Car Keys, Football, and Effective Administration

My thanks to the Practicing Law Institute and the 56th Annual Institute on Securities Regulation.

When I was with you two years ago, I quoted President Franklin Roosevelt when he signed the first of the foundational securities laws in 1933: "This law and its effective administration are steps in a program to restore some old-fashioned standards of rectitude."[1]

This year, I am going to talk about that effective administration.

As is customary, I'd like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.

I believe our securities laws have significantly contributed to our nation's great economic success these last 90 years.

The securities laws-benefiting investors and issuers alike-help create trust in our capital markets. These laws help lower costs. They help lower risks.

The results are evident in the size, scale, and depth of our capital markets. At more than $120 trillion today, they are part of our comparative advantage as a nation, undergirding the dollar's dominance[2] and our role in the world. We are the capital markets of choice for issuers and investors around the globe. At more than 40 percent of the world's capital markets,[3] we punch above our weight class of just 24 percent of the world economy.[4]

This didn't just happen by chance.

Roosevelt and Congress understood in the 1930s that well-regulated markets build trust and create the environment for economic success.

Repeatedly, later Presidents-Richard Nixon,[5] Gerald Ford,[6] Ronald Reagan,[7] Bill Clinton,[8] George W. Bush,[9] and President Obama[10]-and Congresses understood this as well when updating the securities laws to best promote our capital markets and economic success.

One of the ways I think about this is through analogies to common-sense rules of the road for driving or a football game.

Over the years, I've slept better knowing that when one of my three daughters borrows the car keys, that there are common-sense rules of the road to protect them. There are stop signs, traffic lights, and speed limits. There are prohibitions against drunk driving. I sleep better knowing there are also cops on the streets to enforce these rules and keep my daughters safe.

Common-sense rules of the road for driving help protect against risk but also promote economic activity. The U.S. automobile manufacturers of a century ago wouldn't have been as successful without traffic lights and speed limits, which allowed American consumers to trust this new product.

As we enjoy football games this fall, imagine what it would be like if the National Football League didn't have any rules of the road. Imagine if it didn't have referees. There would be mayhem on the field and injuries to players.

Common-sense rules for football not only protect the players, but also build confidence in the integrity of the game for fans. Thus, rules and refs help promote the business of the game.

This is just as true for the world of finance. Common-sense rules lower risk and build trust among the participants in the markets.

When Roosevelt and Congress enacted the securities laws in the 1930s, they had lived through the 1920s when hucksters, fraudsters, scam artists, and Ponzi-like schemers took advantage of investors. They learned what happens when unregulated markets were left on their own. Over the succeeding decades, later Presidents, given changes in technologies and business models, repeatedly saw similar benefits through enhancing regulation of the markets.

They also knew that the rules of the road shouldn't just cover fraud. Congress put in place important provisions about disclosure because information about securities creates a public good.[11] They put in place important provisions regarding corporate governance.[12] For intermediaries, they put in place important provisions about conflicts, disclosures, and business conduct. They also put in place provisions for gatekeepers, such as investment banks and auditors.

Rules of the Road

As students of history and economics, we all know nothing stands still. Technology and business models constantly change. Other nations seek to challenge our place as the capital markets leader.

Thus, for those who have the privilege of service, our job is to continually update the rules of the road. That's what we've been doing. We've worked to lower costs and risks in the capital markets, what economists would call promoting efficiency, resiliency, and integrity.

Treasury Markets

Let me start with the base of our capital markets, the $28 trillion U.S. Treasury markets.[13] They are critical to your clients and your own well-being. They are how we as a nation fund ourselves, the Federal Reserve conducts monetary policy, and the dollar maintains its dominance. They have had repeated jitters, though.[14]

Thus, to lower the cost and risk of these markets, we've put in place a number of reforms, such as those to promote central clearing in these markets.[15] As these clearing rules get implemented over the next year and a half, your clients may look to you on how best to participate in Treasury markets that better promote all-to-all trading and competition.

Equity Markets

Now let me turn to the nearly $60 trillion U.S. equity market. Though it's the deepest, most liquid stock market in the world, we hadn't had a comprehensive update of the rules of the road in nearly 20 years. That's why I'm proud of what the agency has accomplished. Everyday investors now benefit from the shortening of the settlement cycle to one day.[16] This ensures that investors who sell their stock on a Monday get their cash on a Tuesday. You don't have to wait until Wednesday.[17]

This fall, we also unanimously voted to update rules with regard to the national market system.[18] Your clients as well as everyday investors will benefit from more efficient equity markets where stocks can be quoted in narrower increments down to a half of a penny. They also will benefit from a separate rule we adopted unanimously to update information regarding brokers' execution quality.[19]

Corporate Governance

Roosevelt and Congress when enacting our securities laws also gave a role for the SEC to play with regard to corporate governance.[20] Time and again, subsequent Presidents and Congress have added to those laws.[21]

Thus, to better promote trust in our capital markets, we've adopted a number of rules regarding corporate governance. This includes rules for when corporate insiders can sell their shares,[22] when executives have to give back compensation based on erroneously reported financials,[23] and disclosure of executive pay versus performance.[24] We also adopted rules requiring more timely disclosure by those who are seeking control and buy more than a five percent stake in a company.[25]

Disclosure

Many of your clients seek your advice regarding a founding principle of our securities laws: disclosure.

When I came into this job, investors were demanding greater disclosure around issuers' cyber and climate risks. There had been a Special Purpose Acquisition Company boom, and many investors were looking for greater disclosure and integrity in that market.

