Good morning. My comments today will focus on the Disclosure Subcommittee’s draft recommendations relating to the Commission’s proposal on the use of digital engagement practices, or DEPs, by brokers and advisers.[1] These draft recommendations urge that the Commission amend existing rules instead of adopting new ones.

I respect the Subcommittee’s work, as well as the IAC’s statutory independence, but I believe these recommendations need some additional consideration.

This past summer, the Commission proposed new rules to address conflicts of interest that can arise when firms use technology in a way that places their interests, or those of their financial professionals, ahead of investors’ interests.

I voted in favor of this proposal, because the Commission made a strong case that these proposed rules would help protect investors against the unique risks that arise from the use of DEPs.

The analysis of these risks in the Subcommittee’s draft recommendations is right on point. A firm’s platform can include features designed to encourage investors to trade more frequently, take more risks, and manipulate investor behavior.

In the draft recommendations, the Subcommittee acknowledges “the new, inherently opaque, and powerful potential for AI and machine-leading driven PDAs to undermine investor interests and widely propagate subtle conflicts of interest.” And it cautions that it isn’t “minimizing the potential dangers of these technologies, nor advocating for less than strenuous regulation of them.”

The Subcommittee also highlights that expanded retail participation in our securities markets is a positive development, a perspective that I share, and that newer investors are more diverse and lower-income but often lack experience investing or working with an advice professional. These investors are therefore more vulnerable to the behavior-shaping risks inherent in DEPs.

That said, the Subcommittee then pivots towards an extensive focus on the perspective of firms and takes a substantial leap to assert, without much substantive basis, that the Commission’s rule is “far-reaching” with “potential adverse impact on investors if adopted.”

I question these assertions. To me, the Commission’s proposal addresses the challenges highlighted by the IAC head on.

This proposal was informed by extensive public input on a previous Commission request for comment on investor experiences with technology. The Subcommittee’s draft notes that retail investors submitted most of the comments. The Commission separately sought direct feedback from retail investors in the form of a feedback flyer.

This is understandable given that DEPs have a direct impact on the millions of retail investors that increasingly rely on technology to interact with brokers and investment advisers. According to the Federal Reserve Board’s 2022 Survey of Consumer Finances, more than 54% of families in our country own a retirement account.

The voices of retail investors must be at the forefront to ensure that their interests are protected. Given the extensive attention in the draft recommendations to the perspective of firms, and in the interest of arriving at a balanced recommendation, I encourage the IAC to accord due weight to the retail investor perspective.

It also stood out to me that the Subcommittee’s draft recommendations do not adequately acknowledge the current standard of conduct that brokers and advisers must adhere to when interacting with investors.

Today, brokers and advisers must act in the best interests of their clients and must not put their interests ahead of their clients’. It is a critical investor protection common to both brokers and advisers.

Under both Reg. BI and the fiduciary duty standards, disclosure of a conflict of interest is the starting point to addressing conflicts, but satisfying the standard of conduct does not end there. It is critical that brokers and advisers comply with their existing standards of conduct.

An accurate characterization and express articulation of the baseline standard is essential for the IAC to engage in a meaningful and comprehensive discussion of the Commission’s DEPs proposal in order to best inform the Commission on a path forward.

The Commission’s DEPs proposal builds on existing legal standards and provides targeted rules designed to prevent firms’ conflicts of interest associated with certain uses of this technology from harming investors.

This may include investor interactions that do not involve the offering of advice or a recommendation, such as design elements that nudge an action by the investor. Thus, the proposed rule is designed to ensure that firms are appropriately addressing conflicts of interest raised by the emerging uses of digital engagement practices.

It is my hope that the IAC’s discussion of these recommendations will take into account the unique risks that retail investors face by firms’ increased use of DEPs. The benefits of the Commission’s proposed rule in protecting retail investors from harmful interactions enabled by technology that can be easily scaled to reach a large investor base also warrant additional attention.

To the members of the IAC, thank you for your service and for your commitment to investor protection. I have high hopes for advisory committees. They have the potential, if realized, to play a crucial role in informing the work of the Commission by offering us innovative, “outside-the-box” ideas we wouldn’t otherwise think of in the course of our day-to-day work, but that help us fulfill our mission more effectively on behalf of the investing public.

Thank you and Happy Holidays to all.