On November 14, 2016, the SEC convened four panels of individuals at the forefront of the FinTech industry to address the rapid growth of recent innovations in FinTech. Panelists addressed how these innovations impact four main areas: investment advisory services; trading, settlement, and clearance activities; capital formation; and investor protection. The over-arching theme of the forum was the overlay of financial regulation in the rapidly-changing securities industry and how regulation needs revision to better address emerging technologies. Below we have summarized the four panels and the key take-aways.

Investment Advisory Services

Investment advisers have a fiduciary duty to act in their clients’ best interests. Over the last 2-3 years, investing services have largely evolved to include digital wealth managers (“robo-advisers”), which were created in an effort to meet higher standards of client service by making better, smarter, and more sophisticated investment decisions. There has been huge growth in investment management for smaller account sizes over the last few years, thanks in no small part to robo-advisers providing greater access to the market.

Despite the misnomer, robo-advisers are simply financial advisers who make greater use of available technology by automating certain tasks. They are registered with the SEC as advisors and are subject to the Investment Advisers Act of 1940. Individual (human) advisers remain in control of inputting data, identifying algorithms, and assigning investment strategies. The goals of robo-advisors are the same as traditional financial advisers: to protect investors from unwanted risk and volatility, to maintain fair and orderly investment markets, and to facilitate capital investment, all while maintaining a high duty of care as fiduciaries. Far from a “set it and forget it” model, robo-advisers customize each investor’s portfolio and make custom investing decisions for each client. Algorithm design and oversight are important, as flaws in algorithms remain one of the biggest risks.

Robo-advisers have improved investing in several important ways:

1. Taking the workload off of individual consultants, allowing firms to serve more clients. Traditionally, an adviser would talk to a client one-on-one to explain the rationale of investment decisions. Now, clients can access their investment portfolio in real time without having to pick up a phone. Conversations that do take place between clients and advisers have become much more interactive.

2. Bringing in new investors with lower assets under management (AUM) to provide them with basic financial advisory services. Individuals who previously led largely unexamined financial lives now have greater access to markets. Robo-advisors are especially appealing to tech-savvy millennials, as new investors. (The average age of a digital wealth client is 35.) Robo-advisors also make investing much more approachable for individuals who previously couldn’t afford investment advice. The industry can now serve more people than under the less scalable service models that have existed historically.

A real-world application of robo investing is in the looming retirement savings crisis, whereby individuals might not be able to rely on social security when they reach retirement age. Consequently, personal investment portfolios will be extremely important to maintain for an increasing number of people. Individuals (especially un-savvy investors) will need to be advised, not simply given a supermarket of securities to buy.

3. Improved client service at all levels of investing. Robo-advisers service a range of investors. The Vice Chairman of Personal Capital estimated that 1/3 of the company’s assets are held among households managing over $1 million. These more sophisticated higher-net-worth investors benefit from new technologies, with more simplicity and efficiency. All accounts are in one place, so a client can see spending and investments side-by-side.

4. Greater transparency. Robo-advisers maintain high levels of disclosure standards. Clients can see what the wealth manager is doing–that is, how and why investments are being made. One great benefit of using algorithms is that they are highly visible, allowing a client to see if any advice he/she is getting is in conflict. Full and fair disclosure of material information is critical, particularly with respect to higher-yield riskier investments.

Robo-advisors need to be regulated differently, and regulators need to keep pace with the associated technologies.

Trading, Settlement, and Clearance Activities

Distributed ledger technology (DLT)–one of the signature characteristics of blockchain–will be a major disrupter to the financial services industry, changing the way the financial sector thinks about and handles post-trade processes. The major driving force for companies has been cost-savings, but these decentralized databases offer additional benefits to the industry including improved efficiency, speed, and transparency. Whereas cryptocurrencies like Bitcoin rely on an open-access distributed ledger, clearing and settlement networks like Bankchain use permissioned, privately-shared distributed ledgers.

Companies and stock exchanges are increasingly relying on distributed ledgers. NASDAQ uses blockchain as an alternative to recordkeeping and data warehousing. In 2017, the Australian Stock Exchange Group (AGX) will begin building a system for cash equities that relies on DLT.

The SEC announced that it has a dedicated Distributed Ledger Technology Working Group focused on blockchain regulation and how to keep pace with DLT and address the emerging risks. Cybersecurity is of chief concern to regulators as distributed ledgers become more mainstream, but DLT actually offers superior transparency and reduction of systemic risk than traditional exchanges. Other benefits of DLT have been realized by regulators, who can rely on algorithms to provide better access to transaction-level data to facilitate audits.

Capital Formation

Increased regulation has made traditional bank lending difficult, and there is a serious lack of access to capital for small businesses and individuals looking to raise $150,000 or less. Online marketplace lending and securities-based crowdfunding both provide robust opportunities and solutions for small businesses seeking access to capital. Sadly, the existing infrastructure for capital formation is antiquated and broken, with industry leaders expressing a great deal of frustration and placing the blame squarely on the SEC and other regulatory agencies.

