Remarks for Investor Advisory Committee Meeting

Good afternoon and thank you for the flexibility in allowing me to deliver my remarks towards the end of the day due to scheduling issues. Earlier, the Committee engaged in discussions on corporate governance and tokenization and will later discuss artificial intelligence disclosures.

Today, also, is the final Committee Meeting for our Investor Advocate. I want to extend my appreciation to Cristina [Martin Firvida] for her dedication and professionalism. Cristina is the second Investor Advocate in the Commission's history. When she was selected, I was not quite sure what to expect from her. However, Cristina won me over by finding areas of mutual agreement and then executing upon them. One of Cristina's important contributions is reforming the selection process for Committee members. As an SEC staff member, I was here at the very beginning of the Committee. It became clear that the departure of a significant majority of the Committee members every four years was not conducive to longer-term thinking. Through Cristina's efforts, we now have a plan where approximately a quarter of the Committee will be replaced annually, thereby obtaining a smoother transition of new members into the Committee. Thank you, Cristina, for your outstanding service and I wish you the best in your future endeavors!

The Role of Corporate Governance in Capital Markets

Corporate governance plays a role in investor confidence and market integrity. It encompasses the systems, principles, and processes by which companies are directed and controlled. At its core, effective governance ensures that companies are accountable to shareholders and resilient in the face of evolving risks.

Over time, the role of governance has expanded beyond traditional oversight. Companies are increasingly expected to navigate complex issues such as cybersecurity and emerging technologies. A well-functioning board must not only monitor management but also anticipate and adapt to systemic shifts that could affect long-term value creation.

However, Congress specifically left the states in charge of governance under state corporate law. The federal securities laws and regulations play an important complimentary role in providing disclosure, describing the governance structure, the rights of shareholders, and potential risks associated with a company's particular structure as well as for providing a regulatory framework for proxy solicitation.

Yet, as we consider reforms, we must be mindful of the temptation to use the Commission's disclosure authority for registration statements and proxy materials, as well as oversight of exchange listing requirements, to impose prescriptive governance mandates. It is inappropriate to mistake the "investor protection" and "public interest" standards contained in the federal securities laws as Congressional authority to set national corporate governance standards. Congress does not "hide elephants in mouse holes."[1]

Corporate governance is best left to the market to decide. If a potential shareholder does not like a particular governance framework - such as whether it is board composition, independence, expertise, then there is a simple solution: do not invest. Companies with corporate governance structures that are not well received by investors will have a higher cost of capital and a depressed stock price.

Mandatory Arbitration and Acceleration of Effectiveness

Similarly, another area of recent discussion is the Commission's clarification regarding mandatory arbitration provisions in registration statements and how the presence of such provisions will not be an impediment to acceleration of effectiveness. Some panelists might have argued earlier today that this represents a reversal of prior Commission policy or weakening of investor protections. In fact, the Commission has never had a policy prohibiting such provisions. Our recent Policy Statement simply articulates that, absent a clear congressional directive, the applicability of the Federal Arbitration Act was not overruled by the federal securities laws, and the existence of an arbitration provision is not grounds for denying effectiveness under Section 8(a) of the Securities Act.

This approach is consistent with judicial precedent and ensures that our rulebook is clear, transparent, objective, and predictable. To suggest otherwise is to mischaracterize both the law and the absence of any prior Commission's policy.

During consideration of this Policy Statement at the open meeting, I specifically asked whether the Commission could adopt the opposite position. In other words, assume that the parade of horrible described by critics of mandatory arbitration provisions were to occur. Would the Commission have the legal authority to issue a policy statement specifically denying the acceleration of effectiveness of any registration statement if it disclosed the preference of a mandatory arbitration provision? The answer was essentially no - if the disclosure was adequate, then that would be essentially merit regulation, which was not authorized by the federal securities laws.

Artificial Intelligence: Committee Recommendations and Regulatory Considerations

Finally, let me express my appreciation for the Committee's recent work on artificial intelligence disclosures. This is a rapidly evolving area of corporate activity. As AI becomes more deeply integrated into business operations, the need for material information by investors may grow. The Committee has proposed that issuers:

1. Define what they mean by "artificial intelligence" in their disclosures;
2. Disclose board oversight mechanisms, if any, for AI deployment; and
3. Report separately on the material effects of AI on internal operations and consumer-facing matters.

I recognize that these recommendations are grounded in a materiality-based approach and are designed to fit within the existing disclosure framework under Regulation S-K. Furthermore, the Committee's decision to build on existing disclosure items-rather than propose a standalone AI regime-is a pragmatic one that avoids unnecessary structural complexity.

That said, it is important to approach this area with caution. There are practical and conceptual challenges that merit further consideration. For example, the lack of a universally accepted definition of "artificial intelligence" could create interpretative and disclosure issues. Boards, management, and their outside counsel may struggle to determine what qualifies as AI, particularly when distinguishing between traditional automation and more advanced machine learning systems.

Similarly, while board oversight is a critical governance function, mandating disclosures in this area may not always yield meaningful insight for investors-especially if oversight responsibilities are diffuse or still evolving. And while reporting on the material effects of AI is a reasonable goal, it may be difficult in practice to isolate those effects separately from regular business operations.

Moreover, we must be mindful of the potential for regulatory overreach. Prematurely codifying rigid disclosure mandates could stifle innovation, particularly for smaller issuers that may lack the resources to implement complex compliance systems. A one-size-fits-all approach may not be appropriate in a space where use cases, risks, and maturity levels vary widely across industries.

As we consider the Committee's recommendation, our goal should not be to use the federal securities laws as a backdoor attempt to regulate AI. Rather, we must ensure that investors are not left in the dark about material risks and opportunities that may arise from the use of AI in business operations and strategy and to do so in a manner without being encumbered by prescriptive or duplicative requirements.

The Committee provides a forum for this ongoing dialogue, and I look forward to continued engagement on this issue.