Remarks at Meeting of the SEC Investor Advisory Committee
Washington D.C.
Dec. 7, 2023
Thank you, Christopher [Mirabile]. Good morning and thank you to our assembled Committee members and panelists for your participation in this last gathering of the Investor Advisory Committee for 2023. I appreciate the Committee’s hard work this year. Today’s agenda is an appropriate culmination of that work.
I hope today’s panel on financial literacy sparks a wider discussion on how we can do a better job preparing investors for each stage of their investing lives. The Commission’s staff from the Office of Investor Education and Advocacy, the Investor Advocate’s office, and across the Commission excel in their educational outreach efforts, but we are just one agency. Opportunities for others in the private and public sectors to contribute to these efforts abound. Investors armed with solid financial education can take charge of their financial futures with confidence and pass their learning on to their friends and family.
Well-educated investors are able to ask the right questions about complex investment products and strategies, the topic of the second panel. The Commission’s current disclosure regime for complex products leaves room for improvement, and technology offers some promising solutions. What can the Commission do to facilitate financial intermediaries’ ability to use these technologies to enhance the investor experience and investor comprehension of simple and complex products and services? Given that the panel will focus specifically on self-directed investors, how can we ensure that we do not—in the name of investor protection—stop investors from making decisions for themselves? To that end, rough generalizations about newer investors and their investment decisions[1] have the potential to divert our investor-protection efforts down an unwise path that could result in limiting investment options and intruding on investor autonomy. Again, the best thing we can do for investors is to provide them with sound basic financial education, a healthy dose of skepticism, and the confidence to ask questions.
Finally, the Committee will discuss a draft recommendation concerning the Commission’s recent digital engagement practices proposal for investment advisers and broker-dealers. This proposal’s breadth, which the draft highlights, took most observers by surprise. The draft recommendation suggests that the rule as proposed is immeasurably broad,[2] opaque, and burdensome as to likely application,[3] and arguably unnecessary.[4] The draft notes the proposal’s “potential adverse impact on investors,” including because of potential effects on “[r]obo-advisers [which] have generally been helpful in automating investment services and assisting cost-conscious and relatively underserved investors who are unable to receive traditional wealth management services.”[5] Given the investor interests at stake, I look forward to the contribution that today’s discussion and the final recommendation will provide as the Commission ponders next steps.
The draft recommendation offers many topics for discussion, but I have several additional questions. Should we put the rule on hold until we can conduct investor outreach? Would guidance suffice to clarify the application of existing rules to certain digital engagement practices? What would an appropriately narrowed rule look like?
Thank you all once more for your willingness to dedicate so much of your time and passion to the Investor Advisory Committee. I also wish to thank Cristina Martin-Firvida, Marc Sharma, Toni Tornatore, and Adam Anicich for their work in making today’s meeting the success I know it will be. I very much look forward to the discussions to come.
[1] See, e.g., Draft Recommendation of the SEC Investor Advisory Committee’s Disclosure Subcommittee Regarding Digital Engagement Practices at 2 (“Newer investors typically have lower incomes and come from racially and ethnically diverse backgrounds. These investors often lack direct investment experience and access to professional advice, which creates opportunities for firms using DEPs to shape investor behavior in ways that may not be in the investors’ best interest. For example, data shows that in recent years young black Americans often begin investing through high-risk cryptocurrency investments in reaction to targeted marketing by well-known athletes and celebrities. According to a 2022 Ariel-Charles Schwab survey, nearly 23% of black investors under 40 indicated that their first investment was in cryptocurrency.”) https://www.sec.gov/files/20231117-recommendation-use-dep.pdf. (“Draft Recommendation”) (Internal citation markings removed.)
[2] See, e.g., Draft Recommendation at 6 (“In the proposal, the definition of ‘covered technology’ could be construed to cover practically any forward-looking use of advanced technology, theory, correlation analysis, or other technique in the context of an investor interaction and, by the PDA Rule Proposal’s own admission could even include internal analyses compiled on Excel spreadsheets.”).
[3] See, e.g., Draft Recommendation at 11 (“[T]he definition does not actually require a conflict, just consideration of a firm’s own interests. This is in contrast to the traditional definition of conflict of interest which requires a firm to place its interest ahead of its customers or clients. The evaluation requirement would be burdensome in light of the fact that it is fair to assume that a broker-dealer or adviser would not employ a technological tool that did not somehow advance its interest, whether it be for efficiency and cost reduction or other reasons. Under the PDA Rule Proposal, firms may conclude they are required to inventory, test, and monitor all technology, including tools and technologies that have been used without meaningful concerns for decades.”) and 14-15 (“The Commission should distinguish educational DEPs from the types of DEPs that raise investor protection concerns. To the extent educational DEPs are not designed to prompt trading activities, they do not raise investor protection concerns. Additionally, many firms use digital means to market their offerings and such advertising and offering materials should not constitute recommendations. The SEC and FINRA have taken the position that simply distributing advertising and offering materials generally does not constitute making a recommendation.”).
[4] See, e.g., Draft Recommendation at 8 (“The IAC understands and acknowledges the new, inherently opaque, and powerful potential for AI and machine-learning driven PDAs to undermine investor interests and widely propagate subtle conflicts of interests. And we understand and acknowledge the need for a careful and conservative approach to the regulation of these PDAs, including their use with DEPs. However, we still see the potential for elegance and efficiency in trying to address these technologies via modification and expansion of the existing rules, as contrasted with creating a whole separate and parallel set of rules.”).
[5] Draft Recommendation at 8-9 (citation omitted).