Prepared Remarks before the Investor Advisory Committee
Washington, D.C.
March 7, 2024
Good morning. I am pleased to speak with the Investor Advisory Committee (IAC). As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.
I’d like to start by thanking the five IAC members whose terms expire in May: Christopher Mirabile, Cien Asoera, Ted Daniels, Elissa Germaine, and Lori Lucas. I greatly appreciate your work in support of the Commission’s investor protection mission.
I understand today you will discuss equity market structure rules, the definition of materiality, and a recommendation regarding digital engagement practices.
First, as it relates to equity markets, we finalized a rule to shorten the settlement cycle to one day for most broker-dealer transactions, including equity trades.
In fact, in 2015, when the settlement cycle was still three days, the IAC recommended shortening the settlement cycle to one day.[1]
I’m happy to say that in just a few months, after Memorial Day weekend, we will achieve that goal.[2]
Time is money. Time is risk.
For everyday investors who sell their stock on a Monday, they will get their money on Tuesday.
Second, just yesterday, we updated a 24-year-old rule, known as Rule 605, on disclosure of order execution quality.[3] It will improve transparency for execution quality and facilitate investors’ ability to compare brokers, thereby enhancing competition in our markets.
Third, we have a proposal updating key features with regard to the National Market System. This includes minimum pricing increments for quoting and trading, access fees, and round lot order sizes.[4]
Fourth we proposed that the Commission adopt a best execution standard for broker dealers—in essence, that broker-dealers seek the best execution for customers when they buy or sell securities. This rule would cover all sectors of the securities markets, including equity, fixed-income, and crypto asset securities.[5]
Fifth, we put out a proposal to bring greater competition for a segment of the market related to individual investors’ marketable orders.[6]
Lastly, on my most recent birthday, we proposed a rule regarding exchanges’ volume-based rebates and fees.[7]
As to your second topic, this year is the 25th anniversary of Staff Accounting Bulletin 99 – Materiality. It’s also the 90th anniversary of the SEC.
Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called “complete and truthful disclosure.”
At the SEC, as I said in my confirmation hearing, I am guided by materiality as it relates to disclosure requirements under the federal securities laws.
Just yesterday, the Commission adopted final rules to mandate climate risk disclosures by public companies and in public offerings. Consistent with this agency’s disclosure rules over the decades, these final rules are grounded in materiality.
Materiality represents a fundamental building block of the disclosure requirements under the federal securities laws. The Supreme Court articulated the meaning of materiality in cases in the 1970s and 1980s.[8] It is this standard of materiality that is reflected in Commission rules.[9] It is this same materiality standard that appears in numerous disclosure rules governing registration statements and public company annual reports.[10] It is this same materiality standard that is used throughout the final rules we adopted yesterday.
I would note that materiality also has been incorporated in many international disclosure standards. For instance, it has been integrated throughout the International Sustainability Standards Board’s recently adopted sustainability and climate-related disclosure standards.[11] This applies as well to the required greenhouse gas emissions disclosures under those standards.
Finally, you will consider recommendations on digital engagement practices.
In finance, predictive data analytics has potential benefits of greater financial inclusion and enhanced user experience. It already has fueled a rapid change in the field of robo-advisers and brokerage apps.
AI also can also raise issues if the optimization function in the AI system is taking the interest of the platform into consideration as well as the interest of the customer. This can lead to conflicts of interest. In finance, when brokers or advisers act on those conflicts and optimize to place their interests ahead of their investors’ interests, investors may suffer financial harm.
That’s why the SEC proposed a rule last year regarding how best to address such potential conflicts across the range of investor interactions.[12]
Thank you.
[1] See Investor Advisory Committee, “Recommendation of the Investor Advisory Committee:
Shortening the Trade Settlement Cycle in U.S. Financial Markets” (Feb. 12, 2015), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/settlement-cycle-recommendation-final.pdf.
[2] See Securities and Exchange Commission, “SEC Finalizes Rules to Reduce Risks in Clearance and Settlement” (Feb. 15, 2023), available at https://www.sec.gov/news/press-release/2023-29.
[3] See Securities and Exchange Commission, “SEC Adopts Amendments to Enhance Disclosure of Order Execution Information” (March 6, 2024), available at https://www.sec.gov/news/press-release/2024-32.
[4] See Securities and Exchange Commission, “SEC Proposes Rules to Amend Minimum Pricing Increments and Access Fee Caps and to Enhance the Transparency of Better Priced Orders” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-224.
[5] See Securities and Exchange Commission, “SEC Proposes Regulation Best Execution” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-226.
[6] See Securities and Exchange Commission, “SEC Proposes Rule to Enhance Competition for Individual Investor Order Execution” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-225.
[7] See Securities and Exchange Commission, “SEC Proposes Rule to Address Volume-Based Exchange Transaction Pricing for NMS Stocks” (Oct. 18, 2023), available at https://www.sec.gov/news/press-release/2023-225.
[8] See Basic Inc. v. Levinson, 485 U.S. 224, 231, 232, and 240 (1988) (holding that information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision; and quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1977) to further explain that an omitted fact is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”)
[9] See 17 CFR 230.405 (defining the term “material”); 17 CFR 240.12b-2 (same).
[10] See, e.g., 17 CFR 229.101 (Description of business); 17 CFR 229.103 (Legal proceedings); 17 CFR 229.105 (Risk factors); 17 CFR 229.303 (MD&A). See also, e.g., 17 CFR 229.101(c)(2)(i) (requiring discussion of “[t]he material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries”); 17 CFR 229.101(h)(4)(x) (“Briefly describe the business and include, to the extent material to an understanding of the smaller reporting company . . . [c]osts and effects of compliance with environmental laws (federal, state and local) . . . .”); 17 CFR 229.103(c)(3) (requiring disclosure of “[a]dministrative or judicial proceedings (including proceedings which present in large degree the same issues) arising under any Federal, State, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment” if, among other things, “[s]uch proceeding is material to the business or financial condition of the registrant”); 17 CFR 230.405 (“The term material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.”); 17 CFR 240.12b-2 (same).
[11] See International Sustainability Board, “IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures” (June 26, 2023), available at https://www.ifrs.org/content/dam/ifrs/project/general-sustainability-related-disclosures/project-summary.pdf.
[12] See Securities and Exchange Commission, “SEC Proposes New Requirements to Address Risks to Investors From Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers” (July 26, 2023), available at https://www.sec.gov/news/press-release/2023-140.