SEC Forum on Fintech

Securities and Exchange Commission

The Fintech Forum

Monday, November 14, 2016 

Key Topics & Takeaways

  • SEC Leadership in Fintech: Commissioner Piwowar believes the SEC should take the lead regulatory role in the fintech space since the SEC is the only agency with the mission to facilitate capital formation.
  • Securitization and Marketplace Lending: Ram Ahluwalia, CEO and Co-Founder of PeerIQ stated that securitization is the primary innovation that has allowed greater access to credit for small businesses. He explained that marketplace lending has enabled markets to transform illiquid credit into marketable securities that can be sold into a broader base of institutional investors.
  • Robo-Advisors: Rick Fleming, the SEC Investor Advocate, said one of the biggest questions for building investor trust in financial technology will be how it responds to a financial crisis or time of market stress. He commented that the “human touch” remains important. 


Commissioner Opening Remarks

Securities and Exchange Commission Chair Mary Jo White

In her opening remarks, White discussed the need for regulators to not only better understand the role of fintech in the marketplace, but also develop safeguards regarding their use. White noted the potential benefits for fintech in capital markets through innovations such as automated investment advice, distributor technology, and crowd funding. White stated that innovation must not be rushed to the market and that the SEC has been thinking carefully about fintech innovations. 

Commissioner Michael Piwowar

In his opening statement, Piwowar discussed the transformational power of fintech by noting the impact that it is having in East Africa. Piwowar noted that, in East Africa, financial inclusion rates have grown dramatically and crime rates have dropped substantially since the introduction of new financial technologies. Piwowar discussed the need to explore various constructs such as “regulatory sand boxes” to encourage fintech innovation. Piwowar stated that a recent study shows that most common struggle for fintech is navigating different regulatory portals. He added his belief that the SEC should take the lead regulatory role in the fintech space since the SEC is the only agency with a mission to facilitate capital formation. 

Commissioner Kara Stein

In her opening remarks, Stein discussed ways the SEC could help encourage fintech innovation through the Office of Data Strategy or the Digital Data Task Force.  

Panel 1: Impact of Recent Innovation in Investment Advisory Services

Bo Lu, Co-Founder and CEO of Future Advisor at Blackrock, stated that fintech offers two main value propositions for the consumer and for the industry: 1) scalability; and 2) the ability to improve the client experience. Lu noted that the efficiencies created by these services through things such as client enrollment and onboarding allows for the digital platform to alleviate the workload of advisors so they can better serve clients. Whereas under less scalable models, those customers may not be served. 

Mark Goines, Vice Chairman of Personal Capital, highlighted the fact that smartphones have changed the delivery of information and now there is room for many different business models. He maintained that fintech innovation has expanded the forms of communication possible for investment advisors, so firms can send customized messages that suggest actions to their clients. 

Jim Allen, Head of Capital Markets Policy Group at the CFA Institute, shared takeaways from a recent CFA survey, such as that survey participants found that digital platforms helped reduce cost while also providing greater access to investment advice. Allen noted that several survey participants highlighted concerns regarding potential market fraud and miss-selling. Allen also noted that those with high net worth seem to benefit less from the technology than lower net worth individuals due to the potential tax considerations and complexity of various investments for higher net worth individuals.  

Allen noted that fintech does not necessarily eliminate the concerns faced by advisors today in that there could be a conflict embedded somewhere within the advice being given. There is also a question of whether index funds may fulfill fiduciary duties to clients, since one can put money in and not look at it down the road. 

While discussing the client experience, Ben Alden, General Counsel of Betterment, stated that there is a generation of people that want to know not just what securities they can buy but real advice, such as which savings vehicles best meet their goals. Alden noted that fintech can offer true goal-based investing that allows clients to build portfolios that match their risk tolerance and saving objectives.

Lu stated that Future Advisor was created largely because there is a group of consumers/investors that have been unable to attain financial advice through more traditional means since their investable assets were not large. 

All panelist agreed that digital platforms should help advance and improve investment disclosures and transparency. 

Panel 2: Impact of Recent Innovation on Trading, Settlement, and Clearance Activities

Cornell University Professor Emin Gun Sirer maintained that blockchain is revolutionary because it establishes a set of rules that all ledger participants maintain and enforce on each other. He argued that this allows market participants to build digital autonomous corporations in which technology can serve as a trust for things like royalties’ distribution. 

Chris Church, Chief Business Development Officer at Digital Asset Holdings, stated that distributed ledgers increase transparency that is beneficial for regulatory supervision and risk mitigation. Similar to the example of royalty distribution, Church added that the technology can be used to automate transactions over the life cycle of bonds, such that payments can be made based on a what happens in a sequence of events. 

Asked about trends in the development and use of blockchain, McNamara, Principal in the Capital Markets team at PricewaterhouseCoopers (PWC) said the firm has conducted many proofs of concept around the world, and is exploring other applications for blockchain such as posting collateral and handling insurance claims. She noted that there are many bank-to-bank, bank-to-corporate, and corporate-to-corporate uses of distributed ledger technology, with significant participation from both technology and financial infrastructure companies. 

