Sept. 10, 2023
Good afternoon and thank you to the North American Securities Administrators Association (“NASAA”) for inviting me to be a part of this year’s meeting. Returning to San Diego brings back a lot of memories. NASAA held its Fall Meeting in San Diego in September 2006, which was the final NASAA event that I attended as a California state securities regulator before joining the SEC the following month. The highlights of that 2006 event were remarks from future SEC chair and then-NASD chair Mary Schapiro, as well as from two legendary state securities regulators, outgoing NASAA president Patty Struck of Wisconsin and incoming NASAA president Joseph Borg of Alabama. So Andrew [Hartnett of Iowa, NASAA president] and Claire [McHenry of Nebraska, NASAA president-elect], you are both part of that distinguished group of NASAA leaders.
Thank you, Commissioner [Clothilde V.] Hewlett [of the California Department of Financial Protection and Innovation], for those welcoming remarks. I had the privilege of serving as chief advisor to three of your predecessor Corporations Commissioners – William P. Wood, Wayne Strumpfer, and Preston DuFauchard. I also worked with former Department of Financial Innovations Commissioner Conrad Hewitt when he was the SEC’s Chief Accountant.
Back then, the agency was known as the California Department of Corporations. It was an interesting description because the Department did not charter corporate entities; that was the responsibility of the California Secretary of State, which probably left many Californians confused as to what exactly were the Department’s responsibilities. Thus, I am pleased with the change in name to the Department of Financial Protection and Innovation. It is a better reflection of its modern-day mission, but recognizes the long history of investor protection dating back to 1914 and the very first California Corporations Commissioner, H.L. Carnahan.
Innovation also relates directly to this conference’s theme of modernizing investor protection for the digital age. Innovation and technology have transformed the financial markets and expanded market participation. They have made our economy powerful, and California has been fortunate to have Silicon Valley leading the way as the world’s preeminent hub for technology. Our economic success has been due in part to our nation’s strong property rights and a historically measured regulatory framework that has allowed for both innovation and competition. Our cost of capital is the lowest in the world and because of that, investors are willing to take on risks.
Thinking about how far the markets have come since Commissioner Carnahan’s time gives us reason to imagine what the markets will look like in fifty or even one hundred years from now, given the new technological advances being developed. While some may have a fearful vision of artificial intelligence, such as Stanley Kubrick’s film 2001: A Space Odyssey where a sentient computer system called the HAL 9000 murders a number of astronauts, current technology has a multitude of benefits for the markets and the financial services industry. As such, regulators should be working with financial firms to understand how new technologies will be employed, learning the ins and outs of their use, and creating appropriately tailored disclosures so investors can make informed decisions. The SEC should be leading this effort by conducting roundtables, forming advisory committees, and meeting with industry experts to implement proper oversight of new technologies.
The incorporation of technology into the financial markets is not a new idea. Think about stock ticker machines, which were created in the 1860s and used until the 1960s. Even towards the end, trading was a largely manual process with a fifteen to twenty minute delay between the time of transaction and the time it was recorded. Imagine how traders in the 1960s would have reacted to the idea that, in the future, large volumes of trades could be executed in nanoseconds. Would they have believed you? Would they have been afraid? Would they have tried to prevent the development of it? Today, this technology – which at one point was brand new – is commonly used and federal and state regulators have worked together with the SROs and market participants to promulgate rules to regulate such trading.
From stock ticker machines, to the introduction of fax machines in 1964, to the computerization of order flow and introduction of electronic communication networks in the early 1970s – innovation has been at the forefront and the U.S. financial markets have benefitted from these technological advances. As a result, the United States continues to have the largest and most liquid financial markets in the world. Just because something is new does not mean that regulators should fear it and preclude financial institutions from utilizing it. New technologies require regulators to have the necessary technological expertise, whether developed internally or obtained from the outside. Regulators have an important responsibility to understand new technologies and thoughtfully apply or modify existing securities laws and regulations.
State securities regulators may see things faster than federal regulators. They often hear complaints and concerns sooner from retail investors. Thus, SEC coordination with state regulators and active engagement with the private sector is necessary to become aware of new developments in order to fulfill our common mission of protecting investors.
Let’s turn to some of the new technologies being used by financial firms and the benefits these technologies can bring to both the financial industry and to investors. The term “artificial intelligence” can refer to a number of different technologies and applications, including machine-learning, natural language processing, and robotics process automation. Financial institutions can use machine learning-enabled software to augment human investment analysis, with some firms even using AI technologies to execute trades, manage portfolios and develop trading strategies.
AI can be beneficial to the extent that it decreases operational costs for firms and expands access to investors. These developments can result in decreased costs of investment advice and enhance the ability of smaller financial firms to compete for market share. The potential benefits to investors are clear: new technologies can help financial firms develop products and services that are personalized to the needs of their client or customer.
Compliance efforts can also be improved, both by financial institutions and by regulators. Firms will have the ability to use AI technologies to detect signs of fraud; monitor data, flag risk indicators, analyze data and identify patterns that may indicate fraudulent activities – assisting firms in better protecting investors. Firms might benefit from reduced costs and more accurate determinations of compliance violations. They may be able to detect signs of suspicious activity significantly faster, thereby allowing individuals to review and determine whether what AI technologies flagged warrants additional investigation and whether it needs to be escalated to supervisors, regulators and law enforcement.
Regulators also can benefit from using artificial intelligence technologies. Financial institutions have significant reporting requirements, and regulators have the burdensome task of sifting through the mounds of data in their possession. The use of AI technologies in reviewing Exchange Act filings, FOCUS reports, and Form ADV filings can reduce the burden on regulators by assisting in making sense of the information on file, including help with identifying potential areas of risk and concern in those documents. This could assist with policymaking decisions and prevent scenarios where evidence of a fraud slips through the cracks.
Consideration of new technologies such as artificial intelligence and machine learning should be not that much different than the introduction of new technologies in the past. Congress has already put in place a statutory framework that is flexible enough to handle the introduction of new technologies. The Commission has rules on broker-dealers and investment advisors that cover issues regarding conflicts of interest and other concerns. Layering on new, vague, and unnecessary rules that merely increase costs and compliance challenges in an attempt to prevent firms from pursuing new technological innovations is misguided. Instead, the Commission should continue to focus its efforts on transparency and disclosure, allowing investors the choice of which risks to assume.
I would be remiss not to mention that there are risks associated with these technologies, a number of which may be unknown, but I do not foresee AI-controlled robots marching through the streets in a quest for global domination. However, a thoughtful regulator will consider methods for these risks to be mitigated, rather than prohibited. The late Steve Jobs said, “Innovation is the ability to see change as an opportunity – not as a threat.” I have optimism that both federal and state regulators will see these emerging technologies as an opportunity for the financial markets and investors.
Thank you for letting me share some thoughts with you today and recognize the important partnership that the SEC has with the state and provincial securities regulators. I appreciate the efforts of NASAA executive director Joey Brady and Conference Chair Balbiro Kazla in organizing this year’s meeting and for NASAA state securities regulators Leslie Van Buskirk and William Beatty. Thank you to the SEC staff who will be participating, including our Investor Advocate Cristina Martin Firvida, Lori Schock from our Investor Education Office, David Hirsch from our Enforcement Division, and Gary Leung from our Los Angeles Regional Office. Finally, I cannot resist giving a shout out to some of my former colleagues from my time at the California Department of Corporations – Colleen Monahan, Mary Ann Smith, and Theresa Leets – thank you for your continued service to investors and consumers.
 My remarks reflect my views as an individual Commissioner and not necessarily the views of the full Commission or my fellow Commissioners.