Remarks at the IAA Investment Adviser Compliance Conference
Director, Division of Investment Management
March 3, 2022
Good morning. Thank you, Karen, for your kind introduction and for inviting me to speak today. I am delighted to join you for my first public address as the Director of the Division of Investment Management.
Let me begin, if I may, by making clear that my remarks today are my own and do not necessarily reflect the views of the Commission, the Commissioners, or the SEC staff.
Just over two months ago, I was both an academic and a student, studying the economic history of post-bellum America, a time when the country emerged from war to confront income inequality, concentrated wealth, and social and political upheaval, all while heading toward a global pandemic.
I’ve been tempted to wonder whether I can bring any of those learnings into my new job, but nothing dismayed my history professors more than anachronistic presentism and ahistorical comparisons among different eras. So I will leave the Gilded Age behind and focus instead on our own period of economic history: what Daniel Rogers calls the Age of Fracture and Jonathan Levy calls the Age of Chaos. “Fracture” and “chaos” certainly don’t sound like cheery adjectives, and those historians make some persuasive claims about the trials of our time.
But while I’m loath to contradict eminent scholars, I’m also mindful of another concept emphasized heavily in the study of history: contingency. What another historian, Joanne Freeman, defines as “the importance of remembering that people in the past were living in their present, unaware of future outcomes.” What we as participants in our economic life possess that historians don’t is an ability to change those future outcomes. The challenge for those of us living, advising, and regulating in a moment of profound innovation is finding ways to marry dynamism with integrity, and creativity with order.
Today, I would like to share thoughts about the tests posed by modern markets for the millions of Americans who face the task of navigating them.
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Fracture, to give Professor Rogers his due, isn’t hard to spot today. If we confine our conversation to investing, the most salient instance of fracture since 1978 might be the disintegration of large pension plans into millions of defined contribution accounts. The private pension plan is less common as an institution now, and much of the task of investing rests in the hands of individual Americans. Experience and data tell us they are going to need help, ideally from those with “the punctilio of an honor the most sensitive.”
Our asset management industry, and investment advisers in particular, provide essential assistance to clients seeking to navigate the markets. Approximately 46 million individuals currently receive services from registered investment advisers. Nearly 15,000 advisers report more than $110 trillion of regulatory assets under management. The assets in separately managed accounts and private funds have swollen to around $43 trillion and $18 trillion, respectively, and include individuals, institutions, governmental and private pension funds, and non-profit organizations. As a nation, we have a duty to ensure these investors – and their life savings – are protected, and that Americans receive the information they need to make sound investment decisions.
Another instance of financial fracture has occurred in the ecosystem of entities that provide services to advisers and their clients. Whereas advisers themselves once performed many of the functions necessary to run investments, today we see those tasks splintered into distinct index providers, valuation services, model providers, risk managers, data analysts, and many more.
So what, you might ask, isn’t specialization a good thing? Academics certainly don’t have much standing to complain about overspecialization. But I believe that if these service providers are not registered with the SEC, then their performance of critical responsibilities for advisers may constitute an unwelcome disintegration of important protections that could result in harm to investors.
Chaos, the second characterization of our time, theorized by Professor Levy, might be the bolder historical claim. Some would dispute his premise, arguing – to the contrary – that the market brings order to chaos, that prices distill and aggregate the knowledge of competing financial participants into orderly signals. Often, that’s true, but we have also endured moments of turmoil.
In the asset management industry, we have seen technology routinely disrupt the status quo. Since the introduction of the Designated Order Turnaround System to automatically route small orders at the New York Stock Exchange in 1976, and the claims that automated trading related to portfolio insurance contributed to the 1987 market crash, advisers have witnessed the growth of computerized modeling programs for portfolio management, and the subsequent rise of algorithms, high-frequency trading, alternative data sources, and artificial intelligence. The latest frontier involves a new type of digital asset whose value has been transferred to a blockchain. Ten years ago, I doubt many of us were familiar with the term “crypto asset,” yet now their advertisements seem ubiquitous, popping up on social media and anchoring our favorite sports games. I haven’t seen such a frisson of tech-inspired marketing since the twenty-one dot-com commercials of Super Bowl XXXIV in January 2000.
Of course, our past was hardly free from exuberant honeymoons for technology and finance. If you’ll allow me to return to post-bellum America again, the exciting new disruptive technology of the day was the railroad. And that story is, of course, a wonderful exemplar of union and order: who can forget the moment in 1869 when Leland Stanford drove home the golden spike in Promontory Summit, Utah, to join the transcontinental railroads spanning America from coast to coast?
