . . . 1
FISCAL YEAR 2023 SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTOR ENGAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RESEARCH AND INVESTOR TESTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ADVOCACY FOR INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
OMBUDS’ REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
END NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

REPORT ON ACTIVITIES: FISCAL YEAR 2023

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i

“

As innovation in financial

products and services continues to
accelerate, we believe our approaches to
investor protection will also need to innovate
in order to keep pace.”

MESSAGE FROM THE
INVESTOR ADVOCATE

IN MY FIRST MESSAGE AS INVESTOR
ADVOCATE in June of this year, I highlighted my
priorities for the Office of the Investor Advocate
(OIAD):
ƒ Improve our service to retail investors seeking
assistance;
ƒ Increase our engagements with investors and
their representatives; and
§ Enhance our research to identify evidence-based
insights about retail investors.
The purpose of each of these goals is to better
perform the functions that Congress has assigned
to OIAD, and ultimately, to better serve the
investing public.
In this Report on Activities on Fiscal Year 2023, I
would like to update you on our progress on these
priorities, as well as share some of what we have
learned through this past year.

SERVICE TO INVESTORS
The most important function of the Office of
the Ombuds is to address problems that retail
investors may have with the Securities and
Exchange Commission or with the self-regulatory
organizations that the Commission oversees. In
2023, we managed 2,605 matters and responded
to 2,828 additional contacts through the Ombuds’
Office. This represents a greater than 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.
Separately, in the past fiscal year, the Investor
Advocate received almost 900 investor inquiries
which were responded to by staff.
As surprising as the growth may appear, it is
important to note that these numbers do not
represent a spike in inquiries and complaints.
They represent a
continuous progression
in communications
from individuals who
are seeking assistance
on a variety of issues
over the last nine fiscal
years. We observe that
the number of investor
communications with the
Office of the Ombuds has
increased over the same
time period that there has been a rapid growth in
new investors, new products, and new investing
platforms. We believe that, as the number of
retail investors continues to grow, along with the
number and complexity of investment products
and strategies available to retail investors, so will
the demand for services from the Ombuds continue
to grow. More importantly, the expanding retail
investment landscape is also increasing the need for
improved communications between regulators and
the public.

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1

ENGAGEMENTS WITH INVESTORS
To effectively perform its functions, the Office of
the Investor Advocate actively seeks input from
a broad variety of investors. In Fiscal Year 2023,
we doubled the number of investor engagement
activities that we hosted or substantially
participated in, compared to the prior fiscal year.
These engagements were designed to obtain
feedback from investors, their representatives, and
associated stakeholders on policy-related topics.
Our report details some of our most productive
engagements, and we intend in Fiscal Year 2024
to expand our in-person meetings with the public.
In particular, we hope to continue our successful
partnership with federal and state regulators in
efforts to hear from retail investors about their
investment experiences.

RESEARCH ABOUT INVESTORS
In Fiscal Year 2023, the Office of the Investor
Advocate initiated and completed two significant
research projects: one to study registered
index-linked annuities (RILAs), and investors’
understanding of these complex products, and
another to evaluate mandatory arbitration clauses
in investment advisory agreements. Our purpose
in pursuing these and other research projects is
to inform our policy recommendations whenever
possible by providing objective, evidence-based
insights about investors. As a result of our research
in Fiscal Year 2023, we have included in this
report several recommendations that our research
indicates would benefit retail investors.
To summarize our findings and recommendations
with regard to RILAs, we rarely have examined

a more complex retail investment product.
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. 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. As innovation in financial
products and services continues to accelerate, we
believe our approaches to investor protection will
also need to innovate in order to keep pace.
With regard to mandatory arbitration clauses, we
are concerned that a number of characteristics of
these clauses in advisory agreements are not in the
best interest of retail investors. We make a number
of recommendations to help promote a fairer, more
balanced framework for arbitrations between
advisers and their retail clients. In light of our
concerns, we also strongly encourage investors to
learn about the differences between arbitration and
litigation, and to ask appropriate questions of their
advisers where mandatory arbitration clauses are
included in advisory agreements.
The Office of the Investor Advocate takes seriously
the role it has been given in promoting the interests
of investors, and we are grateful for the privilege
of serving the investing public. As we approach the
tenth anniversary of the establishment of the Office
in 2024, we look ahead to further improving the
value of our contributions to the Commission and
to the service we provide investors.

Respectfully Submitted,

CRISTINA BEGOÑA MARTIN FIRVIDA
Investor Advocate

2

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

FISCAL YEAR 2023
SUMMARY

142

ENGAGEMENT
ACTIVITIES

38

11

DATA
COLLECTION
ACTIVITIES completed

127

RULEMAKINGS and SRO FILINGS
reviewed

873

INVESTOR
INQUIRIES

2,605

INVESTOR SUBMISSIONS
to the Ombuds

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3

INVESTOR
ENGAGEMENT

THE OFFICE OF THE INVESTOR
ADVOCATE OIAD is statutorily mandated to
assist retail investors, identify problems that
investors may have, analyze the potential impacts
on investors of rules or regulations, and make
proposals to the Commission to promote the
interests of investors.4 OIAD’s direct engagement
with investors and their representatives support
each of these mandates.
In Fiscal Year 2023, OIAD hosted or participated
substantially in 142 investor engagement activities
(Figure 1) designed to obtain feedback from retail
investors on policy-related topics, and engaged
with a variety of investors to help ensure their
interests were represented across the Securities
and Exchange Commission (SEC or Commission).
OIAD has led various initiatives to engage directly
with investors and integrate their interests into all
of its functions, including:
ƒ Meeting regularly with consumer and investor
advocacy groups where retail investors are a
main focus area;
ƒ Keynoting the North American Securities
Administrators Association’s (NASAA) Senior
Issues Committee annual conference, and
meeting with older investor advocates at the
state level;
ƒ Facilitating a meeting with the Investor
Advisory Committee on retail investor issues,
including with leading industry and advocacy
organizations;

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

ƒ Engaging and collaborating with federal
agencies, state regulators and industry partners,
and international counterparts on issues related
to investors, such as, the Consumer Financial
Protection Bureau (CFPB); the Federal Trade
Commission (FTC), the Departments of
Veterans Affairs (VA), NASAA, the Securities
Investor Protection Corporation (SIPC), and
the Canadian Investor Protection Fund (CIPF),
among others;
ƒ Hosting a large public roundtable with NASAA
and State partners to hear directly from
investors; convening discussions with Financial
Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) agency Ombuds to
address investor issues;5 and
FIGURE 1. Number of Engagements
142

88
72

36

41

FY 2019 FY 2020 FY 2021 FY 2022 FY 2023

§ Envisioning and initiating annual consultations
with the SEC Division of Examinations, to
include direct investor input into the Exam
Priorities for Fiscal Year 2024.

at the Joseph Maxwell Cleland Atlanta Department
of Veterans Affairs Medical Center for a panel
discussion on retail investor-related topics and
investor advocacy.

Throughout Fiscal Year 2023, OIAD actively
sought input from a broad range and variety of
investors—including individual retail investors,
smaller and regional investors groups and
advocates, public and private pension funds, and
other small and large money managers—as well
as regulatory counterparts, non-profits, academic
experts, and consumer groups.

In addition, OIAD supports the SEC Investor
Advisory Committee (IAC), and the Investor
Advocate participates in the IAC as a statutory
member.6 The IAC is one of two Commission
advisory committees. It holds public meetings to
discuss investor-related topics and is authorized
by statute to make formal recommendations to
the Commission. The IAC includes the following
four subcommittees and one working group to
help formulate its policies and recommendations:
1) Investor-as-Owner Subcommittee; 2) Investoras-Purchaser Subcommittee; 3) Market Structure
Subcommittee; 4) Disclosure Subcommittee; and
5) Access and Inclusion Working Group.

Notably, in July 2023, OIAD conducted a large
public roundtable jointly with NASAA and the
Wisconsin Department of Financial Institutions
in Madison, Wisconsin. At the roundtable
(which was also livestreamed on sec.gov)
investors, investigators, and regulators shared
their experiences of securities fraud and engaged
in discussions related to identifying fraud and
avoiding suspicious investments directly with senior
Commission staff and Commissioner Mark Uyeda.
In September 2023, OIAD joined the Secretary
of Veterans Affairs, the Honorable Denis
McDonough, and other federal financial regulators,

OIAD continues to provide broad administrative
and organizational support, and technical
assistance, upon their request, to the IAC. In Fiscal
Year 2023, this included organizing four IAC
public meetings, including the first in-person IAC
Meeting since before 2021, and facilitating six
IAC Recommendations (Figure 2).

FIGURE 2. FY2023 Investor Advisory Committee Activities

Public Meetings 4
Recommendations 6
Subcommittee and Other Meetings

134

REPORT ON ACTIVITIES: FISCAL YEAR 2023

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“

POSITIER aims to provide deep insight into how

investors and other stakeholders interact with the investment
marketplace and how they are affected by SEC policy.”

RESEARCH AND
INVESTOR TESTING

THE POLICY-ORIENTED STAKEHOLDER
AND INVESTOR TESTING for Innovative
and Effective Regulation (POSITIER) initiative
was launched in 2017 to provide a toolkit to the
Commission and OIAD for understanding investors
and increasing the efficacy of policymaking
activities.7
POSITIER aims to provide deep insight into how
investors and other stakeholders interact with the
investment marketplace and how they are affected
by SEC policy. POSITIER researchers enable OIAD
and the SEC to more thoroughly:
1. “Identify areas in which investors would
benefit from changes in the regulations of the
Commission or the rules of self-regulatory
organizations”;8
2. Conduct pre-adoption testing of potential
policies, identifying areas in which investors
would benefit from changes in regulation
and allowing the Commission to “analyze
the potential impact on investors of proposed
regulations of the Commission. . . proposed
rules of self-regulatory organizations . . . and
. . . to the extent practicable, propose to the
Commission changes in the regulations”;9
3. Conduct “retrospective analysis of rules” to help
ensure that policies are working as intended;10
4. Study investor behavior and outcomes to
“identify problems that investors have with
financial service providers and investment
products”;11 and

5. Generate evidence for better organizational
management and overall efficacy, particularly
in the sense of “outcome” indicators of
performance.
To accomplish these aims, POSITIER engages in
high-quality, interdisciplinary research, focusing on
questions and outcomes that provide meaningful
impact on investors’ lives. We work on long-term
research projects of fundamental importance and
with policymakers on applied projects to affect
policies that are under consideration. In all our
endeavors, we seek to provide insight in a costeffective and rapid manner, so that insufficient time
and money are not rationales for forgoing research
and testing.

