Remarks by Commissioner Peirce Before the Investor Advisory Committee

As we close out 2024, allow me a moment to thank you for sharing your time and your wisdom this last year.  I look forward to working with all of you next year, which is likely to be a particularly eventful year for both the Commission and the Investor Advisory Committee.

Thank you also to the panelists who are joining you today to discuss arbitration and alternative assets.  Last year, the Office of the Investor Advocate and the Office of the Ombuds published a report concerning the use of mandatory arbitration clauses by registered investment advisers.[1] Though inconclusive as to the effects of mandatory arbitration on advisory clients, the report suggested “establishing uniform disclosure requirements for adviser arbitration information.” [2]  A disclosure regime can morph into a prohibitory regime. Today’s discussion, therefore, should not lose sight of the importance of allowing investors and their advisers to choose binding arbitration to resolve disputes.  Freedom of contract is a bedrock principle. Submitting a dispute to arbitration is, in many instances, a cheaper and less burdensome process than litigation.  Moreover, as Professor Todd Zywicki has pointed out, “although [] contractual provisions to arbitrate disputes are initially agreed to by contract, [] a substantial body of common law regulation has been built up by courts to ensure that [arbitration processes] are fair and effective alternatives to lawsuits.” [3]

Today’s second panel will take up some of the many questions associated with increasing retail investor opportunities to invest in alternative assets.  For too long, misguided efforts to shield retail investors from risk have prevented them from directly accessing private market opportunities.  Exploring how retail investors can gain diversified exposure to alternative assets with professional advice through existing products, like ETFs, interval funds, BDCs, and closed-end funds is a worthy topic for the IAC.

The Committee also will consider draft recommendations concerning the protection of investors from so-called “finfluencers.”[4]  As the draft acknowledges, “[s]ome finfluencers assist . . .  investors in understanding complex financial information in clear and digestible social media content,”[5] but others are nothing more than a digital twist on the aging actors and gone-to-seed athletes found on any late-night cable channel fronting for a boiler room.  Today’s finfluencers may be talking about crypto on social media, but the concept is the same.  All investors should exercise good judgment, skepticism, and circumspection before putting their money at risk.  To that end, the Commission plays an important role in ensuring that investors have the information they need to make thoughtful decisions in step with their goals and risk tolerance.  The Commission has successfully brought enforcement actions against finfluencers for alleged securities law violations.[6]

The draft includes some useful recommendations for further action.  For example, the draft recommends that the Commission explore possible gaps in disclosure requirements, work with the Federal Trade Commission, make investors aware of finfluencer misconduct, and educate would-be finfluencers about the rules.[7]  But some aspects of the draft are much less compelling and raise numerous questions.  Is there really a regulatory gap to fill?  What is the scope of the recommendation?  For example, is the Committee recommending that we require all finfluencers register as investment advisers, or is it focusing only on finfluencers that are associated with investment advisers?  Has the Committee considered the draft recommendations, which seem to suggest that we have too much unregulated online speech, through a First Amendment lens?  Should the mere mention of one’s holdings in a Tweet really be proscribed because followers might buy those same securities?[8]  Should the SEC really require a person posting investment musings on a social media site to accompany such musings with “regulatory status, educational background and business experience of the finfluencer or lack thereof?”[9]  Should “social media posts give rise to Section 12 seller liability”?[10]  Does the SEC have the authority to demand information from social media platforms “to understand their controls for monitoring problematic finfluencers activities?”[11]  Even if it does have the authority to do so, couldn’t attempts to control social media platform content turn into censorship?  Would the recommendation to work to establish an international “baseline set of requirements that would apply to all finfluencers”[12] be wise in a world where other jurisdictions accept censorship that would be illegal in the United States?

As the draft recommendations acknowledge, social media and innovative technologies have fueled the welcome influx of new investors into our markets.[13]  Emphasis on the potential mischief that can be perpetrated on apps and social media sites ignores that these platforms also enable investors to learn from others’ experiences and be warned of dodgy products and untrustworthy voices.  If we want to serve these new investors, we should focus on upping our game and becoming a bigger presence online, rather than otherizing apps and platforms and infantilizing new investors.  One thing the Commission can do immediately is reinstate OIEA’s standalone social media accounts, which proved to be a very effective way to alert and inform investors.  We also could right our multi-year failure to elucidate clearly what a security is, rather than expecting musicians and athletes to become Howey experts before they tweet.