Sirer commented that while a variety of financial institutions and branches will continue to exist, their processes and roles will change and new revenue-generating services will be created. 

Peterson, said distributed ledger technology  would decrease costs associated with recordkeeping and reconciliation between firms that currently use different systems. He added that the technology will also help regulators, through the establishment of an audit trail, to follow whether firms are putting consumer interests first. 

Szczepanik asked about the mission of regulators and how they continue to satisfy it while supporting the development of new technologies. Mark Wetjen, Head of Global Public Policy at DTCC, commented that the nature of regulation will not change, and that regulators will continue to care about risk management. McNamara stated that regulators will be able to leverage blockchain to be more proactive, suggesting that they can be nodes in the ecosystem and can monitor transactions in this way. Church added that U.S. regulators should be talking to foreign regulators, mentioning the United Kingdom and Singapore as jurisdictions that have been particularly supportive of the development of fintech. 

Asked about impediments to the adoption of distributed ledger technology, Sirer said the security of the infrastructure for blockchain is “nowhere near” where it needs to be for trading financial securities. Wetjen questioned whether regulators will be comfortable moving to a system without “human governance.” McNamara stated that with substantial “legacy” infrastructure, it will take time to implement blockchain broadly. However, whether it takes five years or ten years, she said widespread adoption is coming. 

Panel 3: Impact of Recent Innovation in Capital Formation

Matt Burton, CEO and co-founder of Orchard Platform stated that demand on the borrower side has been the driving force for marketplace lending. Conor French, General Counsel of Funding Circle and co-founder of the Marketplace Lending Association, highlighted the benefits of marketplace lending for both borrowers and lenders: that it is safe and affordable for borrows and offers risk adjusted returns for lenders. However, French and other panelists highlighted regulatory burden as a key obstacle to the growth of marketplace lending. Javier Saade, Managing Director at Fenway Summer Ventures noted that marketplace lending allows for consumers to attain funding in a more desirable environment by stating that younger customers (i.e., the “40 and under crowd) prefer to do business online rather than inside a bank. Ram Ahluwalia, CEO and Co-Founder of PeerIQ stated that securitization is the primary innovation that has allowed greater access to credit for small businesses. He explained that marketplace lending has enabled markets to transform illiquid credit into marketable securities that can be sold into a broader base of institutional investors.  

When asked about the role of algorithms in the marketplace lending process, Burton stated that with algorithms there is a need for transparency concerning loan allocation such that the rules of how the loans are divided should be transparent and verifiable. He suggested that third party allocation verification is one possible solution. French stated there is a need for fair allocation mechanisms such that the investor understands how assets in the investment vehicle are selected. French also stated that there is a need for adequate disclosure around what would happen during a bankruptcy. Karen Mills, Senior Fellow at Harvard Business School, expressed the need for loan-level understanding of what happens during failure, as made evident by the mortgage market. 

Sara Hanks, the co-founder and CEO of CrowdCheck, stated that the initial concern with crowdfunding, whether people understand the risk, has mostly been addressed primarily through adequate disclosures throughout the funding process. Hanks stated there is some concern that people probably do not have all the tools to compare the different types of investments that can be made. She added  that fintech is still maturing as an industry and there is a learning curve for some market participants as they come from the “not-as-regulated technology world” to the highly-regulated financial industry. 

Michael Pieciak, Commissioner of the Vermont Department of Financial Regulation and Chair of NASAA Corporate Finance Section, stated that 34 states have either implemented crowdfunding or are in the process of implementing it. 

Panel 4: Investor Protection in the Fintech Era

Asked about how financial technology will benefit investors, Travis Schwab, CEO of Eventus Systems, said the financial services industry has been developing new technologies for a long time, but that recent innovations and business models can provide greater access to capital for underserved markets and make markets safer and more transparent. Nikhil Lele, Principal in the Financial Services Office at Ernst & Young, said the innovations of today are democratizing data and analytics, with the cumulative effect of investors and consumers having significantly greater expectations for institutions. 

John Walsh, Partner at Sutherland Asbill & Brennan LLP, said the most critical issue for investors is trust, and that the core of regulation is to create a structure of trust such that people are willing to invest. Lele agreed, and added that innovation can build capabilities to improve the underpinnings of trust, such as better communication, data, and security. 

Rick Fleming, the SEC Investor Advocate, said one of the biggest questions for building investor trust in financial technology will be how it responds to a financial crisis or time of market stress. He commented that while products such as robo-advisors have a big future, the “human touch” remains important and it remains to be seen how robo-advisors and investors using them will respond to volatility. 

Turning the discussion to how regulators can better support innovation, Walsh said he was pleased to hear White say the SEC will be reviewing its regulations to keep them up to date because the current rulebook “gets in the way.” Lele added that prescriptive rules are not beneficial in an environment that is constantly changing, as it is with financial technology. Fleming stressed that the SEC needs to have tech-savvy staff that can keep up with and understand new technology. 

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