15

Qualitative

51

Quantitative

POSITIER’s productivity is exceptional. Since
POSITIER’s founding in June 2017, we have
conducted 51 survey and experimental projects,
15 qualitative data collection projects, and
several analyses of market data. Our research
has been cited in multiple rulemaking proposals,
thereby having a direct impact on the investing
public. Additionally, we have engaged in thought

REPORT ON ACTIVITIES: FISCAL YEAR 2023

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leadership by disseminating our work to policy
and academic communities, increasing our impact
by encouraging others to serve the interests of
investors through advocacy, research, or direct
outreach. In Fiscal Year 2023, highlights of our
research group included:
ƒ Completion of a highly innovative and
rigorous research project on registered
index-linked annuities (RILAs) to inform a
rulemaking proposal. This project featured
a fruitful partnership with the Division of
Investment Management, leveraging the
technical knowledge of that division while
maintaining critical independence of OIAD’s
research team. The project was prompted by a
directive from Congress to engage in investor
testing in conjunction with a regulatory
proposal regarding RILAs.12 In completing
the project, POSITIER conducted formative
research to better situate investor testing,
integrating analyses of market data and
marketing materials. The project also helped
demonstrate the potential and the efficacy of
integrating independent and highly credible
rapid-cycle investor research into agency
policymaking. The report was heavily cited in
the Commission’s proposed rule.13
ƒ Final publication of our research on mutual
fund visual aids in a special issue of the
Journal of Association for Consumer
Research, which concentrated on financial
decision-making.14 This research was reviewed
in detail in OIAD’s Fiscal Year 2022 Report
on Activities.15 We believe that publication in
a highly regarded peer-reviewed journal with
broad appeal may increase the impact of this
research throughout the federal government.
Agencies working in similar consumer-facing
domains will be able to draw lessons from
this research and apply them in the context of
consumer protection, and researchers interested
in influencing policy may use the foundations

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laid in this publication to undertake additional
research that benefits policymakers and
investors.
ƒ Promotion of better evidence models across
the federal government through a panel
at the 2022 Association for Public Policy
Analysis and Management (APPAM)
conference. APPAM is a premier national
conference for research on public policy with
two to three thousand attendees each year.
Our panel discussed POSITIER’s research
and strategies for using evidence to promote
informed policymaking, including lessons that
government and academic researchers can use to
improve the transmission of evidence to policy.
§ Elevation of investor-related research in
multiple communities, including through the
Boulder Summer Conference on Consumer
Financial Decision Making, the Association
for Psychological Science, and the University
of Chicago American Marketing Association’s
Marketing and Public Policy Conference. This
outreach helps us thoroughly vet our research
so that we can be confident in our findings,
promote additional inquiry on investor issues,
and aid other entities that may use our research
to help promote investor protection.
As always, there is much more that could be
done to serve the needs of investors and the
Commission. Looking forward, we will continue
to identify and analyze programs and policies
that enable the public to make better investment
decisions and reach their goals and will find
avenues for POSITIER to collaborate with SEC
staff on high-impact policy research. We will
continue to examine interactions among individual
investors, their decision context, key household
factors, and macroeconomic trends. The rest of
this year’s report on investor testing presents results
from several research projects, including insights
for investors.

RESEARCH HIGHLIGHTS FROM THIS YEAR

REGISTERED INDEX-LINKED
ANNUITIES (RILAs)
What Are RILAs and How Do They Work?
RILAs are tax-deferred retirement savings vehicles
that advertise potentially reduced market risk
relative to investing directly in financial markets.
Like many other retirement savings vehicles,
money is first added to the overall vehicle and
then the investor allocates that money to specific
investments. Unlike many other retirement
savings vehicles, because of their structure,
withdrawal penalties, and other features, RILAs
are complex, long-term, and illiquid products that
typically require investors to make a significant
number of complicated decisions with perhaps
unintuitive consequences.
Investors fund purchases of a RILA contract
through premium payments; the initial minimum
amount required to purchase a RILA varies
substantially from $10,000 to $25,000.16 Premium
payments and investment earnings are allocated
by the investor to investment options. These
investment options are shorter-term investments
that often last 1, 3 or 6 years (a period typically
referred to as the “investment term” or “term”); as
such, these investment options may not individually
last as long as the RILA contract itself. Thus, the
investor may need to pick investments several times
over the life of the contract.
Investment options track the performance of an
index (e.g., the S&P 500 PR index, which tracks
the S&P 500’s price returns but not dividends).
Investment options typically carry “insurance
features” that can protect the investor against
certain losses but may also limit investment gains.
Due to the complexity of RILA products, including
the insurance features described more fully below,
there may be hundreds of possible investment

options for an investor within a single insurance
company’s RILA contract.
RILAs are structured in two phases: (1) an
accumulation phase, during which the investor puts
money into the contract and invests in one or more
investment options that track the performance of
an index, followed by (2) an annuitization phase,
during which the assets are turned into a stream of
payments to the owner or returned to the investor
in a lump sum.
Both RILA contracts and their investment options
typically have significant financial penalties for
investors that greatly limit investors’ liquidity
on the investments. Three of the most common
financial penalties are:
ƒ Surrender charges: A RILA contract can define
a “surrender charge period,” typically 6 to
9 years long. During this period, the insurer
charges high penalties for withdrawing money
from the contract; penalties typically start
around 9% to 10% and decrease over the
surrender charge period. Often the surrender
charge period is much longer than an investment
option’s term, requiring investors to hold
investments for multiple investment terms to
avoid surrender charges.
ƒ Interim value adjustments and mid-term
withdrawals: These penalties occur when
money is withdrawn from an investment option
before the end of its term (either when money is
withdrawn from the contract or moved out of
an investment option to another option while
remaining in the contract). These penalties may
be substantial and cause the investor to forfeit
up to 90% of their money. Investors wanting to
avoid these penalties may need to wait several
years before changing indexes or withdrawing
their money.

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9

§ Tax penalties: In addition to other tax
implications, tax penalties may arise when
the investor withdraws money from the RILA
contract before age 59½.17 Due to this age-based
tax penalty, a younger investor that puts money
into a RILA may need to wait many years
before accessing their money without penalty.
To avoid any penalties, an investor would
typically need to meet at least three conditions:
(1) hold the investment through the surrender
period; (2) withdraw money only at the end of
each investment option’s investment term; and
(3) hold the investment until age 59½ or later
(Figure 3). As a result, it is possible that penalty
periods may be challenging to synchronize with
a penalty-free withdrawal because, for example,

an 8-year surrender charge period might expire
in a way that does not immediately align with
money that is invested in two consecutive 6-year
investment options.
Of course, individual investors may face more
complex scenarios involving additional taxes
or withdrawal penalties, further increasing
the complexity of their choices. For example,
individual investors may need to consider factors
including the type of account in which they
hold a RILA, how it is funded, how to best deal
with rollovers, and how to deal with aligning
account withdrawals with other taxes that may
arise. There is much that investors may need to
learn and take account of in order to make these
products useful for meeting their goals, and there

FIGURE 3. Potential Fees and Charges: There are Many

Tax penalties:
In certain tax deferred
accounts if you withdraw
funds before age 59 1/2.

Interim value adjustment:
If you withdraw funds during the
term of an investment option.

Surrender charges:
If you withdraw funds
during the surrender
period.

THE PUNCHLINE
There are lots of fees, so
fee-free withdrawals can
be tricky to manage.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

is much that regulators may need to study and be
aware of in order to fulfill an investor protection
mission. The bottom line is that to avoid charges
and penalties, an investor likely needs to select
and manage a RILA contract for multiple years,
requiring the investor to make many complex
decisions about investment options over the life
of the contract.
Annual fees are charged in some RILA investments,
but the practice is not as prevalent as annual fees
in the mutual fund industry, for example. As an
alternative to charging annual fees, providers will
often make money in other ways such as by earning
more on their own investments than they promise
to pay investors.
Finally, it is noteworthy that the RILA investor
is not directly invested in the index, but rather
a promise by the insurance carrier to pay at a
rate that aligns with the price gains in the index.
Because of this structure, the solvency of the carrier
may be relevant to the value of the promise.

RILA Insurance Features
RILAs offer insurance features that potentially
limit losses of an investment relative to the
underlying index. At the same time, the insurance
features also limit the potential gains. Importantly,
the insurance features generally apply not to the
contract as a whole, but only to a single investment
option for a certain number of years (that is, for
the particular investment option’s “investment
term”). Moreover, the details of these features can
change when investors keep their RILA contract
for a long time; that is, each time an investor picks
from a RILA investment menu, they may face a
different set of investment options with a different
set of insurance features. Investors facing a lack of
desirable investment options at such reinvestment
periods would need to weigh these options
against potentially large charges and penalties for
withdrawing money.

When making a purchasing decision, an investor
who believes a RILA is right for them must pick
an insurance company issuer and contract and
choose how to allocate investment dollars to
investment options within the contract. Investment
options come from a menu that specifies the
bounds on the gains and losses that are applied
to each investment option, the duration of the
investment term, and the underlying index to
which each investment option will be linked. Each
of these attributes will affect the subsequent set
of decisions the investor faces. In other words,
a certain provider may offer only select indices,
and a given index may only be associated with
a certain combination of insurance features. An
investor may have additional considerations
to factor into these decisions, such as their
expectations of when they will want to withdraw
money from the contract, as well as potentially
complex tax implications that might affect
decisions about how to fund a RILA or withdraw
money from it.
Insurance features may not provide protections
against penalties that might be applied for early
withdrawals or the other fees and penalties we
discussed above.
There are two common insurance features that
can limit the losses for an investment option, as
illustrated in Figure 4.
ƒ Floors: A floor is a maximum loss (typically
a percentage) on the investment option. For
example, a 20% floor will protect the investor
from any loss greater than 20%, but the
investor bears any losses up to 20%. A 5%
floor would provide greater protection than a
20% floor.
§ Buffers: A buffer absorbs losses on the
investment option up to a certain point. It does
not turn losses into gains. For example, with a
10% buffer, the insurance company absorbs

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11

losses up to 10%, but the investor bears any
additional losses. In other words, if the index
decreased by 50%, a 10% buffer would reduce
the loss to 40%. Alternatively, if the index
decreased by 5%, a 10% buffer would reduce
the loss to zero. A larger buffer therefore
provides greater protection.
FIGURE 4. Examples of Buffers and Floors in
Different Negative Market Conditions

0%

Significantly
Negative

Negative

Slightly
Negative
0%

-10%

-5%
-15%

-20%

-5%

-5%

-15%

-20%

-30%
-40%
-50%
-60%

-40%
-50%
Index

Index Option
with 10% Buffer

Index Option
with 20% Floor

Insurance features that limit losses vary in how they
mitigate negative performance. For example, this figure
illustrates that in the case where an investor has chosen
a 10% buffer and the index decreased by 50% during
a given investment term, the investor would only lose
40%. As shown, a variety of outcomes are possible.

In general, a buffer protects the investor from
experiencing small losses for the investment option,
but it does not protect them completely against
large losses. In contrast, a floor protects an investor
from experiencing large losses but does not protect
against small losses. When deciding on floors or
buffers and picking a level of protection, some
operative questions would then seem to include:
how often do index losses exceed the buffer? And
how often does the index incur a loss that is larger
than the floor?

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Insurance features can also limit gains for an
investment option:
ƒ Caps: A cap is a maximum gain (percentage) on
the investment option. It reduces the potential
gains from investing in the option compared
with investing in the components of the index
to which it is linked (such as through an
investment in an index mutual fund).
§ Triggers: A trigger fixes gains to a specific
rate so long as the index’s gain is over a
corresponding trigger “threshold.” For example,
consider an 8% trigger with a threshold of 0%.
The RILA would return 8% as long as the index
experiences any return above 0%, including
above 8%. Thus, a trigger is more valuable
when index returns are between the threshold
and the trigger percentage (in this case, between
0% and 8%). A trigger below the index returns
during the investment period is likely to limit
gains relative to the index, whereas a high
trigger could boost gains above the returns
experienced by the index.
In general, both caps and triggers limit the
returns on RILA investment options when there
are large increases in the value of the underlying
index. However, a trigger can provide higher
returns than the underlying index when index
returns are modest.
A final insurance feature may act on both gains
and losses for an investment option but may also
act on gains or losses alone:
§ Participation rates: The participation rate
acts as a multiplier on index performance. For
example, a two-sided 85% participation rate
reduces both gains and losses to 85% of the
gains or losses on the underlying index. For
example, a gain of 10% on the index would be
reduced to a gain of 8.5% with the RILA, and a

loss of 10% on the index would be reduced to a
loss of 8.5% with the RILA. A participation rate
can be over 100%, in effect creating a leveraged
investment product. An investment option with
a participation rate may also have caps or other
limits on gains.

