I understand today’s agenda includes two panel discussions and a discussion of a potential Committee recommendation regarding digital engagement practices.
We live in an historic, transformational age regarding predictive data analytics and the use of artificial intelligence. As we further automate pattern recognition and parts of human intelligence itself, this can create great efficiencies across the economy.
Today’s predictive data analytics models also provide an increasing ability to make predictions about each of us as individuals. Such analytics and narrowcasting have the potential benefits of greater financial inclusion and enhanced user experience.
This also raises the possibilities that conflicts may arise to the extent, for example, that advisers or broker-dealers are optimizing to place their interests ahead of their investors’ interests. If a firm’s optimization function takes the interest of the firm into consideration as well as the interest of the investor, this can lead to conflicts of interest.
In July, we put out a proposal to require firms to analyze conflicts of interest that may emerge when using predictive data analytics to interact with investors. Firms would need to identify any such conflicts that result in an investor interaction that places the firm’s interests ahead of investors’ interests. Firms then would need to eliminate or neutralize the effects of those conflicts.
The point of the proposal is to help ensure that, in their use of covered technologies, firms don’t place their interests ahead of investors’ interests. This is the same standard that we apply already under Regulation Best Interest (Reg BI) to brokers when they make recommendations to retail investors or to advisers—under our interpretation of fiduciary duty under the Investment Advisers Act of 1940—when they provide investment advice.
I would note that under those current rules and interpretation, brokers and advisers cannot address these conflicts of interest through disclosure alone. There still is an obligation to act in an investor’s best interest, and not to place the broker or adviser’s interests ahead of the investor’s interests, even after the conflict has been disclosed.
We have received a lot of feedback on this proposal, and we benefit from that public feedback. I look forward to the feedback the Committee may share today.
Turning to your first panel, financial literacy is such an important topic. Whether it relates to a loan, a mortgage, credit standards, and beyond, financial literacy is critical for investors’ ability to build a secure financial future. I look forward to the Committee’s thoughts regarding ways to enhance financial literacy.
With respect to your second panel, the use of complex products and strategies can present unique risks to investors, including self-directed investors. These complex products often are those that embed leverage into them. Investing in these complex products may create exposures for investors that in many ways resemble buying shares on margin, shorting a stock, or trading in options.
It is important that investors understand the nature and extent of the risks they may take on when investing in complex products. That requires an educated investor.
These remarks were delivered on December 7, 2023, by Gary Gensler, chair of the U.S. Securities and Exchange Commission, before the SEC’s Investor Advisory Committee in Washington, D.C.