I am always ready to be persuaded, however, and look forward to all of today’s discussions.  I would like to thank Brian Schorr and the other members of the Committee for their dedication, as well as Cristina Martin Firvida, Marc Sharma, Andrew Sporkin, Adam Moore, and the countless others here at the Commission for their hard work in putting together today’s meeting.

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1U.S. Securities and Exchange Commission, Office of the Investor Advocate and Office of the Ombuds, Staff Study: Mandatory Arbitration among SEC-Registered Investment Advisers (June 2023), https://www.sec.gov/files/2023-oiad-ria-mandatory-arbitration-report.pdf.[/ref]

[ref no=2]Id. at 6.(go back)

3Todd Zywicki, Testimony of Professor Todd Zywicki Presented to The United States Senate Committee on Banking, Housing, and Urban Affairs “Examining Mandatory Arbitration in Financial Service Products,” at 3 (March 8, 2022) (“Litigation is expensive for both the parties and the public and arbitration and other alternative dispute resolution procedures have been recognized for decades as providing a mechanism for resolving disputes inexpensively and expeditiously. Moreover, although are [sic] contractual provisions to arbitrate disputes are initially agreed to by contract, the terms of arbitration processes a substantial body of common law regulation has been built up by courts to ensure that they are fair and effective alternatives to lawsuits, including ensuring the location is convenient, processes are not unduly expensive, and in many cases, consumers who prevail in arbitration can recover some minimum amount of damages that exceeds their actual out-of-pocket harm. The rapid adoption of virtual arbitration proceedings using video conferencing has further reduced the cost and increased the accessibility of arbitration.”), Arbitration Testimony.(go back)

4Recommendations of the Disclosure Subcommittee of the SEC Investor Advisory Committee regarding the Protection of Investors in their Interactions with Finfluencers (Nov. 22, 2024), https://www.sec.gov/files/sec-iac-finfluencer-recommendation-11222024.pdf. (“Draft Recommendations”)(go back)

5Draft Recommendations at 9.(go back)

6See, e.g., Kimberly Kardashian, Securities Act Release No. 11116 (Oct. 3, 2022); Paul Anthony Pierce, Securities Act Release No. 11157 (Feb. 17, 2023); Floyd Mayweather, Jr., Securities Act Release No. 10578 (Nov. 29, 2018); and Lindsay Dee Lohan, Securities Act Release No. 11173 (Mar. 22, 2023).(go back)

7Draft Recommendation 3.a. (“The SEC should provide guidance to, and engagement with, finfluencers regarding applicable federal securities laws and regulations.”).(go back)

8Draft Recommendation 6 (“Existing anti-fraud and anti-manipulation provisions prohibit certain clearly illegal conduct in securities markets, such as pump and dump schemes. However, regulators have difficulty in applying these laws in a situation in which the finfluencer simply discloses security holdings in a company and easily profits off of their followers predictable trading behavior. In such situations, there is arguably no fraud and if it exists, or if there is an attempt to manipulate, it is hard to prove. We suggest that the SEC and FINRA study whether the laws should be modified to address this potentially harmful market conduct.”).(go back)

9Draft Recommendation 1.a.(go back)

10Draft Recommendation 1.b.(go back)

11Draft Recommendation 5.b.(go back)

12Draft Recommendation 5.c.(go back)

13Draft Recommendations at 1 (“Social media has not only transformed the way we communicate and share information but has also impacted the world of investing. Recent studies, including those by the CFA Institute [The Finfluencer Appeal: Investing in the Age of Social Media, CFA Institute, January 2024)] and the FINRA Investor Education Foundation [Investors of Color in the United States, FINRA Foundation, January 2024] have found that many young investors and investors of color are getting increasingly involved in the securities markets. However, these newer investors are accessing investment advice in non-traditional ways, particularly through social media.”). (Internal citations removed.)(go back)