Lieberman: Level The Playing Field For Small Investors

WASHINGTON – Governmental Affairs Committee Ranking Member Joe Lieberman, D-Conn., will introduce legislation next week to bring needed changes to the financial markets, specifically to protect and defend the interests of America’s small investors. The Small Investor Protection Act responds to changes in the market that have accompanied the growth in the number of individual investors, as well as concerns that the Securities and Exchange Commission has not in the past acted aggressively enough to protect the small investor’s interests.

“If enacted, my bill would go a long way towards reorienting the regulation of our financial markets to better address the needs of the small investors who have become such an integral part of our economy and for whom investments in the market have become such a large part of their economic security,” Lieberman said. “My legislation would help level the playing field for small investors.” The bill complements other reform efforts proposed in the wake of recent revelations that mutual funds permitted favored investors to engage in illegal trading practices. In the last two decades, Lieberman noted, the share of U.S. households owning mutual funds soared from less than 6% in 1980 to nearly 50% in 2002. The number of families owning stocks has increased 60% in the last fifteen years and, as of 2001, exceeded half of all families. Furthermore, he said individuals are increasingly taking responsibility for investing their own retirement money – a responsibility once frequently entrusted to professionals. Since 1983, the number of so-called “defined-benefit” pension plans has declined over 70%, while participation in 401(k) plans has been increasing – with 48 million current 401(k) holders. “Mutual fund investments are investments in the American dream,” Lieberman said. “They hold the nest eggs, the retirement savings, and the college funds for millions of America’s working families. The purpose of my legislation is to ensure that the interests of America’s small individual investors are protected and defended.” The proposal would: • Create a Division of the Investor – Wall Street’s representatives regularly meet with Securities and Exchange Commission staff to comment on new proposals, but the voice of the small investor has been harder to hear. Lieberman’s bill would create a new division to provide the small investor’s perspective on new rule and policy proposals, identify new issues of particular concern to small investors, and serve as a conduit for the concerns of outside advocates for small investors. • Establish an Office of Risk Assessment – The SEC needs to be more proactive in protecting the marketplace against fraud. SEC Chairman William Donaldson has announced creation of an Office of Risk Assessment to gather and analyze data on new trends and risks and to identify new areas of concern for the commission. To ensure the SEC continues this important function, Lieberman’s bill would provide legislative recognition to the office and institutionalize its responsibilities. • Require Consumer Research to Gauge Whether Disclosures Are Easily Understood by Consumers – Although the SEC has occasionally conducted consumer research, it does not routinely or systematically test its proposed disclosures to determine if they are likely to be understood by ordinary investors. Lieberman’s bill would require the commission to consider empirical consumer research to determine whether a proposed disclosure – including its wording, format, and the context in which it appears – is likely to improve the understanding of ordinary investors. • Require Investment Companies to Provide Brief, Easy-to-Understand Disclosures of Mutual Fund Characteristics – Too often, important details of a mutual fund purchase are lost among the pages and pages an investor receives from the investment company. Lieberman’s bill would require investment companies to provide a brief summary clearly outlining relevant characteristics of a mutual fund – such as expenses and risks associated with the fund and the degree to which the fund is diversified. Lieberman’s bill has the support of the Consumer Federation of America, Fund Democracy, Inc., Public Citizen’s Congress Watch, Consumer Action, and Consumers Union. Lieberman is also a co-sponsor of the Mutual Fund Transparency Act, S. 1812, introduced by Senators Peter Fitzgerald, R-Ill., and Daniel Akaka, D-Hi., and the Mutual Fund Investor Confidence Restoration Act, S.1971, introduced by Senators Jon Corzine, D-N.J., and Chris Dodd, D-Conn. Among other things, these two bills together bar late trading and discourage market timing; reform mutual fund governance rules to require that the chairman and 75% of board members of mutual fund companies be independent; require far more extensive disclosure of fund fees and expenses; and work to increase financial literacy.