Well, economic historians can, and they have strenuously challenged that benign memory. Richard White studied the archives of Leland Stanford himself to reveal a story of bloated railroads that rapidly overbuilt on the strength of hot money, rewarded politicians with douceurs of property along new routes to encourage the concession of thousands of miles of land grants, wrought environmental havoc on western lands and indigenous tribes, all while steaming toward widespread bankruptcy and government bailouts. In sum, more destruction than creativity in many ways. So perhaps even compelling, useful innovation can be oversold at first.
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What, then, can we do to address these challenges and to shape the history of our moment? These dynamics are large and affect all manner of American institutions, but let’s focus on those of us who are in the room: you, the members of a trade association that had its beginnings before the Advisers Act was created, and we the regulators. Our story actually begins together, as another economic historian can tell us.
Naomi Lamoreaux notes a key moment in American financial history that contributed to the concurrent rise of the modern regulatory state and interest-groups. When the overbuilding of public works in the 1840s contributed to a collapse in state finances, legislatures adopted substantial measures for reform. Chief among those was the displacement of bills passed for the benefit of specific individuals by bills enacting laws of general applicability. General laws are often manifestly more egalitarian than individualized legislative handouts, and they allow for participants within industries (such as yourselves) to come together to pursue collective goals, and for public servants (such as myself) to administer coherent bodies of law.
What laws of general applicability might ensure that a coherent and orderly market endures for American investors in the face of changes and innovation?
Certainly, any law that grants those investors a faithful ally in the difficult process of investing their money over a lifetime would be a great start. Happily, we have such a law for advisory firms, the Investment Advisers Act. Under federal law, an investment adviser is a fiduciary, owing its clients a duty of care and a duty of loyalty. The topic of serving as a fiduciary is covered at length on your agenda for this conference. The Act also provides registration and recordkeeping requirements and authorizes, among other things, the Commission to adopt rules reasonably designed to prevent fraudulent, deceptive, or manipulative practices.
In my first six weeks at the agency, the Commission published several Advisers Act rule proposals that directly impact investment advisers and take steps toward ensuring coherence and order. If adopted, I believe that the proposals would close gaps in information and enhance investor protections in light of industry developments. For example, new rules would prohibit certain practices by private fund advisers and require investment advisers and registered funds to adopt cybersecurity policies that include greater oversight of service providers.
Additionally, I am interested in considering ways to bring order to the new frontier of crypto assets and the expanding use of digital technology. For investment advisers, I am cognizant of questions about how providing advice regarding crypto assets impacts compliance with the Act, particularly aspects of the custody rule. The expanding opportunities to invest in securities directly using digital platforms, such as robo-advisers, online brokerages, and mobile investment apps and portals, also present challenges. I look forward to considering recommendations in light of the comments we have received in this area.
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I believe that the Commission’s involvement and engagement with the industry in each of these areas will be critical to promote a vibrant investment advisory industry and the economy at large. I also note that what we do exists within the broader context of the economy and its history. As a novice public servant, I am mindful of two theories in particular. First, the argument by Thomas Piketty that societies that tolerate profound economic inequality also court social unrest, but narrowing economic inequity can promote social stability. A robust regulatory regime that supports an informed investing populous is a strong way to create opportunities for economic equity. Second, the corollary of Daniel Rogers, that when individuals are isolated, social cohesion can disintegrate and social institutions can collapse. Investment advisers are the fulcrum in our economic machine; the critical pivot that connects individual investors to their financial destiny.
Let me offer a final story from history that illustrates the importance of making investment decisions and the potential long-lasting ramifications of those choices. Near my parents’ house in my home town of Midleton, County Cork, Ireland, stands an unlikely sculpture called Kindred Spirits: six twenty-foot eagle feathers made of stainless steel arranged into the shape of a bowl. The piece is an homage to the Choctaw Nation, who made a remarkable financial decision long ago.
The Choctaw were allies of the United States in the War of 1812, fighting with distinction alongside then-General Andrew Jackson at the Battle of New Orleans. Twenty years later, as president, that son of Irish immigrants forced the Choctaw off their lands and onto the Trail of Tears, along which more than half their members perished. A few years later, the Choctaw heard of a community on the other side of the ocean that was suffering from a famine that would claim almost a million lives. So with very little to give, the Choctaw pooled together $170 to send to Irish famine relief in 1847. The sculpture in Midleton was unveiled 170 years later, in 2017, to honor that $170 gift.
What else might the Choctaw have done with their money? If they had put those savings into an account and targeted 5.9 percent interest for 170 years, it could be worth millions today. Instead, they chose to give it away, to those in desperate need.
Soon after that sculpture was installed, COVID-19 broke out across the world and hit Native American communities particularly hard in 2020. So the Irish, no longer a people in deprivation, launched a charity drive to send money back to those tribes. It raised $3 million.
Or, if you prefer, a compound annual growth rate on $170 over 170 years of 5.9 percent.