We proposed and, based upon public comment, adopted rules in all three areas.[26] These rules all are grounded in materiality, a fundamental building block of the federal securities laws' disclosure requirements.

Our securities laws also require important disclosures by broker-dealers and investment advisers to their clients. In particular, Congress had given us authority 25 years ago with regard to privacy notices to investors.[27] Given the significant changes in technology, I'm proud that we unanimously adopted rules requiring covered firms to notify customers of data breaches that might put personal information at risk.[28]

In addition, we've enhanced transparency to the markets as a whole through publishing aggregate, anonymized data regarding registered investment funds, private funds, and investment advisers.[29]

Resiliency

Part of promoting the best capital markets in the world, as well as safeguarding the public, is always to have an attentive eye on financial stability. Thus, we have been on the lookout for those risks that can spill out and hurt everyday Americans. This, in part, is why we took up the Treasury markets projects I discussed. It's why we adopted money market fund reform[30] as well as updates to the information we collect from private funds.[31] Though the SEC had adopted rules in both areas after the financial crisis, we learned from the instability when COVID broke out that much had changed.

Accounting and Auditing

When I got to the SEC, I found there was some unfinished business with regard to a law adopted nearly 20 years earlier, the Sarbanes-Oxley Act.

I admit, having worked closely with Sen. Paul Sarbanes on the passage of that law, I felt when I got to the SEC that the administration of that law hadn't fully lived up to his vision.

First, for nearly 20 years, the Chinese authorities wouldn't let the Public Company Accounting Oversight Board (PCAOB) inspect or investigate the auditors of Chinese-related companies listed in U.S. markets. With the help of a recently passed law,[32] we set in motion, along with the PCAOB, serious negotiations with the Chinese authorities, which culminated in a Statement of Protocol signed in August 2022.[33] I'm pleased to report that for the last two years, for the first time, the PCAOB has been able to fulfill its inspection and enforcement-related responsibilities as it relates to audit firms in China and Hong Kong.[34]

Second, for practical reasons, Sarbanes-Oxley permitted the newly established PCAOB to carry over existing American Institute of Certified Public Accountants standards on an interim basis. When I started at the SEC, though, there were still 42 of these 49 so-called "interim standards." I'm pleased to note that progress has been made: in the past three years, the PCAOB now has updated half of the interim standards.

Crypto

When I arrived in 2021, the Commission under Chairman Jay Clayton had already brought some 80 actions, including the Ripple case,[35] against participants in the crypto markets that were not following the common-sense rules of the road.

His Commission and he spoke often about these markets, starting in his third month in office when the Commission put out the DAO Report.[36] The SEC has continued that vigilance to ensure that those offering or selling securities comply with our time-tested securities laws. Since 2018, this has represented generally between five-and-seven percent of our overall enforcement efforts.

Court after court has agreed with our actions to protect investors and rejected all arguments that the SEC cannot enforce the law when securities are being offered-whatever their form.[37]

Not every asset is a security. Former Chairman Clayton[38] and I have both said that bitcoin is not a security, and the Commission has never treated bitcoin as a security.

Our focus, rather, has been on some of the 10,000 or so other digital assets, many of which courts have ruled were offered or sold as securities. Putting this in context, aside from bitcoin, ether, and stablecoins, the rest of this market approximates $600 billion. That's less than 20 percent of the whole crypto market and less than one quarter of one percent of the worldwide capital markets.

Let me make two points.

First, those parties offering or selling securities to the public need to register and give proper disclosure to the public. Second, the intermediaries-broker-dealers, exchanges, clearinghouses-need to be registered and properly regulated as to conflicts, disclosures, and business conduct.

Prior to my arrival at the Commission, numerous filings for exchange-traded funds (ETFs) and products (ETPs) for bitcoin had been disapproved or withdrawn at the SEC staff's request. Shortly after I arrived in 2021, the first bitcoin futures ETF went effective after consultation with SEC staff. Though we initially followed in our predecessor's footsteps with regard to ETPs that hold physical bitcoin, the Commission approved ETPs for physical bitcoin and ether earlier this year. Subsequently, in contrast with non-compliant crypto asset markets, investors in these products have gotten the benefits of disclosure, oversight, lower fees, and greater competition.

This is a field in which over the years there has been significant investor harm. Further, aside from speculative investing and possible use for illicit activities, the vast majority of crypto assets have yet to prove out sustainable use cases.

Everything we've done is focused on ensuring compliance with our laws. What we've found since the 1930s is that compliance matters. It protects investors. It builds trust in our capital markets. It helps issuers tap into our markets. History has shown for 90 years that robust securities regulation both creates trust in markets and fosters innovation.

Remarkable SEC Staff

Before I close, I want to say something about the SEC and its staff. It's a remarkable agency. The staff and Commission are deeply mission-driven, focused on protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.

The lawyers, accountants, economists, policy experts, and other staff generally could make more money working somewhere else. They choose, though, to work on behalf of the public here at the SEC.

It's been a great honor to serve with them, doing the people's work, and ensuring that our capital markets remain the best in the world.

Conclusion

Sam and Jane Gensler, my mom and dad, never worked in finance or even completed college. When they invested their savings, our family benefited from the securities markets' common-sense rules of the road.

The SEC's effective administration of well-regulated securities markets promotes trust. It's what brings investors and issuers to the market like fans to a football game. It's what underpins the world's largest capital markets. It's what has contributed to our nation's great economic success these last 90 years.

I've been proud to serve with my colleagues at the SEC who, day in and day out, work to protect American families on the highways of finance.

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