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.
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. 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.
The SEC can and does play a role in providing investors with tools they can use to assess whether a particular investment or investment strategy makes sense for them. We require that issuers provide honest disclosures about securities so that investors can gauge whether an investment is right for them. Moreover, we offer general educational materials that help investors to appreciate the role investments can play in their families’ lives, to spot frauds, to understand different types of investment products, to appreciate the value of portfolio diversification, and to ask good questions about whether a particular investment or investment professional is right for them.
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Respect for individual liberty is a core American value: People have the presumptive right to make choices that affect themselves and their families, and government should be wary of overriding those choices. All Americans deserve that respect in their financial lives as they do in every other aspect of their lives. 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.