I think of this story as a demonstration that decency and humanity have very long memories. And that the contingency of our investments today can ensure harmony and order in our country for many years to come. No matter what the historians tell us.
My ultimate goal as Division Director is to work toward a cohesive society with an order in which innovation and investment can flourish. I can’t think of a more worthy calling.
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I would like to end my remarks today by thanking the staff of the SEC’s Division of Investment Management. Every day, I’m impressed anew by their professionalism, expertise, and commitment to the agency’s mission, particularly in these extraordinarily challenging times. During my first days at the Commission, they worked tirelessly to brief me on a broad array of issues impacting the investments of millions of Americans, in addition to all of their regular work furthering the SEC’s mission.
In particular I want to highlight the 14 staff members in the Investment Adviser Rulemaking Office, who were involved in all of the rulemaking projects related to investment advisers that the Commission proposed this year, specifically Form PF, cyber security, and private fund advisers. I thank each of these dedicated public servants, and I am privileged to join them in this important work.
 The Securities and Exchange Commission (“SEC” or “Commission”) disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
 Daniel T. Rogers, Age of Fracture (2011).
 Jonathan Levy, Ages of American Capitalism: A History of the United States, 587 – 732 (2021).
 Joanne Freeman, I’m a Historian. I See Reason to Fear – And to Hope, The Atlantic, Aug. 17, 2020, available at https://www.theatlantic.com/ideas/archive/2020/08/historian-historic-times/615208/.
 Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928).
 Based on analysis of data reported on Form ADV through the Investment Adviser Registration Depository (IARD) system as of December 31, 2021. The data consist of assets that are reported by both advisers and sub-advisers, including mutual fund and ETF assets.
 Id. Separately managed accounts have approximately $43 trillion in regulatory assets under managements and private funds have approximately $18 trillion in gross assets.
 See Securities and Exchange Commission Historical Society, Transformation & Regulation: Equities Market Structure, 1934 to 2018, Automating the Exchanges, 1976-1995, available at https://www.sechistorical.org/museum/galleries/msr/msr03d_nyse.php#:~:text=The%20next%20year%2C%20SIAC%20began,in%20to%20operation%20in%201976.&text=In%20the%20mid%2D1970s%2C%20NYSE,exchange%20to%20adopt%20more%20technology; Kenneth G. Pringle, The Culprits of the 1987 Market Crash Remain a Mystery. What Lessons Can We Draw From It Now?, Barron’s, Oct. 13, 2021, available at https://www.barrons.com/articles/the-culprits-of-the-1987-market-crash-remain-a-mystery-what-lessons-can-we-draw-from-it-now-51634112900.
 Richard White, Railroaded: The Transcontinentals and the Making of Modern American (2011).
 Naomi R. Lamoreaux & John Joseph Wallis, Economic Crisis, General Laws, and the Mid-Nineteenth-Century Transformation of American Political Economy, Journal of the Early Republic, Vol. 41, No. 3, Fall 2021, at 403-433.
 See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Rel. No. IA-5248 (June 5, 2019), available at https://www.sec.gov/rules/interp/2019/ia-5248.pdf. See also SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963).
 See Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, Rel. No. 33-11028 (Feb. 9, 2022), available at https://www.sec.gov/rules/proposed/2022/33-11028.pdf; Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Rel. No. IA-5955 (Feb. 9, 2022), available at https://www.sec.gov/rules/proposed/2022/ia-5955.pdf; Amendments to Form PF to Require Current Reporting and Amend Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers, Rel. No. IA-5950, available at https://www.sec.gov/rules/proposed/2022/ia-5950.pdf.
 See, e.g., Division of Investment Management Staff in Consultation with FinHub Staff, Staff Statement on WY Division of Banking’s “NAL on Custody of Digital Assets and Qualified Custodian Status” (Nov. 9, 2020), available at https://www.sec.gov/news/public-statement/statement-im-finhub-wyoming-nal-custody-digital-assets. This statement represents Staff views and is not a rule, regulation, or statement of the Commission. The SEC has neither approved nor disapproved its content. SEC Staff statements have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.
 See Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology to Develop and Provide Investment Advice, Rel. No. 34-92766 (Aug. 27, 2021), available at https://www.sec.gov/rules/other/2021/34-92766.pdf.
 Thomas Picketty, transl. by Arthur Goldhammer, Capital in the Twenty-First Century (2014).
 See supra at n. 2.
 Thank you to the Investment Adviser Rulemaking Office team led by Sarah ten Siethoff: Melissa Gainor, Melissa Harke, Sirimal Mukerjee, Michael Neus, Christopher Staley, Christopher Chase, Matthew Cook, Juliet Han, Lawrence Pace, Alexis Palascak, Emily Rowland, Christine Schleppegrell, Tom Strumpf, Samuel Thomas.