Highlights:

The use of predictive data analytics, however, also can lead to potential conflicts. Conflicts may arise to the extent that advisers or brokers are optimizing for their own interests as well as others.
I have asked the staff to make recommendations to the Commission for potential rulemaking on these matters, and I welcome the Committee’s thoughts.
I also understand that the Committee later today will consider a number of recommendations.
- Two of these are with regard to our outstanding proposals on beneficial ownership and large trader reporting for security-based swaps.
Single-stock ETFs, including levered and/or inverse single-stock ETFs, can present unique risks to investors, especially retail investors. Holding a single-stock ETF is not the same thing as holding the underlying stock or a traditional ETF. In particular, investing in a levered single-stock ETF may create exposures for investors that in many ways resemble buying shares on margin. Further, investing in an inverse single-stock ETF is meant to be similar to shorting a stock. Single-stock ETFs often are designed to be held for a short time period, such as a single day. Though these products are listed or traded on exchanges, they are not necessarily right for every investor.
It’s important that brokers and advisers comply with existing standards of conduct when providing advice or recommendations to investors regarding complex and high-risk products—including single-stock ETFs.

Full Speech:

Good morning. I’m pleased to speak with the Investor Advisory Committee. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.

I look forward to hearing about your three panel discussions today on (i) private funds’ disclosure regarding possible geopolitical risk of their overseas investments, (ii) digital engagement practices, and (iii) audit committees.

Let me say a few words on digital engagement practices.

Predictive data analytics and artificial intelligence are transforming so much of our economy. Finance is no exception.

AI already is being used for call centers, account openings, compliance programs, trading algorithms, and sentiment analysis, among others. It’s also fueled a rapid change in the field of robo-advisers and brokerage apps.

When the predictive data analytics and algorithms behind these apps are optimizing for investor interests, this can bring benefits in market access, efficiency, and returns.

The use of predictive data analytics, however, also can lead to potential conflicts. Conflicts may arise to the extent that advisers or brokers are optimizing for their own interests as well as others. Further, the underlying data used in these analytic models could be based upon data that reflects historical biases, affecting fair access and prices in the markets.

I have asked the staff to make recommendations to the Commission for potential rulemaking on these matters, and I welcome the Committee’s thoughts.

I also understand that the Committee later today will consider a number of recommendations.

Two of these are with regard to our outstanding proposals on beneficial ownership[1] and large trader reporting for security-based swaps.[2] Should you vote to approve these recommendations, they will be put into the comment files for consideration. I look forward to learning more about the Committee’s views on these matters.

Finally, let me speak to your potential recommendation regarding single-stock exchange-traded funds (ETFs).

Single-stock ETFs, including levered and/or inverse single-stock ETFs, can present unique risks to investors, especially retail investors. Holding a single-stock ETF is not the same thing as holding the underlying stock or a traditional ETF. In particular, investing in a levered single-stock ETF may create exposures for investors that in many ways resemble buying shares on margin. Further, investing in an inverse single-stock ETF is meant to be similar to shorting a stock. Single-stock ETFs often are designed to be held for a short time period, such as a single day. Though these products are listed or traded on exchanges, they are not necessarily right for every investor.

It’s important that brokers and advisers comply with existing standards of conduct when providing advice or recommendations to investors regarding complex and high-risk products—including single-stock ETFs. Staff recently published a bulletin regarding brokers and advisers’ care obligations including, among other things, the “heightened scrutiny” advisers and brokers should take regarding complex or risky products.[3]

Thank you.