KEY TAKEAWAYS FROM THE
RILA RESEARCH
In Fiscal Year 2023, the POSITIER team conducted
extensive research, including investor testing, to
inform the design of a new registration form for
RILA products.18 This research was conducted
in collaboration with the Division of Investment
Management. The project was prompted by a
directive from Congress19 to conduct testing to help
“ensure that a purchaser using the form receives
the information necessary to make knowledgeable
decisions”20 and supplemented that testing with
analyses of the RILA market to better understand
the products.
The POSITIER team conducted four separate,
interconnected research streams to understand
RILA products (Figure 5):
1. Analysis of the existing market for RILA
products—exploring potential investor returns
under various market scenarios—to better understand the economic features of these products.

2. Review and analysis of RILA marketing materials
to understand issuers’ perspectives on the RILA
value proposition and also to better understand
how potential investors are approached.
3. Qualitative investor testing—in the form of
1-hour one-on-one interviews with 20 annuity
owners and shoppers—to better understand
comprehension, barriers to understanding,
and reactions to initial versions of the Key
Information Table (KIT), a hypothetical
summary disclosure that contains information
about RILA contracts and their features and
risks.21 Due to the in-depth and labor-intensive
nature of this research approach, it is common
practice to conduct a relatively small number
of interviews.
4. Quantitative investor testing with thousands of
consumers to assess potential form designs and
to quantitatively assess comprehension.
Understanding the impacts of regulations on
consumers is important to designing effective
policy. Bringing insights from individuals and
households to inform policymaking discussions
requires significant technical expertise, an
infrastructure to collect and analyze data under
tight timelines, and the ability to translate research
findings to policymakers. The POSITIER team
engaged with the topic of RILAs before the
rulemaking proposal was released. This work,

FIGURE 5. RILA Research Methods (4 Methods Used)

Qualitative

Simulations

Market Analysis

Quantitative

INSIGHTS ABOUT RILAS

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13

conducted at a much earlier stage than prior
investor testing, helped ensure that data-driven
insights informed the proposed rule.22
The research project yielded five key lessons about
RILAs of relevance to investors.

Lesson #1: Complexity and Jargon Make
RILAs Hard to Understand
RILAs are challenging for consumers to
understand. The products are complex, and the
jargon used to explain them is unfamiliar to
even the most sophisticated consumers.23 In our
qualitative and quantitative testing, we provided
consumers with hypothetical disclosure text and
assessed their understanding of RILAs. We found
that many consumers were confused by or unable
to understand key terminology, such as investment
term, interim value adjustment, and buffer.
Beyond the terminology, we found that many
interview participants struggled to understand
the details of the RILA contract presented in
the hypothetical disclosures. These difficulties
manifested both in their explanations of key
concepts and in their application of the knowledge.

INDEX

|

PENALTIES

INTERIM
VALUE
ADJUSTMENT

RILA
CAP
BUFFER

SURRENDER CHARGE

TRIGGER

TAX

FEES

CONTRACT
LENGTH
14

FLOOR

INVESTMENT TERM

O F F I C E O F T H E I N V E S T O R A D V O C AT E

In quantitative testing, we asked consumers to
answer true–false questions about the RILA
materials that were presented. Despite the
disclosures, consumers were only able to answer
58% of the questions correctly on average, which
is only slightly better than what we would expect
if the participants were randomly guessing. These
results suggest that substantial conceptual barriers
surround RILAs.
In sum, many participants remained unable to
fully understand the implications of the RILA
features and, thus, had limited ability to apply that
information in decision-making.

Lesson #2: Insurance Features Greatly
Affect How a RILA Performs and
Investors’ Chances of Losing Money
In our analysis of the RILA market, we considered
how different RILA features could have influenced
an investor’s possible investment returns in recent
history. We performed this analysis by applying
currently available investment option insurance
features to the historical returns of the indices that
RILA issuers track. Our baseline simulations used a
commonly offered investment option from the data
(a one-year investment term, an 18% cap and 10%
buffer) and our comparison options were slight
modifications from that baseline.
These simulations compared the returns from
investing in a RILA option with the returns of
the index itself in order to understand the extent
to which RILA insurance features would have
mitigated losses and capped returns during the
1990 to 2019 period. We believe this analysis could
be informative for people who are evaluating the
potential economic value of the RILAs. In turn,
more accurate assessments of economic value may
help potential investors decide if and how to invest
in a RILA.

Overall, our results suggest that the purchasers’
choices of insurance features can significantly
impact returns. Surprisingly, despite the emphasis
on the insurance features as risk mitigation devices,
during our historical simulation period, some RILA
investment options would have actually increased
risk and reduced returns versus investing directly in
the underlying index.
To illustrate the effect of insurance features on
potential returns, Figure 6 summarizes the results
of our simulations. Each panel presents the
distribution of the simulated outcomes for one
of four realistic 1-year investment term options
that an investor may encounter. Specifically, we
simulated investment returns associated with a
$10,000 investment in a given RILA investment
option that rolled over five times, for a total
investment duration of 6 years. Simulations were
repeated starting in each month from 1990 to
2013 (i.e., one simulation ran from January 1990
to January 1996, a second ran from February
1990 to February 1996, and so forth, ending
with a final simulation from January 2013 to
January 2019). In each panel, the height of each
bar represents the number of simulations that
resulted in a particular final investment balance.
Specifically, results for the RILA investment
option are shown in blue and results for the S&P
500 index are shown in yellow.
The investment options we examined in
Figure 6 were:
ƒ An 18% cap and 10% buffer (Panel A; note
that this was similar to an investment option
offered by many different issuers and was the
main case we explored in our research)
ƒ A 13.5% cap and 15% buffer (Panel B)
ƒ A 10.9% trigger and 10% buffer (Panel C)
§ A 19.5% cap and 20% floor (Panel D)

It is clear from Figure 6 that the RILA options we
examined would have reduced the potential gains
and the extent of the losses relative to the index.
At the same time, potential returns to the RILA
options differed significantly depending on the
particular insurance features. For example, in Panel
D (19.5% cap, 20% floor), the probability of losing
money would have been 37% compared to 15%
for investing directly in the index. Additionally, the
highest possible gains would have been limited.

Lesson #3: The Timing of RILA Purchases
Affect Investors’ Chances of Losing Money
Our historical simulations also highlight an
important result that may be unintuitive to
potential investors: The precise timing of
investments can have substantial impacts on how
insurance protections are triggered. While timing
is important to a certain extent in the case of
purchase and sales decisions in many investments
the issue is particularly acute for RILAs. Investment
options purchased within a RILA are associated
with a forced sale at the end of each investment
term. In other words, RILA investors experience
an adjustment in the value of their RILA holdings
at the end of each investment term; thus, even if
the underlying index is only temporarily depressed,
investors cannot wait until a market recovery to
realize gains. Put another way, although RILA
products have a long-run investment purpose and
investment options offer insurance protections on
the realization of returns at the end of a term, RILA
investors’ investment options essentially place a
bet on the realized value of the index on a specific
end-of-term day.
General market fluctuations occur constantly and
affect the value of many investment products. Yet,
because RILA investments leave investors limited
discretion over the timing of sales, timing-based
changes in value are particularly important for
these products. An investor purchasing a mutual

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15

FIGURE 6. Comparing Alternative Investment Options
120

Panel A: 10% buffer and 18% cap

Count

90
60
30
0

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

120

Panel B: 15% buffer and 13.5% cap

Count

90
60
30
0

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

120

Panel C: 10% buffer and 10.9% trigger
(threshold 0%)

Count

90
60
30
0

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

120

Panel D: -20% floor and a cap of 19.5%

Count

90
60
30
0

$10,000
Index

$15,000

$20,000

$25,000

$30,000

$35,000

RILA

This figure displays simulated investment outcomes for different RILA investment options (as specified in each panel).
The height of each bar represents the number of simulated realizations with that particular outcome.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

fund or exchange-traded fund tracking the index,
in contrast, could hold the fund for a longer period,
with the possibility of avoiding losses due to a
forced sale on a specific date.

As a comparison, the right panel of Figure 7 shows
a RILA with the same insurance features (18%
cap, 10% buffer) held for a 6-year period starting
in 1991. In this instance, at the end of 6 years,
the RILA would have underperformed the S&P
500 index due to the 18% cap, which would have
limited the returns in certain years when the index
gained value. The final investment value of the
RILA in 1997 would have been approximately
$4,000 lower than the index.

As an example, consider the investment option
from the left panel of Figure 7 (18% cap, 10%
buffer). During the period from 1999 to 2000, the
S&P 500 rose by 20%, but this RILA investment
option’s returns would have been capped at 18%;
thus, by 2000, the RILA would have slightly
trailed the index. The situation was different in the
2000 to 2002 period, when the index dropped in
value. Over that period, the RILA’s buffer would
have reduced losses, allowing its cumulative
value to exceed that of the hypothetical S&P 500
investment. By 2005, the $10,000 investment made
in this RILA investment option in 1999 would have
increased by 27% (ending at $12,730), whereas the
index lost 1.5% (ending at $9,857).

Together, the two panels of Figure 7 illustrate the fact
that the value of a RILA (and the value of a RILA
relative to its index) can vary significantly depending
on the time period during which it is chosen, even
holding constant the insurance features.

Lesson #4: Increased Comprehension Is
Possible Through Investor Testing
A quantitative test with thousands of consumers
and qualitative tests with a smaller group of

FIGURE 7. Simulated Value of a $10,000 Investment in a RILA Option Versus Direct Investment in the
Associated Index over Different Time Periods
From 1991 to 1997

From 1999 to 2005
$24

Investment Balance in Thousands

Investment Balance in Thousands

$13
$12
$11
$10
$9
$8
$7

1999 2000 2001 2002 2003 2004 2005
Index

RILA

$20

$16

$12

1991

1992

Index

1993

1994

1995

1996

1997

RILA

The RILA investment option in both graphs is the same: an S&P 500 price return–linked index with an 18% cap, 10%
buffer, and a 1-year investment term. These two graphs illustrate the fact that the value of a RILA (and the value of a
RILA relative to its index) can vary significantly depending on the time period during which it is chosen, even holding
constant the insurance features.

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17

individuals were conducted to explore how
well potential investors understand RILAs
and what changes could be made to improve
comprehension. Our investor-focused testing
research design consisted of 1-hour, one-on-one
qualitative interviews with 20 individuals from
around the country with varying levels of
experience and sophistication, which enabled
us to identify key ways that investors interact
with RILA information and to identify areas
of confusion. Using this qualitative research
as a basis, we tested various disclosures more
broadly with over 2,500 participants in a rigorous
quantitative testing study. For that quantitative
testing, we sampled a broad mix of investors who
were diverse in terms of age, gender, education,
and annuity ownership (Figure 8).
Although we generally found comprehension
to be quite low, there were some variations on
the disclosure materials that resulted in modest
increases in comprehension. Our research was
highly accelerated due to a compressed timeframe;

nevertheless, our analyses demonstrated the promise
of testing for improving disclosure while providing
practical guidance to the rulemaking team.
One focus of the rule proposal was the use of
a Key Information Table (KIT) to highlight
aspects of RILAs with which investors might be
unfamiliar. Our research design focused on two
alternative versions of the KIT: a version with
question-and-answer (Q&A) headings, and a
version with non-Q&A headings. An additional
dimension of the study tested the differential
impacts of four potential introductions to preface
the KIT: a “Benefits Only” introduction based
on our review of RILA marketing materials; a
“Key Terminology” introduction that referenced
a number of key terms used in the KIT; a
“Decision Focus” introduction that attempted
to avoid the use of jargon and layer information
to help participants unpack how a RILA works
in digestible pieces (e.g. this version covered the
purpose of a RILA before delving into more
complex details of the products); and a control

FIGURE 8. Participant Characteristics
FEMALE

62.2%

37.5%

5.2%

MALE

OTHER OR
MISSING

57.8%
42.1%

No

Yes

1.4% No High School Diploma
12.3% High School or Equivalent
18.2% Some College
68.1% BA or Above

OWNS ANNUITY

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

EDUCATION

condition that provided no introduction at
all. Thus, each participant viewed one of four
introductions and one of two KIT versions, for a
total of eight different combinations.

