Networks, knowledge, and nudges: Determinants of retail investor compliance

This paper investigates the determinants of retail investor compliance with FINRA Rule 4512, a behavioral regulatory intervention encouraging the designation of a trusted contact to mitigate financial exploitation. Despite its protective intent, adoption remains limited: only 38% of U.S. retail investors reported compliance in the 2021 National Financial Capability Study. We analyze how financial literacy, portfolio composition, market attitudes, and social trust shape both the decision to name a trusted contact and the likelihood of being named. To address endogeneity, we instrument financial literacy using (i) state-level higher education density and (ii) exposure to mandatory high school financial education. Two-stage least squares estimates reveal that literacy significantly increases compliance, whereas naïve OLS underestimates its effect. Portfolio structure matters non-monotonically: investors holding non-risky assets, diversified portfolios, or larger investments are more likely to comply, and literacy amplifies these effects. Social capital further moderates adoption, with high-trust regions boosting compliance, particularly for literate investors. Our results demonstrate that the effectiveness of light-touch interventions like Rule 4512 depends on the interaction between individual capability, behavioral context, and community trust, highlighting the importance of embedding regulatory nudges within socially and cognitively supportive environments.