Speech by SEC Staff:
The New Frontier and The Man Who Shot Liberty Valance
Director, Office of International Affairs
U.S. Securities and Exchange Commission
ASIC Summer School 2008
February 20, 2008
Thank you, Belinda, for that kind introduction. And thank you to the organizers of the ASIC Summer School for their kind invitation to speak.
Before I begin, I should start with the standard SEC disclaimer: The SEC as a matter of policy disclaims responsibility for any private publications or statements made by any of its employees. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
It's truly great to be back in Australia. I am fortunate to have the opportunity to visit many countries around the globe. And although each one has its own particular charms, to me, there is something truly special about Australia. Perhaps it is because, in Australia, like no place else, you can find this magnificent juxtaposition of gleaming modern cities against a beautiful, vast and seemingly untamed frontier. It has become fashionable as of late to describe global capital markets as the "New Frontier." This allusion to the Wild West is amusing. For in this world, there are no cowboys, no barroom brawls, no gunfights. But in considering global markets, we can perhaps forgive the use of this romantic analogy, this juxtaposition of modernity and the Outback. Indeed, as metaphors go, describing global capital markets as the New Frontier, at least in its cinematic representation, might not be entirely inaccurate.
I have a passion for cinema. And to the surprise of some, I enjoy the classic American Western. One of my all-time favorite Westerns is a movie called The Man Who Shot Liberty Valance,2 starring the great American actor, Jimmy Stewart, and that icon of the American Western, John Wayne. Why do I enjoy this movie so much? First, it has all the elements of a great Western: a stoic hero; a disreputable villain; stagecoach robberies; barroom brawls; and the inevitable showdown — a gunfight in the street. But perhaps I like it so much because the apparent hero of this film is actually not the stoic gunfighter. It is instead a young lawyer carrying a bag full of law books instead of a gun. The movie also happens to provide a telling lesson about responding to the challenges of regulating the global capital markets.
For those of you who haven't seen the film, let me give a quick synopsis. The movie opens with our young lawyer, played by Jimmy Stewart, traveling from out East with the seemingly naïve intention of bringing law to the frontier. However, before reaching his destination, he is savagely beaten and robbed when his stagecoach is ambushed by a band of outlaws. Luckily, he is found by the John Wayne character — a hard-bitten, sharp-shooting cowboy — and brought to a little town where he is nursed back to health. He soon finds out the facts. The leader of the outlaws is a notorious thug and killer by the name of Liberty Valance. John Wayne, who our young lawyer befriends, turns out to be the protector of the town, and the one man tough enough to stand up to Liberty Valance.
The young lawyer sets out to establish a rule of law on the frontier. He is eventually challenged to a showdown in the street by a drunken Liberty Valance. Although opposed to settling disputes by violence, as well as being ignorant of guns, he steps out to meet his antagonist and his apparent doom. They face off; both men fire their pistols. Surprisingly, despite his skill as a gunfighter, it is Liberty Valance who falls dead in the street. Our young lawyer is a hero. He is universally applauded as "the man who shot Liberty Valance," and this fame helps him get elected to positions of great authority — governor, senator, etc. — and he is instrumental in ushering in the rule of law to the frontier.
Considering that I, myself, am a lawyer from out East, you can perhaps see why I like this film as much as I do.
What we are witnessing today with the interconnection of markets is nothing less than the opening of a new frontier. It is true that our capital markets have always had an international component, and that cross-border transactions have always been with us. But it is the exponential advances in computer and telecommunication technologies that have the potential to virtually eliminate the boundaries between markets. The Internet and other communication technologies — much like the railroad that ran through far-flung western towns of a century and a half ago — herald the potential creation of wealth and progress by connecting formerly isolated outpost and markets. Today, virtually any trader, broker or business — no matter the location — can conduct a transaction a half a world away with the click of a computer mouse.
The promises of this new frontier are many. These promises include lower transaction costs, greater choice, and greater competition among financial service providers, to the benefit of investors and issuers alike. Ever deeper and more liquid capital can now be directed to where it will be used most efficiently. Issuers now have the ability to seek capital at the lowest cost wherever it may be. Investors can now diversify their portfolio risk across borders more effectively and at less cost then ever before. All things being equal, modern economic theory suggests such investment diversity is wise.
However, all things are not equal. For one, in the United States, cross-border trading entails higher costs because foreign financial services providers cannot solicit US investors unless regulated by the SEC. The result is that US investors bear the cost of the intermediation by both a US broker and the foreign broker that actually executes the trade. All things are not equal also because this new frontier presents risks. We must keep in mind that as national markets become integrated, global risks become domestic risks. The cross-border consequences of the Asia Crisis of 1997 and the more recent subprime crisis are evidence of that fact. And just like in our film, bandits, not unlike the sadistic Liberty Valance, ply the borderlands. These modern-day bandits rob and defraud investors; not with guns, but by employing the same technologies used by legitimate multinational businesses and financial service providers. And as in the Wild West, we find snake oil salesmen plying their wares in our markets, foisting worthless or dangerous products on unsuspecting customers.
