Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
SEC commissioner: Investors have the right to make their own decisions without regulators standing in the way
CNN Business | | Oct 11, 2021
As a commissioner at the Securities and Exchange Commission, an important part of my job is protecting investors from the fraudsters who can cause them so much harm. Although swindlers often change their pitch to reflect the day's most popular trends — cannabis, crypto and clean energy are all the rage now — the cases the Commission brings typically have the same thing in common: they involve someone lying to get other people's money. Soon, other "hot investment opportunities that are too good to pass up" will be exploited by fraudsters, and when they do, the Commission will ensure that the securities laws are enforced.
Seeing these frauds day after day, week after week and year after year can make a securities regulator like me wonder whether anyone raising money from investors is honest. But that cynicism, understandable as it may be, can undermine our role in protecting investors.
Video Interview: SEC Commissioner Hester Peirce interviewed by Alixe Cormick at FFCON21
Investor protection means enforcing antifraud and disclosure rules, but it also means protecting an investor's right to make investment decisions for herself, to take risks and to use the latest technology to trade and invest. As in other areas of life, people want to be able to make choices about their finances, even if others might question those choices or choose differently for themselves. Investors learn both from their mistakes and their successes.
Investment decisions are inherently personal
An investor's age, career opportunities, asset mix, family situation, cash flow, expenses, anticipated length of retirement, interests, personal convictions and risk tolerance all play into whether a particular investment makes sense for a particular person at a particular time. Even two people who appear to be similarly situated may not be equally well-served by the same investment. Consequently, investment decisions are best made by an investor or an adviser with a deep understanding of the investor's circumstances and financial needs, not by a regulator seeking to act in what it perceives to be the "typical" investor's best interest.
Because a regulator cannot know each individual's complex mix of circumstances, she cannot decide which investments are good for which investors when. A regulator who attempts to do so is essentially saying that she can look from afar at an investor's life and decide what securities are best for that investor. A regulator, for example, may structure rules in a way that pushes retail investors into passive index funds and away from individual stocks or actively managed funds. That passive portfolio might be right for many investors, but other investors may prefer a different mix of investments.
See: Speech by SEC Commissioner Peirce: Prosperity’s Door
Because of the inherent limitations on what it can know about particular investors, the SEC would do well to resist the urge to engage in financial planning by regulation, which is what it does when it limits an investor's ability to decide for herself what investments should be in her portfolio.
Regulators, risk-averse by nature, also should avoid imposing their own risk tolerance on investors, many of whom are comfortable with taking risks that regulators would not themselves take in choosing their own investments.
For instance, the SEC has been reluctant to greenlight traditional investment products holding crypto, potentially harming investors by restricting their ability to diversify their portfolios and to gain exposure to the growth potential of this new technology.
Regulators have a role to play, but that role should always be carried out with humility and a realization that investors have a right to make their own decisions, regardless of what regulators think of them.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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