FIGURE 9. Summary of Average Percentage
of Questions Answered Correctly Across
Introductions
How do RILAs work?

Our quantitative study measured comprehension
across 28 questions, which could be organized
into four subscales: “How do RILAs work?”
(these questions considered the basic purpose and
structure of RILAs); “Which investors should
consider RILAs?” (these questions asked about
the potential appropriateness of a RILA in selected
investment settings); “How do upside caps and
downside protections work?” (these questions
asked about the insurance features of a RILA);
and “What happens upon withdrawal of funds?”
(these questions asked about the liquidity aspects
of RILAs, largely about how early withdrawal
penalties work).24

Control (No Introduction)

48.3

Key Terminology

48.0

Benefits Only

48.5

Decision Focus

52.9

Which investors should consider RILAs?
Control (No Introduction)

56.8

Key Terminology

55.5

Benefits Only

57.0

Decision Focus

60.1

How do upside caps and downside
protections work?

Figure 9 summarizes our quantitative study by
subscale and introduction. Average comprehension
on the “How do RILAs work?” subscale differed
across the introductions, with the Decision Focus
introduction having the highest comprehension
(Figure 9). The differences between the Decision
Focus and other introductions are all at least
marginally significant, although the magnitudes
of these differences are all modest. The “Which
investors should consider RILAs?” subscale had
differences across introductions with the Decision
Focus having the highest average performance. All
the other introductions have significantly worse
average comprehension, although the magnitudes
of these differences are modest. Performance on the
“How do upside caps and downside protections
work?” had no significant differences between
introductions. Finally, on the “What happens
upon withdrawal of funds?” subscale, average
performance differed between the Key Terminology
and the control introductions, with the Key
Terminology doing significantly worse, again, with
only a modest difference in magnitudes.

Control (No Introduction)

56.9

Key Terminology

58.4

Benefits Only

56.6

Decision Focus

56.6

What happens upon withdrawal of funds?
Control (No Introduction)

62.9

Key Terminology

61.1

Benefits Only

62.2

Decision Focus

62.7

Four introductions were developed to observe investors’
understanding of key concepts about RILAs. The first
introduction, “Control” was a control scenario, which
participants were given no information about RILAs. The
second introduction, “Key Terminology” was designed
to introduce participants to key terminology. The
third introduction “Benefits Only” described potential
benefits of owning a RILA. The fourth introduction,
“Decision Focus” reduced the use of jargon and
presented information in an order we believed to be
more meaningful to new potential investors. Within
each introduction, all participants answered questions
categorized in four separate conceptual sub-scores:
(1) How do RILAs work? (2) How do upside caps and
downside protections work? (3) Which investors should
consider RILAs? (4) What happens upon withdrawal
of funds? Numerical values represent the average
percentage of subscale questions answered correctly by
participants assigned to the given introduction condition.

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FIGURE 10. Comprehension of RILAs across KIT Formats

62.3
Percent correct

60

50

57.4
50.2

57.1

57.3

62.1

56.9

48.4

40

How do RILAs work?

Which Investors Should
Consider RILAs?

Q&A KIT format

non-Q&A KIT format

How do upside caps and
downside protections work?

What happens upon
withdrawal of funds?

Participants were presented with one of two sets of KIT rows, with each row presented one at a time. The first set
(Q&A) framed each row title as a question, and the second set (Non-Q&A) framed each row title as a statement. All
participants answered questions categorized in four separate conceptual sub-scores: (1) How do RILAs work? (2)
Which investors should consider RILAs? (3) How do upside caps and downside protections work? (4) What happens
upon withdrawal of funds? Numerical values represent the average percentage of subscale questions answered
correctly by participants assigned to the given condition.

Average comprehension across the two KIT
formats (i.e., Q&A and non-Q&A headings),
was similar, as shown in Figure 10. However, the
Q&A format yielded greater comprehension on
the “How do RILAs work?” subscale, albeit a
quantitatively modest difference. Across the other
three subscales the KIT formats did not result in
different comprehension, Figure 10.
Our quantitative study provided additional
suggestive evidence that the jargon used in the
discussion of RILA products may also hamper
comprehension, with possible downstream
consequences on decision-making. When
comparing the comprehension questions that
included jargon versus those that did not,
participants on average answered fewer of the
jargon-laden questions correctly.
Overall, these results suggest that disclosure
materials can improve comprehension, although
modest changes were observed in this study.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

Further research and study are needed to build on
these findings and develop disclosures that help
investors make decisions in line with their goals
and interests.

Lesson #5: Limited Transparency is a
Barrier to Understanding RILA Products
Although POSITIER constantly endeavors to make
disclosures more accessible to a broad range of
investors, we are mindful that different investors
and other stakeholders may have different needs
for detailed information. Our research efforts
were greatly aided by our ability to design and
run complex calculations and by having extensive
access to highly informed individuals who have
technical expertise with the products.
At the same time, our research would have
benefitted from an increase in available data on
RILA investments. We were unable to identify
and access a data source that has reliable current
and historical data on RILA product offerings,

which impaired our team’s ability to study certain
aspects of RILAs. Moreover, we were unable to
identify data that would help us assess the impact
of early withdrawals on investors or on realized
returns of actual investors. While some proprietary
data sources may provide some insights for
investors, the lack of readily available data makes
it more difficult for potential investors to properly
evaluate the benefits and costs of investing in
RILAs and to select appropriate investment
options for themselves.
Advocates and policymakers interested in the
impacts of RILAs on investors may consider
encouraging the development and maintenance of
systematic, accessible and reliable data on RILA
product offerings and usage by investors.

Concluding Thoughts on RILA
Investor Testing
RILAs are a relatively new financial innovation that
have been increasingly attracting investments since
emerging in the early 2010s.25 If used with attention
to the substantial early withdrawal penalties, the
products and some investment options may offer
a set of benefits that appeal to certain investors.
Our study provided extensive insights about these
products that may be useful to investors, regulators,
and the public. Although much more can surely
be learned and communicated about RILAs, we
believe our effort provides an enormous step
forward on a rarely studied investment product
that is expected to be increasingly sold.26
RILA products are complex and may require
considerable effort on the part of providers,
regulators, and investors to ensure they are
purchased by investors who can benefit from them,
and used in a way that realizes those benefits (for
example, for long-term retirement savings and
with careful attention to, among other things, early
withdrawal penalties, tax consequences and an

investor’s appetite to make complex investment
decisions over the life of the contract).
Our investor testing demonstrates that testing
methods can effectively examine the relationship
between disclosures and comprehension and
point to ways to improve disclosures for investor
decision-making (Lesson #4). While the proposed
RILAs registration form was diligently developed
with the aid of investor testing under tight time
constraints, we remain concerned that a significant
number of RILA investors will be unable to
make fully informed decisions related to these
products. With more time, it is possible that more
effective RILA disclosures could be developed,
communicating more useful and relevant
information for investors’ decisions. It is also
possible, however, that any retail investor-friendly
disclosure would be insufficient to capture the
inherent complexity of RILAs.
More broadly, we are concerned that the
Commission’s historical disclosure-based regulatory
regime alone may prove inadequate not just for
RILAs, but for many highly complex financial
products. As innovation in financial products and
services continues to accelerate, we grow concerned
whether the Commission’s investor protection
efforts will keep pace. Currently, a significant
portion of such efforts rely on the assumption
that full and fair disclosure by financial product
sponsors is sufficient to allow investors to make
fully informed decisions about investment products.
Given the investor testing results discussed above,
however, we believe it would be appropriate to
explore whether that assumption holds true for
highly complex financial products and whether
alternative investor protection safeguards should
be considered. We encourage our colleagues across
the Commission to entertain new, innovative,
data-driven, and investor-focused approaches
to disclosures and investor protection related to
complex financial products.

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One potentially more desirable approach would
be to provide shorter, layered disclosures that
organize information in terms of decisions that an
investor needs to make or questions an investor
might plausibly have. Currently, investors receive
disclosures on many aspects of a product or service
and are expected to sift through many different
topical areas to assemble information relevant to
them for a particular decision. The situation can be
more challenging for investors who may not know
what information they need to know, as they may
have difficulties identifying and assembling the
relevant information.
Building on our RILA research, a particular avenue
for improving disclosure could involve the creation
of decision trees to help guide investors through
the many complex decisions one must make when
deciding to purchase an investment. In the case
of RILAs, an investor must answer questions
such as: Is a RILA right for me? Which insurance
carrier should I purchase from? What index
should my RILA track? What insurance features
should I select? Each of these questions is complex,
often require consideration of a set of subsidiary
questions, and may require different information
to answer.
Figure 11 provides a sketch of how such a decision
tree might work when evaluating an investment
product. This diagram is provided for illustrative
purposes only, given that each of the decision
nodes on the diagram (diamonds) may itself
involve a set of subsidiary decisions. Nevertheless,
the illustration suggests a possible sequence of
decision nodes for the purpose of discussion.
The first node asks investors to consider if this type
of product is appropriate for their goals: How does
the product work? Does it serve a purpose aligned
with the investor’s goals? Are there better options
available? These questions seem fundamental to
any investor product evaluation.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

The second node asks if the product provider
is right for the investor. Does the provider offer
options that are appropriate for the investor?
Could the financial viability of the provider be an
issue? There are many factors that may go into
such a decision.
The final node asks, “Of the investment options
this provider offers, is this one the right one
for me?” This last node embodies a layer of
comparison shopping, where specific product
features are relevant.
FIGURE 11. Stylized Investor Decision Tree

Does this type of
product match my
financial goals?

Consider
other types of
investments

YES

Is this
provider right
for me?

Consider other
providers

YES

Of the
investment options
this provider offers, is this
one the right
one for me?

YES

Continue
evaluating the
investment product

Consider
different options
or products the
provider offers

Of course, this illustrative decision tree is too
generic to fully guide an investor, but it highlights
some conceptual aspects of a decision tree. A good
decision tree can produce an efficient organization
of information and may help an investor to quickly
identify if a product is not right for them.
Aside from providing a decision tool to an investor,
how could such a decision tree guide the design of
a disclosure? Standard disclosures are rarely written
with a specific decision context in mind. Often,
disclosures are structured with an assumption that
an investor has already determined that the type of
product or the provider is the right one for them—
at best, essentially assuming the investor is at the
last node of the illustrative decision tree. While the
content of disclosures may to be extremely valuable
to different types of investors, the structure of
disclosures may make the content less useful to
investors who are at different nodes in the decision
tree. A decision tree model may help issuers
organize the content of disclosures in a way that
could more effectively inform investors.
We must also acknowledge the assistance
investment professionals provide many retail
investors when making financial decisions. In
particular, investment professionals are likely
to play an important role in ensuring the
appropriateness of RILAs for investors, as RILAs
are often professionally sold products. RILAs
are frequently marketed to older investors; thus,
it is reasonable to ask whether a highly illiquid
investment is the right choice for a specific older
investor. Given the costly nature of RILA penalties
discussed above, information on how often they
are levied would provide significant insights on
how well investment professionals help investors
during the purchasing process. If RILA products
were to be recommended following proper analysis
of an investor’s situation, one would expect to find
that charges and penalties would rarely be levied

in practice (because the investor’s likelihood of
withdrawal would be thoroughly considered before
a sale was made). Data on RILA withdrawals and
household financial shocks are thus likely to be
relevant to investors, financial intermediaries, and
regulators. Unfortunately, as noted above, we lack
transparency in the RILA market, which makes it
difficult to ensure that investors are receiving the
information they need to make decisions about
these products.
Overall, we encourage the Commission to explore
new, innovative, and data-driven approaches to
investor protection related to complex financial
products and to test disclosures that better
assist investors and their decision-making. With
respect to RILAs in particular, we look forward
to analyzing public comments on the proposed
RILAs registration form, and to working with our
colleagues to help ensure that investors are enabled
to make fully informed decisions.

