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Understanding New and Emerging Technologies to Further Investors Interests

FinTech
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Monday, November 14, 2016, 6.38PM / SEC Chair Mary Jo White  

I want to welcome all of you to the SEC’s first Fintech Forum — both those of you in the auditorium in Washington and those watching online.

 

The rapid development of new platforms and technologies for financial services, which has been accompanied by tremendous growth in private investment and growing attention from regulators, makes this an ideal time to bring the relevant stakeholders together to discuss both the role of fintech in our securities markets today, and where it is headed. With global investment in fintech companies estimated to be over $19 billion last year,[1] it is safe to say that fintech is well on its way to playing an important role in the future of the securities industry.

 

And regulators have an obligation to understand, monitor, and — where appropriate — encourage such developments, while simultaneously being prepared to implement safeguards where necessary to protect investors and our markets.

 

Today’s forum is an excellent venue for considering all of these issues. Of course, an event of this magnitude with panelists of this caliber is not easy to produce. So, I want to begin by thanking our staff for their tremendous efforts in putting the Forum together, including Michael Batlogg, Sara Young, Bruce Claybrook, Amy Starr, Elizabeth Blase, Tina Barry, Dietrich King, the teams from the Office of Public Affairs and from Publishing and Printing, and our talented moderators. I also want to thank Commissioner Piwowar for suggesting that we hold the forum at this time. And I want to especially thank our distinguished panelists for coming here to share their important insights.

 

There is relatively widespread agreement that fintech innovations have the potential to transform key parts of the securities industry — and to do so in ways that could significantly benefit investors and our capital markets. Today’s forum focuses on several of these developments that are particularly important to the SEC.

  • Automated investing advice has the potential to give retail investors broader, and more affordable, access to our markets.
  • Distributed ledger technology could greatly simplify the trading, settlement and clearing processes, making transactions faster, more efficient, and less expensive.
  • Online marketplace lenders and crowdfunding portals are providing individuals and small businesses with new paths to access capital. 

It is important to foster an environment where potentially transformative innovations that make for safer, better markets can flourish. But, as the saying goes, with power comes responsibility. We must ensure new developments are not rushed to market or implemented in a way that facilitates a risk of fraud or harm to investors. Entrepreneurs should recognize that they are not only innovators, but also market participants with important duties and obligations. Although some may view regulatory compliance as a burden, the U.S. securities markets are the safest and most reliable in the world largely because of — not in spite of — our robust investor protections.

 

We, as regulators, also have an important responsibility — to evaluate how our existing rules address both the challenges and opportunities presented by these new technologies. At the Commission, we have been thinking carefully about the specific challenges presented by each of the areas being discussed today.

 

The last few years have seen rapid growth in the availability and popularity of automated investment advisory programs. Consistent with our mission, we have been considering how these so-called robo-advisers, as registered investment advisers, meet their fiduciary and other obligations under the Advisers Act. In particular, we are looking at how advisers that provide investment advice with limited, if any, human interaction: (1) provide appropriate disclosures so that their clients understand their services; and (2) obtain information to support their duty to provide suitable advice. We also are considering how automated-advisers are designing their compliance programs to address the particular challenges relevant to providing automated advice and how these firms safeguard client data and address business continuity in the event of a disruption.

 

In the area of blockchain, or distributed ledger, technology, our staff, including members from our Distributed Ledger Technology Working Group, are carefully evaluating when and how this technology will be on-boarded within the securities market. To the extent there are real benefits to participants in the financial services sector and their customers, especially to back-office functionality, we are considering whether this technology will obviate certain services and participants or, rather, be adopted into current infrastructures. We also are looking closely at how innovators will overcome challenges to the widespread adoption of distributed ledger technology, such as interoperability and scalability, and to what extent such systems will be permissioned. Another important concern is how innovators will address issues of cybersecurity and the safety of customer data and assets in a blockchain.

 

Significant excitement also surrounds the use of securities-based crowdfunding, which we hope will continue to fuel the development of a vibrant alternative for small businesses to raise capital from retail investors. To foster an ecosystem of growth, it is important that there be robust investor protection, and we are counting on brokers and funding portals to be active gatekeepers in this space.

 

In the online marketplace lending space, the Commission staff, uniquely among federal regulators, focuses on investor protection. One key challenge is the adequacy of the information available to investors to make informed investment decisions, such as information about the loans and borrowers underlying their investments, as well as the platform’s proprietary risk and lending models. As investors are drawn to potentially higher yielding but riskier marketplace loans, information about the borrower’s ability to repay the loan underlying the investment is critical. When it comes to these investors, innovation must be built upon a foundation of full and fair disclosure of material information, which is the bedrock of the federal securities laws.

 

The speed and impact of some of these developments heighten the need for the consideration of regulation to be both thorough and forward thinking. That is why I directed the creation of a fintech working group at the SEC earlier this year, which includes staff from across the agency to evaluate the emerging technologies. I have asked the group to focus on specific, tailored recommendations — after a careful and informed review, including incorporating insights from today’s forum — about what the SEC should do to provide clarity on existing regulatory requirements and help foster responsible innovation. Such recommendations could take several forms, including for providing staff guidance, concept releases, or proposed rulemaking, or they may simply call for, in part, improved communications about existing regulations and interpretations that are not widely understood among innovators. They may also confirm, at least in part, that our existing regulatory approach is already suitable to address new developments.

 

The working group will be soliciting additional input from investors, innovators, and the many other stakeholders in these new technologies. We are at the early phase, not the end, of our outreach. Today’s event is an important part of that process. And I welcome and encourage everyone’s continued engagement as we work to understand the new and emerging technologies to ensure that they work to further the interests of investors while building stronger, ever more innovative markets.

 

I look forward to today’s discussions, and I want to thank you again for coming and sharing your expertise and points of view. 

Footnotes

[1] See KPMG and CB Insights. The Pulse of Fintech, March 9, 2016  

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