There is, of course, already law in the global capital markets — enacted in our individual jurisdictions and enforced by us, the regulators — which are designed to combat fraud and regulate sales practices. This is not unlike the situation faced by the young lawyer in our film. He discovered that those living on the frontier had a code. This code emphasized autonomy, strength, and individual action; it distrusted outside interference. And just as that code was not meant for a world of commerce and the railroad, the SEC's regulatory approach to cross-border financial services was devised when the world was a different place. Our approach was designed for markets that then were self-contained and isolated from the outside world.
So, how should regulators contend with this new frontier, what can we do? All of the risks I described can work to make this frontier a scary place.
One approach for dealing with this new environment is isolation. We can try to seal our borders. Much like the sheriffs of old required all strangers to check in upon arrival, we can insist that all entities — whether foreign or domestic — providing financial services or products come fully under our regulatory control in every detail.
We might also be tempted to open up the town gates — let in everyone who wishes to do business with our citizens, declare caveat emptor and accept the ensuing race to the bottom.
Neither of these approaches is economically efficient.
And, in the case of the SEC's, I believe our mandate makes both approaches difficult if not impossible. The SEC is charged with three overarching goals: protecting investors, making sure our markets are fair, orderly and efficient, and promoting capital formation. Protecting investors from fraud while assuring them that they are getting the best investment opportunities available, and the broadest array of information upon which to base their choices, is a challenge. Opening our markets indiscriminately or keeping our investors locked at home does not achieve any of these goals.
International collaboration is a third, better alternative.
Many of you might be wondering about the ending of the movie The Man Who Shot Liberty Valance. You might be asking yourself how could our naïve, young lawyer, a man who had never held a gun in his life, have beaten a notorious gunfighter like Liberty Valance. You appropriately would question my artistic and literary sensibilities if I were to enjoy a movie with such a clichéd and hackneyed ending. The answer is that our young lawyer didn't kill Liberty Valance. This is the hook that makes this a great movie, and teaches a valuable lesson.
What we learn is that Liberty Valance was actually killed by a shadowy figure at the end of the street. Just as the two men raise their pistols and Liberty is about to end our young lawyer's life, John Wayne hidden from view shoots Liberty Valance. You see, John Wayne realizes that for his town to advance and for its citizens to prosper, it needed the help of the young lawyer. Although he knew it meant he would become less central to the town, he decides to cooperate with the young lawyer to remove the barriers to a new, more efficient legal order.
My attraction to the idea of recognizing the regulatory regimes of counterparts that hold to the same objectives and achieve the same outcomes as a basis for allowing the cross-border provision of foreign services and products — or mutual recognition — grew out of a similar realization.
While countries vary in their approaches to securities regulation, many jurisdictions share the same passion for investor protection and market integrity. The protections these jurisdictions offer investors may mirror each other. And if counterparts in these jurisdictions can build mechanisms that make our oversight and enforcement systems relatively seamless, I believe that financial service providers may one day be able to operate on a cross-border basis and substitute compliance with their home jurisdiction's regulations for compliance with that of the host jurisdiction through a system of selective mutual recognition.
Reciprocal and selective mutual recognition could end duplicative regulation and lower the cost of capital for issuers. But, more importantly, it could also increase investment opportunities while enhancing investor protection and the ability of regulators to cope with international trends and risks.
Before I conclude, I can't help but return one last time to our movie. Some of you might have noticed a curious, almost distressing, component of our story. In order to achieve the desired end — the shooting of Liberty Valance and the opening of the town to the benefits of the modern world — both of our protagonists, the young lawyer and hard-bitten cowboy, were forced turn against certain cherished notions. John Wayne had to be willing to work collectively and, therefore, sacrifice his belief in autonomy and his need for personal glory. Jimmy Stewart, although opposed to aggressive action and confrontation, was willing to step out into the street, gun in hand, to stop Liberty Valance. In this same way, mutual recognition may require some regulators to depart from certain cherished notions. Each regulator must be willing to abandon total self-reliance and trust the regulatory oversight and capabilities of like-minded regulators. On the other hand, some regulators who would expect to be recognized may need to strengthen their regimes and be willing to step into the street and face down the bandits. I believe this is a task worth undertaking. As investors today look overseas for investment opportunities, we must be prepared to guard this new frontier.