STOCK MARKET EXPECTATIONS
Multiple nationally representative surveys
ask investors to forecast future stock market
movements, with the goal of understanding
consumption, savings, and investment decisions.
Typically, these surveys ask individuals to report
the likelihood that the market will increase in value
(e.g., the Federal Reserve Bank of New York’s
Survey of Consumer Expectations; the University
of Michigan Health and Retirement Survey), which
may be a natural way for most people to think
about stock market movements.
In POSITIER research regarding stock
market expectations, we identify a novel and
counterintuitive effect regarding how these
expectations are elicited.27 Specifically, we show
that when individuals are asked to predict the
likelihood that the stock market will increase in

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23

value, they provide more pessimistic forecasts than
when they are asked to make the inverse forecast
about the likelihood the market will decrease in
value. This difference implies that existing surveys
may vary in accuracy depending on how questions
are phrased, a point of crucial importance for
investors’ decision-making, since expectations are
key to economic models.
Academic research has shown that individuals’
perceptions of products as positive or negative
are generally consistent with the way product
attributes are framed. For instance, a company
with an “85% success rate” will often be perceived
more positively than one with a “15% failure
rate.”28 Thus, the finding from the forecasting
question—the probability of a stock market
increase leads to more pessimistic forecasts—is
particularly surprising.
The reverse framing effect for stock market
expectations is stable over many contexts. In
our research, we find the framing effect within
nationally representative samples, for predictions
of market performance over the next month and
over the next year, and over several months of
data collection. The difference is found when
participants read information about prior market
performance and when using additional variants on
the wording of stock market questions. However,
differences in forecasts are smaller among those
who have greater financial literacy and greater
comfort with making numerical judgments.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

This research shows that investor and consumer
forecasts may be meaningfully impacted by the
way in which questions are asked. Furthermore,
because the standard framing for a forecast
question is to ask about the likelihood of market
growth, our research suggests that many elicitations of investors’ forecasts may underestimate
investors’ true beliefs about future market performance. Overly pessimistic expectations about
future stock market performance could lead
policymakers to believe a recovery from a down
market is less likely than it actually is, or it could
make policymakers less concerned about a period
of stock market growth than would otherwise
be warranted. Beliefs about stock market growth
also contribute to inflation expectations among
firm managers, with potential consequences on
the prices of goods.29
We recommend that future elicitations use a neutral
frame that simultaneously asks about the likelihood
that the market will increase and the likelihood
that the market will decrease. We believe that such
elicitations will provide more accurate information
on investors’ expectations of the stock market.

Concluding Thoughts
Serious and robust evidence on investors’ decisionmaking can have an enormous impact on policy
proposals that affect investors’ well-being. As
described above, whether investors have the information necessary to make well-informed decisions
is consequential for their financial outcomes;
similarly, understanding investors’ decisions can
help the Commission determine whether policy
interventions are appropriately crafted.

ADVOCACY
FOR INVESTORS
THIS SECTION OF OUR ANNUAL
REPORT ON ACTIVITIES describes a
selection of our policy activities on behalf of
investors for the period from October 1, 2022 to
September 30, 2023 (the Reporting Period).

PRIVATE MARKETS
As described in our prior Reports, the Office of
the Investor Advocate has long focused on the
issues surrounding the growth of the private
markets in the United States.30 The SEC regulates
the private markets through, among other things,
the regulation of offers and sales of securities by
issuers, including private companies, pursuant
to the exemptions from the registration process
for securities offerings under the Securities Act of
1933. Over the past 15 years, the private markets
have expanded considerably, with the amount
of capital raised in these markets during this
time exceeding the amount of capital raised in
public registered offerings.31 As we have previously noted, investing in the private markets may
involve heightened risks compared to investing
in the public markets, particularly for retail
investors.32 These risks may include reduced,
incomplete or unreliable disclosure, illiquidity,
and greater risk of fraud and/or investment loss.
Nevertheless, the private markets, encompassing
a variety of asset classes such as equity, debt, real
estate, and private investment funds, have become
a critical pathway for companies seeking to raise
capital and a major source of investment opportunities and portfolio diversification for investors.

During Fiscal Year 2023, we closely monitored
developments relating to the private markets,
including pending legislative proposals in Congress,
and evaluated their potential effects on investors.
In addition, as discussed below, we engaged in
outreach efforts, analyzed and shared research
findings with Commission staff, and explored the
issues and concerns raised by investors and others
regarding the relative lack of available information
on the private markets.

Outreach
During Fiscal Year 2023, the
Office engaged internally and
externally with the Commission,
Commission staff, investors, and
other stakeholders as part of our
ongoing effort to gain a deeper understanding of
the issues and different perspectives surrounding
the private markets. This outreach effort included a
number of events where retail investors recounted
their experiences with private investments or
otherwise voiced their concerns regarding these
investments. We also had the opportunity to meet
with various institutional investors and other
market participants who shared their views on
aspects of the private markets.
For example, we have sought the views of investors
and other parties on the issue of accredited investor
status. A significant reason behind the continued
growth of private markets is the increasing
number of investors who qualify as “accredited
investors” and are thus eligible to invest in private

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25

TABLE 1. Accredited Investor Definition
Wealth

Net worth

Other Criteria

An individual qualifies as an
accredited investor based on
wealth when that person, either
alone or together with a spouse or
spousal equivalent, has a net worth
that exceeds $1 million, excluding
the value of the person’s primary
residence.

An individual qualifies as an
accredited investor based on
income when that person has had
an annual income that exceeded
$200,000 (or $300,000 with a
spouse or spousal equivalent) in
each of the prior two years and
has a reasonable expectation of
the same for the current year.

An individual can also qualify as
an accredited investor through
other measures of financial
sophistication, for example, by
holding in good standing certain
professional certifications or
designations. Entities can qualify
as accredited investors by
meeting certain criteria under the
accredited investor definition.

offerings under a number of offering exemptions.33
Individuals qualify as accredited investors based
on certain wealth and income thresholds, which
have not been adjusted for inflation since they were
adopted in the 1980s, or through other measures
serving as a proxy for financial sophistication
(Table 1).
The views expressed by commentators on the
accredited investor definition have varied widely,
ranging from support for either an expanded or
a more restrictive definition, or even advocating
for the elimination of the definition altogether.34 In
this regard, we note that the panel discussion on
accredited investor status at the Investor Advisory
Committee’s September 2023 meeting—one of four
panel discussions held by the Investor Advisory
Committee on private markets during Fiscal
Year 2023—highlighted various perspectives and
considerations in amending the definition.35
In view of the magnitude of the private markets
and the significant and growing number of retail
investors now able to invest in these markets as
accredited investors, we expect that continuing and
expanding this outreach effort will be a priority of
the Office going forward as we endeavor to provide
a voice for investors in this important area.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

Investor Research
We believe that investor
research may provide a helpful
source of objective data for
the Commission in making
policy decisions with respect
to the private markets. For example, during
Fiscal Year 2023, our Office of Investor Research
(OIR) analyzed survey data on the investment
knowledge and economic vulnerability of retail
investors, including accredited investors, in the
context of income and wealth. OIR may explore
the possibility of engaging in further research on
topics relating to the private markets and investor
welfare, drawing on its multidisciplinary research
expertise in economics, finance, psychology, and
communications. We believe that these and other
potential areas of inquiry, if undertaken, could
benefit the Commission in considering various
policy approaches to improving the regulation of
the private markets.
Information on Private Markets
Issuers conducting private
offerings often utilize
Regulation D, which sets forth
various exemptions from the
registration requirements of the
Securities Act of 1933, including the widely

used Rule 506(b) exemption.36 In view of the
significant size and opaque nature of the private
markets, some commentators have urged the
Commission to enhance the requirements of Form
D, the notice of an offering under Regulation D
that is filed with the Commission.37 These
commenters point to, among other things, the
lack of transparency in the private markets, the
limited information currently required to be
provided in the form, and the degree of issuer
noncompliance regarding this filing requirement.38
Conversely, other commentators have raised
concerns about the increased burdens and costs
associated with enhancing Form D, such as the
amount and nature of the additional information
that would potentially be made public through
Form D filings.39 During Fiscal Year 2023,
we sought to deepen our understanding of
the issues surrounding Form D as well as
potential approaches to improving the quality of
information available on private offerings both
to the Commission and to investors. We look
forward to working with Commission staff as
they consider whether to recommend additional
action in this area.

EQUITY MARKET STRUCTURE
In 2023, the Commission continued working to
enhance many aspects of the equity market. In
general, our office sought to ensure that the needs
of investors, both large and small, were considered
during this ongoing process of enhancing the
equity market.
As noted in our recent June 2023 Report on
Objectives, in December 2022, the Commission
proposed a set of four significant rulemakings
intended to improve the environment for retail and
institutional trading in the modern market.40 The
proposed rules would: (1) establish a Commissionlevel best execution regulatory framework; (2)
require certain retail orders to be exposed to

competition in open public auctions: (3) amend
existing rules to narrow “tick sizes” for quoting
and trading certain stocks, lower market access
fee caps, and accelerate transparent pricing;
and (4) amend execution quality disclosure
requirements for market centers. Through the
perspective of our office’s overall concern, we
reviewed the proposals and public comments.
We have considered the comments submitted in
response to these proposals in order to consider
how these amendments may help promote the
interests of retail and institutional investors,
whether they be adopted in whole, in part, or in
some amended form. Over the last year, we have
and will continue to encourage the Commission
to consider commenters’ suggested adjustments
that appear most likely to benefit investors when
finalizing these proposals. Our own Office of
Investor Research also continues to consider how
the presentation of disclosure data in this proposal
could best serve investors.
We have also monitored a number of proposals
from self-regulatory organizations on the
topic of equity market structure. For example,
FINRA requested public comment on possible
enhancements to its own rules concerning the
centralization of execution quality disclosure
requirements for market centers operated by
broker dealers.41 Although this effort would
enhance accessibility of a significant portion of the
proposed disclosure reports, it would not eliminate
search costs for those investors looking to compare
and contrast all of the various reports. We continue
to consider how to facilitate centralization in order
to help investor decision making in this space.
Retail investors often contact OIAD to express
concern regarding the practice of short selling, a
trend that has increased over the last few years.
We supported the Commission’s efforts to enhance
transparency in short selling42 as well as the

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27

opaque network of stock lending and borrowing
that facilitates the practice,43 and look forward to
the Commission and FINRA implementing these
disclosure regimes over the next year. Maintaining
a repository of relevant data should help improve
the Commission’s ability to monitor this area of the
market, as well as provide the public with useful
information about the practices. All investors
should benefit from having free and readily
accessible short sale-related data available through
the Commission’s website.