Marketplace lending relies on algorithms and other technology to evaluate borrowers. Assessing risk is one of the main challenges for the current data and analytics. But far from being a behind-the-scenes operation, lending firms are deeply committed to loan-level disclosure and transparency, allowing lenders to evaluate and minimize risk themselves. Marketplace lending has the opportunity for enormous growth, and increased competition will continue to benefit consumers and small businesses by creating downward pressure on interest rates. Collaboration between banks and marketplace lenders will prove hugely beneficial going forward.

Crowdfunding has become another hugely successful method of raising capital, and it exists on many platforms including Kickstarter, GoFundMe, and Indiegogo. But crowdfunding platforms continue to face obstacles because of regulatory uncertainty. Inconsistencies in state and federal regulations remain one of the biggest obstacles to crowdfunding platforms. Regulators’ failure to clarify those inconsistencies have left the United States behind in innovation regarding capital formation, particularly with respect to digital and mobile-based lending.

Investor Protection

The most pressing issue for investors is trust, which is at the core of investment capital. No trust = no investment.
Consequently, investor protection is a top priority in the FinTech industry.

Protecting investors means keeping them well-informed. Industry leaders and regulators agree that investor access to information is paramount. Investors want to be able to see the information that is relied upon to make investment decisions. Innovations in FinTech have greatly improved the quality of data and have streamlined the processes for making relevant data available to customers. The common denominator in how companies provide better customer service is technology-driven innovation, which has raised the bar for customer service across the financial industry.

Another critical aspect in protecting investors is increasing cybersecurity and protecting the data that investors rely on to make decisions. Effective cybersecurity in the realm of compliance involves:

1. Monitoring for cyber intrusion;
2. Preventing intrusion by controlling access; and
3. Responding to cyber-attacks.

A lot of innovation has taken place most recently in the area of responding. Companies like Target who are victims of security breaches must be prepared to address the problems appropriately. Target did not, and they suffered. Dedicated cyber security advisors emphasize the importance of responding to security breaches correctly: Identifying the cause of the breach, and proposing solutions for more robust safety measures going forward. Every company should have a plan for hardening cybersecurity.

Innovators and regulators have the shared goal of inspiring trust in the market by improving disclosure and maintaining a high level of cybersecurity. How best to achieve these goals is still the subject of debate. Regulators are quick to note that regulations offer not only protection to investors, but contribute to investor confidence in the market. Companies argue they have strong incentives (even absent regulations) to continuously improve data access and security, which in turn inspires investor trust and protection.


FinTech is no longer just a term, but a movement that drives innovation across financial markets. Companies in the FinTech industry are always innovating, offering new technologies and platforms to better service their clients. As one forum panelist noted, there is virtually one new FinTech idea every week. In its early stages, FinTech included technology like ATMs and has now grown to include highly sophisticated blockchain technology, data aggregators, and new approaches to data mining.

And as FinTech transforms the financial industry across the board, from high-level investing to small peer-to-peer payments, it challenges existing norms, and faces regulatory hurdles. The SEC and other regulatory agencies have found themselves in a position of playing catch-up, trying to tailor old regulations to rapidly emerging new technologies, which is often unhelpful. Alternatively, regulators are attempting to implement revised regulations and guidelines that directly address new technologies. Unfortunately, the response has been sluggish. Regulations have not kept up with many innovations, to the great frustration of companies trying to implement those innovations. This lack of revised regulation is perhaps even worse than over-regulation because it makes innovators uncertain about how new technologies will fare. A company would certainly not want to sink millions of dollars into a new innovation, only to have it shut down by the SEC. Bolder companies like Uber and Airbnb have forged ahead, often finding themselves in positions of asking for forgiveness, rather than permission, when they fall afoul of regulations.

A proposed solution has been to build a “regulatory sandbox” in which companies would be allowed to experiment with new products in a controlled space with a limited number of consumers. This plan has many benefits, and has overwhelming support of the industry. Other countries like the UK and Singapore have rolled out similar regulatory sandboxes, but regulators in the United States have so far shut down this possibility, leaving the US woefully behind in this respect. Industry pushback has been swift, criticizing regulators for stymying innovation.

Among the challenges to regulators is striking the right balance between fostering innovation while ensuring new technologies and products aren’t rushed to market prematurely in a way that facilitates data breaches, increases risk of fraud, or otherwise harms investors. This will require regulators to recommit themselves to staying informed about new technologies in order to propagate comprehensive and forward-looking regulations. Regulatory complexity will continue to exist, presenting greater opportunities for providers of Regulatory Technology (RegTech), as they help companies come into compliance and enhance risk assessments, all while remaining innovative. Ultimately, the SEC will continue to largely determine how FinTech will function.