Regulatory Challenges in Financial Education Professor Howell E. Jackson Harvard Law School How to Increase the Effectiveness of Financial Education: Lessons from Economics and Psychology Dartmouth College October 17, 2005

Outline The Basic Investor-Issuer Relationship The Problem of Financial Intermediaries An Array of Regulatory Options

Issuer Individual Investor

Issuer Individual Investor Trading Market

Issuer Individual Investor Trading Market Professional 1.Security at Market Price 2.Execution Services 3.Advice on Transaction

The Trilateral Dilemma Financial Professional Consumer Financial Product Service Provider A Service Provider B Service Provider C Service Provider D Service Provider E

The Real Estate Settlement Transaction Real Estate Professional Home Purchase Consumer 2.) Paid by Consumer Settlement Service Provider E 1.) Selected by Market Professional 3.) Side Payment to Market Professional Legal Structure Proposed Price Controls RESPA in 1974 Kickbacks Prohibited HUD-1 Disclosure Civil Liability Some HUD Safeharbors

Investment Managers and Excessive Commissions Investment Manager Investor Portfolio of Securities Brokerage Firm 1.) Selected by Investment Manager 2.) Brokerage Commission Paid by Investor 3.) Side Payment To Investment Manager Legal Structure Litigation for Fraud 1975 Amendments Disclosure 28(e) Safe Harbor Soft Dollar Practices

Banks and Consumer Privacy Bank Banking Services Tele- Marketer 1.) Delivery of Private Customer Information Customers 2.) Purchase of Products by Consumers 3.) Side Payment To Bank Legal Structure Some Written Consent G-L-B Act of 1999 Mandatory Notice Opt-Out Right Affiliate exemption

401(k) Plans and Excessive Fees Corporate Sponsor 401(k) Plan 401(k) Plan Provider 1.) Selected by Corporate Sponsor Employees 2.) Plan Fees Paid by Employees 3.) Benefits To Employer/Sponsor Legal Structure Fiduciary Duties “Exclusive Benefit” Reasonableness 404(c) Safe Harbor Limited Information Range of Choices Third Party Advice Employer Stock Rules

An Array of Regulatory Options Disclosure –Materiality of Terms –Common Format Opt Out/Opt In Fiduciary Duties –General –With Safeharbors –Affiliate Exemptions Mandated Segregation of Functions –Chinese Walls –Third Party Providers Price Regulation –Reasonableness –Rate Regulation Prohibitions

Regulatory Challenges in Financial Education Professor Howell E. Jackson Harvard Law School How to Increase the Effectiveness of Financial Education: Lessons from Economics and Psychology Dartmouth College October 17, 2005