CYBERSECURITY
Over the years, the Office of the Investor
Advocate has sought to ensure that the interests
of investors are represented and considered
with respect to the cybersecurity initiatives of
the SEC. The increasing frequency and severity
of cybersecurity incidents at public companies,
funds, and other regulated entities have been

well-documented, with significant costs ultimately
being borne by investors.44 With the U.S. economy
growing ever more interconnected through digital
technology and electronic communications,
we expect that cybersecurity and its impact on
investors will continue to be important area of
focus in OIAD’s activities.
During Fiscal Year 2023, OIAD analyzed and
provided investor-focused feedback on the
following Commission rulemaking proposals
relating to cybersecurity in Table 2.
We are encouraged that the Commission has
prioritized cybersecurity in its rulemaking efforts.
Going forward, we will continue to consider
public comments submitted in response to the
pending cybersecurity proposals, and we look
forward to working with Commission staff as they
consider recommending additional action. We will
also monitor the implementation of the recently

TABLE 2. Investor-focused Feedback on These Rulemaking Proposals
Investment Companies and
Investment Advisers

28

Public Companies

In February 2022, the Commission proposed rules
and amendments intended to enhance cybersecurity
preparedness and improve the resilience of registered
investment advisers, and registered investment
companies and business development companies
against cybersecurity threats and attacks.45

In July 2023, the Commission adopted final rules
requiring public companies to disclose material cybersecurity incidents on Form 8-K and provide enhanced
disclosure of cybersecurity risk management,
strategy, and governance in annual reports.46

Proposed Amendments to Regulation S-P

Market Entities

In March 2023, the Commission proposed
amendments to Regulation S-P intended to enhance
the protection of customer information by, among
other things, requiring broker-dealers, investment
companies, registered investment advisers, and
transfer agents to provide notice to individuals
affected by certain types of data breaches that may
put them at risk of identity theft or other harm.47

In March 2023, the Commission proposed two
rulemakings that are intended to protect the
U.S. securities markets and investors in these
markets from the threat posed by cybersecurity
risks.48 The proposed rules would: (1) require key
market participants to take measures to protect
themselves and investors from the harmful impacts of
cybersecurity incidents; and (2) amend existing rules
to expand the scope of entities subject to Regulation
Systems Compliance and Integrity (“SCI”) and update
requirements to take account of the evolution of
technology and trading.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

adopted public company cybersecurity disclosure
rules and anticipate sharing any feedback on
these rules from our outreach activities with our
Commission colleagues.

PROBLEMS ENCOUNTERED BY
INVESTORS
Pursuant to Exchange Act Section 4(g)(6)(B)(III),
we are required to provide a summary of the
most serious problems encountered by investors
during the prior fiscal year. Two of the more
troubling problems encountered by investors,
as summarized in other sections of this report,
are RILAs and onerous mandatory arbitration
provisions in investment advisory agreements.
In addition, Figure 12 below summarizes some
of the other serious problems that investors have
encountered during Fiscal Year 2023, based on our
consultation with sources both within and outside
the Commission.

Each of the products and practices listed in
Figure 12 represents an area of concern for
investors during the Fiscal Year 2023. OIAD
communicates regularly with various Divisions
and Offices within the Commission, including
with the Division of Enforcement, the Division of
Examinations, and the Office of Investor Education
and Advocacy, among others, to gain awareness of
the problematic products and practices that such
Divisions and Offices may discern in the course
of their work. The Office also maintains regular
communications with other regulators, such as
FINRA, NASAA, PCAOB, and the Municipal
Securities Rulemaking Board to maintain visibility
into problematic products and practices that those
regulators have confronted in their day-to-day
responsibilities during the reporting period.

FIGURE 12. Lists of Certain Problems Encountered by Investors During Fiscal Year 2023

SEC49

• Noncompliance with Regulation BI
• Noncompliance with the Adviser Marketing Rule
• Crypto Asset Securities
• Leveraged and Inverse ETFs

NASAA50
Reported
potentially
problematic
products or
practices

• Digital Asset Frauds
• Pig-Butchering Schemes
• Social Media and Internet Schemes

FINRA51

• Phantom Riches
• Social Consensus
• Source Credibility

• Scarcity
• Reciprocity

PCAOB52

• Proof of Reserve Assertions
• High Audit Deficiency Rates
• Recurring Quality Control Deficiencies

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29

“

It is our Office’s challenge, duty, and

privilege to provide personalized assistance
to the investors who seek our help, often as a
point of first contact or as a last resort.”

MESSAGE FROM
THE OMBUDS

EVERY DAY, INVESTORS ACROSS THE
COUNTRY and around the world reach out
to the Office of the Ombuds53 for information
and assistance in resolving issues related to the
Commission and the SROs we oversee. These
issues span the breadth of the federal securities
laws and touch on the rules the Commission
and SROs create, as well as the ways those
rules are implemented and enforced. It is our
Office’s challenge, duty, and privilege to provide
personalized assistance to the investors who seek
our help, often as a point of first contact or as a
last resort.
As the retail investor’s confidential channel of
communication with the Commission, our Office
often learns of matters that impact large groups
of investors and matters that have an outsized
impact on an individual or small group of
investors. In these circumstances, we do more than
listen. We act. We inform and educate interested
parties within the Commission about trending
investor protection matters. We work with the
Division of Enforcement to identify and thwart
fraudulent schemes. We study and report on areas
of widespread investor concern. We engage with
SROs and individuals, offices, and divisions within
the Commission to clarify existing practices, and,
where appropriate, to highlight the harms these
practices may cause retail investors.

Our Office operates independently of the
Commission, yet we are bound by a core standard
of impartiality that prevents us from taking sides on
a given issue. Our obligation to remain impartial
precludes us from directly advocating on behalf
of retail investors. However, we remain singularly
committed to amplify their voices, escalating their
concerns when needed, and promoting the fair
application of policies and procedures across the
Commission and the
SROs we oversee.
Fiscal Year 2023 brought
significant change
and challenge to the
Ombuds’ Office. Despite
its small size, our team
has met each challenge,
exceeded expectations,
and achieved significant
milestones on behalf of
retail investors. Among other accomplishments,
our Office completed a landmark study of
mandatory arbitration. We hosted a successful
law school Investor Advocacy Clinic Summit—
broadcast live to almost 2,000 viewers—providing
clinic students the chance to discuss the importance
of their work. We worked closely with the
Office of Information Technology to implement
substantial enhancements to our Ombudsman

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31

Matter Management System (OMMS) platform,
enhancements that will improve the user
experience and the integrity of our data collection.
But perhaps most importantly, we have personally
helped over 2,600 investors, thwarting fraudulent
schemes, providing useful information, and,
sometimes, just listening. This is the heart of our
work. It is work unlike any other, and, for this
dedicated team, the work is its own reward.

We are grateful for the opportunity to personally
serve the retail investor community in this unique
role. In 2024, I hope that our Office will become
a more active liaison for retail investors. We
look forward to expanding upon and fortifying
our relationships within the Commission, our
relationships with stakeholders committed to
investor protection, and especially our relationships
with the investor communities that we serve.

Respectfully Submitted,

STACY A. PUENTE
Ombuds

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

WHO WE ARE
In March 2023, Investor Advocate Cristina Martin
Firvida announced the appointment of Stacy A.
Puente as Ombuds of the Securities and Exchange
Commission.54 Ms. Puente leads an experienced
team of lawyers, each with differing subject matter
expertise, all dedicated to providing personalized,
tailored assistance to the retail investors that
contact the Ombuds Office for help. Through
direct engagement with investors, interested parties
within the Commission, and external stakeholders
committed to investor protection issues, the
Ombuds Office fulfills its statutory role as the
confidential liaison between retail investors and
the Commission.55
This Ombuds’ Report56 discusses the work and
efficacy of the Office for the Fiscal Year beginning
October 1, 2022, through September 30, 2023.

WHAT WE DO
Exchange Act Section 4(g)(8), 15 U.S.C. §
78d(g)(8), requires the Investor Advocate to
appoint an Ombudsman (Ombuds) to act as a

confidential liaison in resolving retail investors’
concerns and questions about the Commission
and the self-regulatory organizations (SROs) the
Commission oversees.57
The Ombuds is required by statute to:
(i) help retail investors resolve questions and
complaints they may have with the Commission or with SROs the Commission oversees;
(ii) review and make recommendations regarding
policies and procedures that encourage
investors to present questions to the Investor
Advocate regarding compliance with the
securities laws;
(iii) take steps to ensure the confidentiality of
investor communications with our Office; and
(iv) submit semiannual reports to the Investor
Advocate that describe the activities and
evaluate the effectiveness of the Office.58
In carrying out our objectives, the Ombuds team
adheres to three core standards of practice, as
illustrated in Figure 13.

FIGURE 13. Ombuds: Three Core Standards of Practice

Confidentiality
The Ombuds takes necessary steps to preserve the confidentiality of communications
with investors, although communications may be disclosed where the investor
consents, or where the investor alleges a violation of the securities laws or other
exigent matter.

Impartiality
The Ombuds does not take sides on issues—instead, our Office fields investor
questions and complaints to clarify issues, facilitate discussions, and identify options
and resources that address investor issues or concerns.

Independence
Though the Ombuds reports directly to the Investor Advocate, our office is
independent from the SEC. The Ombud’s Report, included as a part of the Investor
Advocate’s semi-annual report to Congress, is filed without any prior review or
comment from the Commission or other SEC staff.

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33

HOW WE HELP
Figure 14 illustrates the process by which we
receive and assist investors with their requests.
Additionally, we submit credible allegations
of securities violations to the Division of
Examinations and the Division of Enforcement
for potential examination, investigation, or
enforcement action. We study and report on issues
of significant investor impact. We work with
other offices and divisions across the Commission,
as well as SROs, to assess the effects of specific
policies or practices on retail investors. Last, we
inform the Investor Advocate and other interested
parties within the Commission about trending
investor protection concerns.

How to Reach Us
Individuals and interested parties may contact our
Office by email, telephone, and regular mail.59
However, our primary means of corresponding
with the public is through the OMMS,60 an
electronic portal for receiving, responding to, and
managing data collected from investor submissions.
Through the diligent efforts of the SEC’s Office of
Information Technology, the Ombuds Office will
launch a series of substantial enhancements to the
existing OMMS system in Fiscal Year 2024. These
enhancements are designed to increase ease of use
for investors, expedite and standardize processes
for Ombuds staff when responding to investor
submissions, and more effectively track investor
submissions by volume and other characteristics.

FIGURE 14. Ombuds Process: Review, Research, Resolve

Review
The Ombuds team reviews
all incoming investor
correspondence to determine if
and how we may assist.

Research
The Ombuds team identifies the nature of
the issue, conducts tailored research, and
engages with appropriate personnel within
the Commission or SROs to gather relevant
information.

Resolve
The Ombuds team works to
resolve investor questions and
complaints by providing investors
with requested information and
access to additional resources, by
escalating certain matters through
appropriate channels, when necessary,
and by monitoring outcomes.

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O F F I C E O F T H E I N V E S T O R A D V O C AT E

INVESTOR VOICES, BY THE NUMBERS
The Ombuds team maintains records in OMMS of
all inquiries and responses handled by our Office.
When a new matter is received, it is assigned a label
or “Primary Issue Category,” reflecting the nature
of the issues raised in the submission. In tracking
investor submissions by volume and by Primary
Issue Category, OMMS may serve as an early
warning system—identifying existing or potential
problems on the horizon for retail investors.61

FIGURE 15. Number of Investor Matters
Received from October 1, 2022, to
September 30, 2023

In Fiscal Year 2023, the Ombuds team
additionally reviewed and/or responded to 2,828
additional emails, phone calls, and other forms
of correspondence relating to the 2,605 investor
matters—for a combined total of 5,433 contacts
with or on behalf of retail investors. Figure 16
FIGURE 16. Number of Follow-up Contacts
with Investors Arising from Their Initial
Submission
2.5%

9.8%

15.7%

0.5%

In Fiscal Year 2023, the Ombuds Office received
and processed 2,605 matters. Figure 16 illustrates
the number of investor matters received from
October 1, 2022, to September 30, 2023, divided
into the 12 Primary Issue Categories:62

10.0%

17.5%
7.5%

0.4%
11.7%
11.1%
6.1%
4.5%
31.7%

36.1%

13.5%

9.2%
2.5%
0.3%

2.5% 3.5%

2.6%
0.2%

0.4%

0.3%

Atypical Matters (71)

Atypical Matters (255)

FINRA Complaints/Questions/Procedures (284)

FINRA Complaints/Questions/Procedures (194)

Non-SEC/Other Matters (330)

Non-SEC/Other Matters (288)

SEC Investigations/Litigation/Enforcement
Actions (172)

SEC Investigations/Litigation/Enforcement
Actions (118)

Allegations of Securities Law Violations/Fraud (383)

Allegations of Securities Law Violations/Fraud (240)

Securities Laws/Rules/Regs/Procedures (100)

Securities Laws/Rules/Regs/Procedures (68)

Securities Ownership (8)

Securities Ownership (6)

SRO Rules/Procedures (10)

SRO Rules/Procedures (8)

Company Disclosures and Information (71)

Company Disclosures and Information (66)

Investment Products/Retirement Accounts (895)

Investment Products/Retirement Accounts (941)

Organized Campaigns (10)

Organized Campaigns (12)

SEC Questions/Complaints (494)

SEC Questions/Complaints (409)

Total 2,828

Total 2,605

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35

details the number of follow-up contacts with
investors arising from their initial submissions,
separated by Primary Issue Category.

