Prepared Remarks Before the 2022 SEC Investor Advocacy Clinic Summit

Good morning. It is good to be with you today. As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff of the SEC.

I’d like to thank the SEC Office of the Investor Advocate and the SEC Retail Strategy Task Force for putting on today’s event. I’m glad to be here alongside folks from the Financial Industry Regulatory Authority (FINRA), the AARP, law school clinics from around the country, and my fellow SEC colleagues. I want to give an especially warm hello to all of the law students in the audience who have made the time to participate in investor advocacy clinics. Today’s summit features a great set of presentations and panels.

One of the pillars of the SEC’s mission is to protect investors. Fundamental to that pillar is the need to help all investors, including older Americans, guard against financial fraud. Our registrants have to comply with investor protections through specific duties — things like fiduciary duty, duty of care, duty of loyalty, best execution, and best interest.

The law school clinics participating in this Summit are important partners in our work. To provide a little history, in 1997, then-SEC Chairman Arthur Levitt announced an initiative to give small investors, dealing with fraud, an avenue to find excellent legal representation.

At the time, Chairman Levitt stated that “small investors get much-needed legal assistance, and students gain valuable learning experience.”[1]

He called the idea of these clinics a “win-win proposition.”[2]

To date, clinics like the ones you are involved with have formally represented hundreds of investors and recovered millions of dollars on their behalf.[3]

This summit affirms what Chairman Levitt understood so well: For investor advocacy clinics like yours, your wholesale involvement helps our agency protect investors.

Beyond your important work to represent small investors who have experienced fraud, we value your outreach and engagement efforts, too.

I want to thank all of the clinic-affiliated members of the audience for the work you do for your clients and for the perspective you provide to our agency.

Victims of fraud, far too often, are older adults. Some have retired, others have neared it, but all have spent decades preparing their nest eggs.

Today, the FBI estimates that older adults lose nearly $3 billion per year to financial scams.[4] The risk of fraud is growing for all of us, including older adults. We all are spending more time online, a change that is accelerating during the COVID pandemic.

We also are accessing financial services through and with new kinds of technologies—from robo-advisers and brokerage applications to cryptocurrency to adjusting to life conducted over video.

These changes have created new opportunities for scammers to confuse and defraud investors. This is an unfortunate challenge for people entering their golden years.

Our Division of Enforcement is the cop on the beat for matters like these. One example is affinity fraud, when bad actors target identifiable groups, such as veterans, ethnic communities, members of the same profession, or other groups, like older Americans. For example, just last week, the SEC successfully sued a party that had defrauded federal employees close to the retirement age.[5]

Another area of challenges that new technologies present is in relation to the use of digital engagement practices, including predictive data analytics, behavioral prompts, differential marketing, and differential pricing.

The question is, what are finance platforms optimizing for?

Are they solely optimizing for the investor’s benefits, including risk appetite and returns? Or are they also optimizing for other factors, including the revenues and performance of the platforms?

Economists typically recommend that older investors saving for retirement reduce their risk profile. What happens if the finance platform they use determines that the platform might earn more money for itself if it guides that investor toward a higher risk profile?

A related issue is bias, and how people — regardless of race, color, religion, national origin, sex, age, disability, and other factors — receive fair access and prices in the financial markets.

How can we help ensure that for older Americans, and for all Americans, new developments in predictive data analytics don’t reinforce societal inequities?

Finance platforms have to comply with investor protections through specific duties — things like fiduciary duty, duty of care, duty of loyalty, best execution, and best interest.[6]

To close existing gaps around investor protections, last fall, SEC staff issued a request for comment on digital engagement practices to inform the recommendations I’ve asked them to make for the Commission’s consideration.

Among the thoughtful comment letters we received were those from three law school clinics that are represented here today: the University of Miami, Pace University, and St. John’s University.[7] These comment letters provided an important perspective on digital engagement practices. All three reported seeing a sharp increase in the number of small investors seeking representation for claims related to the use of online platforms employing digital engagement practices.

They also commented based on their own experience, and their classmates’ experience, as young investors who largely invest through some form of digital platform.

Stepping back, I was pleased to see that the program today includes panels and presentations on topics that are central to our investor protection mission, including the valuable lessons you have to share about fraud prevention from your own case work; speculative investing, crypto assets and meme stocks; risks of options and margin trading; and the effects of gamification on investor behavior.

All of these topics are, in one way or another, directly implicated in the rules that we either have proposed already or have under consideration at the Commission.

These evolving innovations present new opportunities, but we must make sure that investors have the protections they need in place.

For example, currently, there are significant gaps in investor protection when it comes to the American public — including older Americans — buying, selling, or lending crypto assets.

In addition, older adults and retirees who have invested in complex exchange-traded products such as “leveraged exchange-traded products” and “inverse exchange-traded funds” may unknowingly have entrusted part of their nest eggs to financial products with elevated risks.

Lastly, under SEC rules, broker-dealers and investment advisers have an obligation to act in their customers’ best interests. Earlier this week, SEC staff released a Staff Bulletin related to the obligations of broker-dealers and investment advisers when making account recommendations to retail investors.[8]

Whether they’re investing in crypto or complex products, or whether they’re investing with a human adviser or a robo-adviser, investors deserve the safeguards of our time-tested securities laws.

Thank you and I’m happy to turn it over to the panel.