Technology-Driven Change and Investor Protection: Remarks at the Investor Advisory Committee Meeting

Good morning and thank you to all of the members of the Committee for your time and input today.[1]

I’d like to extend a warm welcome to Brian Schorr, the Committee’s new Chair.

The democratization of finance, the rise of self-directed investing, much faster execution of trades, and the emergence of AI technologies will all continue to have ramifications for our capital markets and for millions of retail investors in our country.

A key question the Commission will necessarily confront is: how can we achieve the highest level of investor protection in the face of technology-driven change?

Some of the trends behind this key question are easy to spot today:

• 58% of U.S. households owned stocks in 2022, with investors of color entering the market at a faster pace than White investors.
• 60% of investors under 35 years of age are getting investing information from social media.

The most popular investing social media financial influencers, or “finfluencers,” have millions of followers and earn millions of dollars from advertisements, sponsorships, and membership and consulting fees.

The discussion today around the rise of social media in investing will help inform the Commission’s ongoing investor protection work.

• What attracts retail investors to these influencers?
• Do these influencers play a similar role to media personalities who in prior decades would write newsletters or books, or appear on TV, but now reach a larger audience through social media platforms?
• Are there conflicts of interest, transparency, or investor protection concerns that have a direct impact on investors?
• If so, what are the Committee’s recommendations for meaningfully addressing these concerns?

Many retail investors are moving away from the more traditional model of relying on professional advisers to process complex financial information and to make investment decisions.

In fact, a majority of new investors are self-directed and, in the future, could find themselves more inclined to rely on social media and AI-generated news and analysis.

In light of these trends, the Committee’s draft recommendations on ways to bolster investor education and improve financial literacy, including increasing the availability and usefulness of the Commission’s own educational resources, are a good starting point for further discussion.

I’m a firm believer in the idea that the Commission can always do more to expand the reach of our investor protection resources to as many retail investors as possible.

It is also good to see the Committee address how best to protect self-directed investors when trading complex products and using complex strategies.

FINRA’s account approval process for options trading was created in a different era, when retail investors relied more heavily on the expertise of financial professionals. In light of today’s market realities, this approval process needs to be revisited for appropriate investor protection updates.

It stands to reason that brokers should be required to determine that options trading is in a client’s best interest before providing account authorization to do so. This standard should apply to all complex products such as leveraged and inverse exchange traded funds.

As regulators, and to best serve the public interest, we have an obligation to keep up with the times. We must ensure that technological innovation, which holds potential for benefiting retail investors, does not lead us to lose sight of our investor protection mission.

Finally, with AI dominating headlines, the Committee will also be discussing how this emerging technology affects existing regulation. I appreciate the Committee’s attention to this issue.

As AI technologies evolve and mature, we will need to stay abreast of any potential risks that they may give rise to.

Today’s panel will hopefully foster a better understanding of the types of standardized frameworks, governance, and risk management practices worth considering when deploying AI tools.

There’s so much to discuss in this rapidly evolving area and I look forward to learning from your discussions.

Thank you again for your service and for your contributions to today’s panels.