We believe that the OIR study, viewed in
conjunction with increasing investor complaints
about regulatory messaging, prompts the question
whether regulatory communications and industry
disclosures are creating an imbalanced landscape for
investors, where those with less effective access to
information are at higher risk of loss due to less
informed investment decisions. We echo the
concerns stated in the Message from the Investor
Advocate, that, as the number of retail investors
continues to grow, so will the need for improved
communications between regulators and the public,
as well as the need for regulators to reexamine the
existing disclosure regime for industry participants.64

An Early Warning System
From Fiscal Year 2022 to Fiscal
Year 2023, the Ombuds observed a
significant increase in submissions
involving FINRA Complaints/
Questions/Procedures and a related uptick in
questions surrounding digital assets. We believe the
increase in questions and concerns submitted to the
Ombuds regarding these areas arises from investor
dissatisfaction with the clarity, content, and timing
of communications from regulators about financial
industry rules, products, and market activity.

Measuring Our Progress through the Years
Since the Office of the Ombuds was
first established in 2014, the number of
investor matters and investor contacts
has steadily grown. Figure 17 illustrates
the trend toward increased investor engagement
with the Ombuds Office.

At the same time, as observed above in the
discussion of RILAs,63 OIAD’s research suggests
that disclosures about increasingly complex
products may not sufficiently inform the investing
public about the nature of and risks associated with
these products.

FIGURE 17. Volume of OMMS matters and OMMS Contacts
5,632
3,231

Contacts
New Matters

5,712
2,932

5,433
2,828

4,088

Total Contacts

3,693
2,441
2,213

1,224
727
228

222
1,002

226
1,105

499
FY 2015

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2,780

1,331
2,401

1,494
1,480

1,647

FY 2019

FY 2020

1,045

2,605

449
FY 2016

FY 2017

FY 2018

O F F I C E O F T H E I N V E S T O R A D V O C AT E

FY 2021

FY 2022

2023

Between Fiscal Year 2015 and Fiscal Year 2023,
there has been a 522 percent increase in the number
of investor matters received, and a corresponding
1,240 percent increase in the number of investor
contacts arising from these matters.
These numbers alone do not reflect the time
and effort the Ombuds team invests in research,
information gathering, internal and external
collaboration to provide each investor with the
tailored responses they seek.
The increase in our investor engagements may
be due to an expanding sector of retail investors,
amplified investor interest in Commission rules
and enforcement efforts, and our Office’s efforts to
raise awareness of the assistance we provide. It is
our intention to help an ever-growing number of
investors—particularly those who need our help
the most.

TRENDS AND NOTABLE MATTERS—
FISCAL YEAR 2023
Digital Assets
Following the Commission’s
announcement of litigation against
several crypto platforms, the Ombuds
Office received many questions and
comments from investors about crypto products.
Some investors questioned the SEC’s authority to
regulate digital assets, while others supported the
Commission’s regulatory efforts, even calling for a
Commission rulemaking to combat fraud relating
to cryptocurrency and digital assets. Given the
influx in crypto-related comments and complaints
reported in Fiscal Year 2023, we are hopeful that
the ongoing efforts of regulators and legislators
in this space will help mitigate investor harm and
increase investor confidence.

Short Selling and Threshold Lists
During Fiscal Year 2023, the Ombuds
continued to receive a high volume
of complaints about short sales in
various exchange-traded securities.
Many of these complaints focused on threshold
lists—SRO-generated lists of certain equities with
a “fail to deliver” position for five consecutive
settlement days.65 These investors often believed
the inclusion of a security on a threshold list
was evidence of abusive “naked shorting.” The
Ombuds provided investors information about
Regulation SHO,66 the Commission regulation
governing the short sale of equities and clarified
that the inclusion of an equity on a threshold list
does not necessarily indicate the occurrence of
abusive short selling or other impermissible trading.
SRO Communications with Investors
As noted above, many complaints
received this Fiscal Year involved
SRO communications with retail
investors. These investors generally
expressed concern that SROs were not providing
clear or sufficient information directly to the
retail public. Many investors held positions in
securities impacted by SRO regulatory decisions
and complained that SROS did not provide
information about those regulatory decisions in
a manner that was easily accessible and suitable
for non-professionals. In addressing these investor
concerns, the Ombuds engaged with staff in
appropriate offices at the Commission to voice
these investor concerns.
Discovery in FINRA Arbitration
In Fiscal Year 2024, Ombuds staff
intends to complete and report
the findings of its study of the
incidence and potential effects of
abusive discovery practices in the FINRA Dispute
Resolution forum.

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ENGAGING WITH THE PUBLIC
2023 SEC Investor Advocacy
Clinic Summit Overview
On Wednesday, March 29, 2023, the Ombuds
Office and the SEC Division of Enforcement’s
Retail Strategy Task Force (RSTF) hosted the
fourth annual SEC Investor Advocacy Clinic
Summit (Summit) as a virtual event. For the
second consecutive year, the Summit was a joint
endeavor between the Ombuds and RSTF. The
event, livestreamed to over 1,800 external viewers
on the SEC’s website and to SEC staff internally,
was intended to highlight the work of the law
school clinics and raise public awareness of the
services they provide. Students discussed the origin
of the clinics and nature of their work, the role
of mandatory arbitration in resolving brokerage
disputes, two representative cases, resource
allocation, and other challenges to the viability
of the clinics.
All 11 U.S. law school investor advocacy clinics67
shared their perspectives and engaged with SEC
subject matter experts on pressing issues currently
facing retail investors. Given the success of this
and prior summits, we look forward to hosting the
2024 Summit as a signature feature of the Ombuds’
commitment to retail investors and the work of the
law school clinics.

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Additional Engagement Activities
In addition to the Summit, Ombuds staff
participated in and attended select securities
industry events with the goal of improving our
service to retail investors and educating external
groups about the services our Office can provide.
These events included informational meetings and
listening sessions with the American Association
of Justice, the American Association of Retired
Persons, international regulators, and directors of
the law school investor advocacy clinics. Ombuds
staff also met periodically with the Coalition of
Federal Ombudsmen, as well as the Public Investors
Arbitration Bar Association (PIABA), FINRA, and
the FINRA Ombuds.
Pursuant to the Office’s study of mandatory
arbitration among SEC-registered investment
advisers, the Ombuds conducted interviews
and engaged in discussions about mandatory
arbitration with PIABA, FINRA Dispute
Resolution Services, the American Association
of Individual Investors, the Securities Industry
and Financial Markets Association, the North
American Securities Administrators Association,
Better Markets, Financial Services Institute, the
American Arbitration Association, and JAMS.

INVESTOR INITIATIVES

STUDY AND FINDINGS
Mandatory Arbitration among
SEC-Registered Advisers
In our Report on Objectives for Fiscal Year 2023,
the Ombuds Office acknowledged troubling
anecdotal information about investor experiences
with their advisers in mandatory arbitration.68
Prompted by this information, we committed to
initiating a study of mandatory arbitration among
SEC-registered investment advisers (RIAs), to
develop a “more complete understanding of RIA
arbitration, and… identify any problematic issues
impacting retail advisory clients.”69 What follows is
a summary of this important study and its potential
implications for advisory clients.

OVERVIEW
In January 2023, the Ombuds Office, in
coordination with the Office of Investor Research
and the Investor Advocate Office of Chief Counsel
(hereafter, collectively, “Staff”), launched a study
to evaluate: (1) the occurrence of mandatory
arbitration clauses in SEC-registered investment
adviser agreements; (2) the occurrence of certain
restrictive terms in mandatory arbitration clauses,
such as damage limitations and class action
waivers; (3) the frequency of SEC-registered adviser
arbitration; (4) the frequency of unpaid arbitration
awards among SEC-registered advisers; and (5) the
effects of mandatory arbitration clauses on clients
harmed by their advisers.70
Staff reviewed a sample of investment advisory
agreements and compiled data regarding the
occurrence of mandatory arbitration clauses, as
well as the occurrence of various restrictive terms.

To correct any potential non-representativeness of
this sample, Staff used inverse probability weighting
to adjust this data.
Due to the lack of publicly available information
about SEC-registered adviser arbitration,
Staff could neither determine the frequency of
adviser arbitration nor the frequency of unpaid
adviser awards. Staff also could not identify
a representative sample of advisory clients to
determine the effects of mandatory arbitration
clauses. Instead, as a proxy for the perspectives of
advisory clients, Staff interviewed eight external
stakeholder groups identified as having information
relevant to the issue of mandatory arbitration, and/
or as having publicly expressed opinion on the
issue of mandatory arbitration. Their views, while
anecdotal, provided insight into the potential harms
and benefits of mandatory arbitration clauses for
advisory clients.

SUMMARY OF FINDINGS
Occurrence of Mandatory Arbitration
Clauses and Other Arbitration Terms
Based on the sample of 579 investment advisory
agreements reviewed, Staff estimated that
approximately 61 percent71 of SEC-registered
advisers serving retail investor clients incorporated
mandatory arbitration clauses into their investment
advisory agreements.
Of the agreements that contained mandatory
arbitration clauses, Staff estimated the frequency
with which advisers incorporated the specific terms
in Table 3.

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TABLE 3. Frequency of Specific Provisions in Mandatory Arbitration Clauses
Agreement designates a particular dispute resolution forum:

92%

When designating a forum, advisers designated the following fora:
American Arbitration Association (AAA)

83%

Financial Industry Regulatory Authority (FINRA) Dispute Resolution Services

10%

JAMS

6%

Other

1%
37%

Agreement designates particular forum rules:
When designating forum rules, advisers selected the following rules:
AAA Commercial Rules

83%

JAMS Streamlined Rules and Procedures

3%

JAMS Comprehensive Rules and Procedures

2%

AAA Securities Arbitration Supplementary Procedures

1%

Agreement designates the arbitration venue:

60%

When designating arbitration venue, percent of agreements that did not consider client’s location or
place of business:

97%

Agreement precludes participation in class action

6%

Agreement limits claims the client may assert

5%

Agreement limits damages that may be awarded

11%

Agreement includes fee-shifting provision

18%

Frequency of Adviser Arbitration,
Unpaid Awards
State-registered advisers, investment adviser
representatives, and SEC-registered advisers are
not uniformly required to disclose information
about arbitrations with their clients.72 Moreover,
SEC-registered advisers’ preferred dispute
resolution fora do not track the number of adviser
arbitrations. For these reasons, Staff could not
obtain data about the frequency of arbitration or
unpaid awards among SEC-registered advisers.
As a related point, private arbitrators lack
jurisdiction over the parties after an award is
issued. Parties to an arbitration are expected to

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abide by the terms of the arbitrator’s award.73
However, when a party fails to comply with an
arbitration award, the other party may need to
enforce the award through the court system and
litigate a dispute over an unpaid award. A survey
of federal and state case law did not yield results
upon which to reliably estimate the frequency of
litigation involving unpaid arbitration awards
among advisers.

