Protecting and Respecting Investors: Remarks at Meeting of the SEC Investor Advisory Committee

Thank you, Brian [Schorr]. Congratulations on your debut as IAC Chairman. Congratulations to Colleen [Honigsberg] for taking on the role of Committee Secretary. I look forward to working with you in your new roles and appreciate your willingness to take on the responsibilities that come with the positions. Thank you to all IAC members for volunteering your time and energy to the Committee, and thanks also to today's panelists.

An overarching theme to today's agenda is the prominence of technology in the investing experience. An investor needs nothing more than her phone to research and purchase securities, engage with a financial adviser, and manage her portfolio. As today's discussions will highlight, these technological advancements bring challenges to investors, markets, and regulators. Let us not, however, lose sight of the benefits. A new generation of young retail investors is participating in our markets due almost entirely to the barrier-breaking functionalities that new technologies provide. A crucial variable in a successful investing life is time. The sorts of technologies that today's panels will address can facilitate long-horizon investment. By appealing to a younger demographic and facilitating early access, they provide new investors with the time they need to trip and fall and get back up a little savvier with plenty of runway left to put hard-won lessons into practice.

The first panel, "Examining the New Frontier for Investment Advice," will discuss social media as a source of investment advice. Regardless of where an investor gets her advice, the age-old defense against fraud applies: do your homework and be skeptical. The young people using social media for investment advice often do just that. Stigmatizing or inhibiting how newer, younger investors receive, share, and process information about investing will not halt securities fraud, but it may discourage those investors from participating in and benefiting from our capital markets.

We should celebrate young investors' initiative in embracing new tools to start investing early, respect their right to approach investing through what may appear to us unconventional means, and encourage them to demand the information they need to make informed decisions. We should not try to guard against fraud by choking off technologies that have benefited and could continue to benefit investors. We should look for ways those new technologies can bring more investors into our markets. Our response to traditional boiler rooms is not to blame the telephone and seek out ways to limit its use, nor should that be our go-to solution when confronted by abusive practices perpetrated using social media or trading apps. To the contrary, as the investor education draft recommendation suggests, we should communicate with investors using those new tools. Educating investors and punishing unscrupulous brokers and advisers is the answer, not inhibiting innovation.

Today's second panel on artificial intelligence is also sure to be interesting. The technology has been around longer than popularly believed but has become a frequent front-page story in the last year. As I suggested in a recent speech, we at the Commission need to take a breath and focus on providing clarity to market participants rather than embarking on a more aggressive agenda that seeks to stifle AI.[1] The Commission and Commission staff should engage with industry to assist new adapters in meeting their existing regulatory obligations to protect investors while allowing them to use AI to serve investors. We need to be open to providing exemptive relief. Of course, more difficult questions might lead us to consider regulatory changes, but we should not rush into rule-writing without carefully identifying a problem that the rule is intended to solve. How can the Commission reject its tendency for hidebound rigidity and create an environment in which innovators can flourish while remaining agnostic as to which innovations and innovators succeed? You can help us think through that question.

In the afternoon, the Committee also will discuss two draft recommendations, one on self-directed investors[2] and another on financial literacy.[3] A desire to ensure that investors receive the information they need to make sound investment decisions unites the two recommendations. The Commission and its Offices of Investor Education and Advocacy and the Investor Advocate are committed to empowering investors to make good decisions, but we can always do more. I commend the Committee for allocating substantial time to discuss each draft recommendation. I have several questions for your consideration during these discussions:

1. The draft recommendation regarding self-directed investors would increase requirements on firms serving these investors. Would these proposed prescriptions deter firms from making certain products and strategies available to self-directed investors? Similarly, is requiring firms to make a best-interest determination for products they determine to be complex an indirect way of preventing self-directed investors from accessing any products other than plain vanilla products? If so, how does that result accord with the fundamental American principle that every individual should be free to make decisions for herself? Self-directed investing, even if it comes with risks, is a manifestation of this freedom.
2. Would anything in the draft recommendation on self-directed investing discourage firms' existing efforts to make educational resources available to investors? Sometimes regulatory mandates or even nudges can undermine effective voluntary initiatives.
3. I appreciate the second draft recommendation's focus on high school financial literacy education. I have had the chance to visit some high schools in my role as a Commissioner. Yet, I think we need to start earlier. What do you think?
4. The second draft recommendation would have us require that regulated firms direct investors to SEC educational materials.[4] While I agree that SEC materials are helpful and we should do a better job promoting them, I do not want to discourage firms, which are often closer to market happenings, from developing their own materials tailored to their customers. These firms often spend considerable resources and use great creativity in educating their customers. Has the Committee considered whether its draft recommendation might discourage firms from creating their own educational materials?

Thank you, and I look forward to today's discussions.