Stakeholder Perspectives74
Stakeholders unanimously agreed that mandatory
arbitration clauses benefited advisers by, among
other things, simplifying the dispute resolution
process through limited discovery75 eliminating

the right to appeal,76 maximizing privacy
during and after the arbitration, and increasing
both predictability and efficiency through the
designation of a known arbitration forum with
familiar rules. Proponents of mandatory arbitration
further asserted that advisory clients—like their
advisers—experienced these same benefits.
In contrast, critics of mandatory arbitration argued
that advisers experienced these benefits at the
expense of clients. Because advisers unilaterally
draft their advisory agreements, critics believed
advisers often selected the forum, the rules, and
the venue that would likely increase costs for the
client and favor the adviser. They also asserted that
the limited ability to exchange information during
discovery might prevent clients from obtaining
evidence to prove their claims, and the inability
to appeal would likely preclude review of an
arbitrator’s decision. Critics also asserted the lack
of uniform disclosure requirements for adviser
arbitration information might allow recidivist
advisers to conceal client allegations of wrongdoing from regulators and prospective clients.
Stakeholders agreed, to varying degrees, that
advisers should consistently be required to disclose
more complete information about customer
arbitrations and unpaid awards. Proponents
of mandatory arbitration argued that, while
disclosure of all customer allegations might subject
advisers to unwarranted reputational harm, full
and fair disclosure of allegations the adviser deems
material would create a competitive advantage
for honest advisers and promote fairer markets.
Critics of mandatory arbitration more broadly
argued that advisers’ fiduciary duty necessitated
disclosure of customer arbitration information,
irrespective of whether the adviser deemed the
information material.
Several stakeholders also stated that differences
between the adviser and broker77 arbitration

regimes disadvantaged advisory clients. For
instance, some stated that certain provisions
permissible in advisory agreements, such as class
action waivers, damage limitations and claim
limitations, are impermissible in agreements
between brokers and their customers. These stakeholders further argued that such limiting terms
negatively affect arbitral outcomes for advisory
clients. Others stated that the costs associated with
private adviser arbitration significantly exceed
the costs associated with broker arbitration, and,
in some instances, the high costs could preclude
advisory clients from filing arbitration claims at all.

Comparison with Broker Arbitration
A comparison of relevant rules in the FINRA Code
of Arbitration Procedure for Customer Disputes
(FINRA Code) supported stakeholder concerns
about the use of restrictive terms in advisory
agreement mandatory arbitration clauses. While
the FINRA Code applies uniformly to disputes
between customers and their brokers and governs
contractual provisions relating to mandatory
arbitration,78 advisers may choose the terms of their
respective mandatory arbitration clauses.
As noted above, six percent of SEC-registered
advisory agreements with mandatory arbitration
clauses included class action waivers, five percent
of agreements limited the types of claims that could
be asserted, and 11 percent limited the types of
damages that a client may seek in the arbitration.
In contrast, the FINRA Code prohibits usage of
class action waivers,79 prohibits language that limits
a party’s ability to file “any claim” in arbitration,80
and prohibits language that limits the ability of
arbitrators to make “any award.”81
Of the 60 percent of mandatory arbitration clauses
that designated a venue for the arbitration hearing,
97 percent designated a location that disregarded
the client’s location. In practice, clients could be
required to participate in an arbitration far from

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their place of residence, incurring travel and
lodging expenses to attend in-person hearings.
Under the FINRA Code, the default location
for the arbitration venue is generally the hearing
location nearest the customer’s residence at the time
of the events leading to the dispute.82
A notable percentage of advisory agreements
with mandatory arbitration clauses also imposed
requirements on the type and/or number of
arbitrators—e.g., requiring a panel of three
arbitrators, or requiring arbitrators to be
affiliated with the securities industry. Because
each arbitrator is compensated separately, a panel
of three arbitrators would predictably increase
the cost associated with the arbitration. Several
stakeholders also suggested that arbitrators with
securities industry ties might be biased in favor of
advisers. By comparison, the FINRA rules require
panels to consist of a single arbitrator, unless the
claim amount exceeds $100,000, or the parties
jointly agree to a three-arbitrator panel.83 In cases
with one arbitrator, the FINRA Code requires the
selection of a public arbitrator, unaffiliated with
the securities industry, to preside over the dispute.84
In cases with three arbitrators, the FINRA Code
guarantees parties the ability to select a panel of all
public arbitrators.85
Although arbitrators in FINRA DRS are not
required to write opinions or provide explanations
for an award, arbitrator awards must be in
writing.86 In contrast, many advisory agreements
included provisions that prohibited arbitrators
from providing written awards.
Staff’s review also supported the notion that costs
of adviser arbitration generally exceed those of
broker arbitration. For instance, the frequent
designation of commercial, or business-to-business,
arbitration rules result in higher initial filing fees
and other expenses for clients, potentially making

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the filing of a claim cost-prohibitive. Conversely,
as noted above, the FINRA Code of Arbitration
Procedure for Customer Disputes governs all
disputes between brokers and their customers. In
FINRA DRS, initial filings fees range from $50
(for matters valued up to $1,000) to a maximum
of $2,300 (for matters valued over $5,000,000).87
By comparison, under the AAA Commercial
Arbitration Rules, clients bringing a matter valued
at $75,000 or less must pay an initial filing fee
of $925 if the panel consists of one arbitrator.88
AAA commercial arbitrations with three or more
arbitrators are subject to a minimum initial filing
fee of $4,400.89 In many instances, this filing fee
alone might prevent clients from bringing claims
against their advisers.

RECOMMENDATIONS AND
CONCLUSIONS
Recommendations Regarding the
Use of Restrictive Terms in Mandatory
Arbitration Clauses
Based on Staff estimates, most investment
advisory agreements contain mandatory
arbitration clauses, and some contain restrictive
terms that could drive up the costs of arbitration
for advisory clients, and/or negatively affect the
arbitration process or arbitration outcomes for
advisory clients. Table 3 reflects the approximate
frequency with which such terms are included in
advisory agreements.
We note that the Investment Advisers Act of 1940
(Advisers Act) establishes a federal fiduciary duty
for investment advisers, fundamental to advisers’
relationships with their clients.90 An investment
adviser’s fiduciary duty comprises a duty of care
and a duty of loyalty, which require an adviser
to, at all times, act in the best interests of the
client, and prohibit an adviser from placing its
own interests ahead of the client’s interests.91
The adviser’s fiduciary duty is broad and applies

to the entire relationship between the adviser
and its client.92 It “follows the contours of the
relationship between the adviser and its client,
and the adviser and its client may shape that
relationship by agreement, provided that there is
full and fair disclosure and informed consent.”93
The fiduciary duty is enforceable through the
antifraud provisions of the Advisers Act, which
generally prohibit an adviser from “engaging in any
transaction, practice, or course of business which
operates as a fraud or deceit upon any client or
prospective client.”94
The Commission has made clear that, while
an adviser’s fiduciary duty may be shaped by
agreement, the duty may not be waived.95 The
Commission has additionally stated that, where
certain clauses in retail advisory agreements
purport to relieve an adviser from liability for
nonwaivable claims, such clauses are likely to
mislead retail clients into not exercising their legal
rights in violation of the Advisers Act antifraud
provisions.96 Recently, the Commission found
that an adviser willfully violated the Advisers Act
antifraud provisions by including such a “hedge”
clause in its advisory agreement. 97 In so finding,
the Commission noted the adviser had no policies
and procedures to assess a client’s sophistication
in the law or to explain the meaning of the clause,
provided no enhanced disclosures regarding when
a client may retain a right of action, and offered no
evidence that the clause would be understood by
retail clients.98
In similar manner, it is the view of the Office
of the Investor Advocate that if an adviser
includes language in an advisory agreement
preemptively limiting the damages available
to clients in arbitration, or limiting the types
of claims that clients may assert against the
adviser in an arbitration, such limiting language
might mislead retail clients into not exercising

their legal rights and would constitute a breach
of the adviser’s fiduciary duty in violation of
the antifraud provisions of the Advisers Act.99
We further believe that contractual provisions
precluding clients from participating in class
action lawsuits, designating an arbitration venue
without regard to a client’s physical location,
invoking commercial arbitration rules intended
for business-to-business disputes, and/or imposing
fee shifting provisions that unilaterally impose
the costs and fees of an arbitration on the client
have the obvious and likely intended effect
of increasing the cost and inconvenience of
arbitration for advisory clients. It is therefore also
our view that, where such provisions are included
in an advisory agreement, absent evidence the
adviser has made effort to gauge whether the
client understands these provisions and the client
has provided informed consent, the adviser is
placing its interests ahead of the client’s interests
in violation of the fiduciary duty.

Recommendations Regarding Disclosure
of Arbitration-Related Information
An absence of information prevented Staff from
generating reliable statistics about the frequency of
SEC-registered adviser arbitration or the number
of unpaid arbitration awards. This absence of
information is attributable to: (1) a lack of express
arbitration-related disclosure requirements for
SEC-registered advisers; and (2) the privatized
nature of adviser arbitration. Both factors interact
to obscure SEC-registered investment advisers’
arbitration-related information from the view of
investors and regulators, as described below.
State-registered advisers and individual
adviser representatives are required to disclose
their involvement in certain types of client
arbitrations in standardized disclosure forms.100
By comparison, SEC-registered advisers are not
specifically required to disclose information about

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arbitrations with clients; rather an adviser must
only disclose facts it deems material to the advisory
relationship.101 The Commission previously
considered whether to require advisers to disclose
arbitration information in their Forms ADV,
but determined not to require such disclosure,
as arbitration settlements or awards might not
reflect a finding that an adviser had violated the
law, and disclosure might cause unwarranted
reputational harm to the adviser.102 However,
the Commission suggested that advisers should
“carefully consider whether particular arbitration
awards or settlements do, in fact, involve or
implicate wrongdoing and/or reflect on the
integrity of the adviser, and should be disclosed to
clients in the brochure or through other means.”103
The Commission also stated it would “continue to
assess whether we should require that these events
be reported by firms registered with us.”104
It is the view of the Investor Advocate’s Office that
an adviser’s involvement in a client arbitration
is often material to the advisory relationship
and should be a requisite disclosure in certain
circumstances. We note that the Commission’s
prior concerns about reputational harms arising
from arbitration-related disclosures would apply
equally to state-registered advisers, investment
adviser representatives, and brokers, all of which
are required to disclose certain arbitrationrelated information. We therefore believe that
SEC-registered advisers should similarly disclose
this information. We further believe that, to the
extent practicable, arbitration-related disclosures
should be harmonized across adviser types
to decrease investor confusion and promote
regulatory clarity.
We further note, however, that the privatized
nature of adviser arbitration poses a significant
obstacle in any attempt to assess the truth or
falsity of advisers’ arbitration-related disclosures.

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As illustrated in Table 3, advisers often choose to
arbitrate with clients in private dispute resolution
fora such as AAA and JAMS. The SEC lacks
jurisdiction over these private fora, and therefore
cannot easily obtain information with which to
confirm the existence or outcome of an adviser’s
arbitration. These fora also do not aggregate or
otherwise make publicly available information
about adviser arbitration. In the absence of this
information, regulators would ostensibly need to
rely on the integrity of an adviser’s arbitrationrelated self-disclosures to determine whether the
adviser satisfied its disclosure obligations.

Conclusions
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A0ef9409e08d24acc. Public record. Not legal advice.