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Remarks at the “SEC Speaks” Conference

Commissioner Kara M. Stein

Feb. 20, 2015

It is a pleasure to be with you today for the 44th annual “SEC Speaks.”

At the outset, I would like to remind you that the views I am expressing today are my own and do not necessarily reflect those of the Commission, my fellow Commissioners, or the staff of the Commission.

Before I begin my remarks, I would like to acknowledge the remarkable and dedicated career of Harvey Goldschmid. Just a few weeks ago, Harvey visited me to discuss his perspectives on a number of timely securities law issues. His superb intellect was reinforced by his engaging personality and skill as a teacher.

Harvey’s intense passion for the securities laws and investor protection was an inspiration to many of us. In authoring a tribute to Harvey Goldschmid in 2006, SEC historian Joel Seligman labeled him one of the most influential Commissioners.[1] I couldn’t agree more.

This conference provides us with an opportunity to look backward and to look forward. As I look back over the SEC’s history, I am always impressed by the rate and degree of change.

Picture Wall Street 80 years ago — the street was filled with dozens of young men — “runners” — carrying paper back and forth between various brokers and dealers and banks and exchanges and companies that made up the securities markets. Runners were the backbone of the securities market, delivering paperwork and stock certificates at a rate of $8 per day. Maybe the telephone would ring (the desk telephone was launched in 1932) or a telegram would arrive. And investors, would look to the newspaper to decide what stocks to buy or sell.

In 1930, the New York Stock Exchange (NYSE) introduced new and improved high-speed tickers — devices that communicated stock prices — that could print 500 characters a minute. The new speed was double the rate of the old tickers. Paper was the basic mode of market communication, but even then technology was changing the market.

Fast-forward 80 years, where advances in technology and communication have forever transformed the landscape of our securities marketplace. The world is entirely digitized. Instead of runners carrying papers, fiber-optic cables carry digital signals from Kansas to New York faster than the human brain can process.

Microwave towers beam messages between market centers in less than one-half a second. High-speed computers process trades almost instantly over a global network without the touch of human hands. Digital signals, not paper, are now the basic mode of market communication. And these signals are leading to significant changes in the way our securities markets function — from trader gestures and shouts to complex algorithms or “algos” that interact in today’s market with little supervision.

The intersection of technology and a new highly interconnected global marketplace is part of a digital revolution that affects business models and products — and how our securities market operates. Electronic trading venues have proliferated. Trading volumes have increased exponentially. Internet finance continues to grow rapidly. In fact, the Internet is being used more and more as a resource for providing financial services, including the use of robo-advisers.

This digital revolution results in opportunities for rapid innovation in the financial system. And, it is also disrupting our regulatory paradigm. Our regulatory architecture needs to evolve and stay out on the edge of these developments. We need to be constantly reassessing and redefining our regulatory perimeter as new financial products and financial structures emerge and evolve. Our regulatory approach needs to be flexible and nimble to adapt to this new and constantly changing digital world.

This rapidly evolving landscape brings new challenges as the Commission carries out its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Today, I want to focus on three topics connected to this new landscape. First, I want to discuss how we should be reimagining disclosure and data to keep pace with a digitized and data-centric market. Second, I’ll spend a few minutes talking about how technology has pushed us toward increasing complexity and some concerns I have in this area.

Finally, after discussing how our regulatory regime has been disrupted in many areas, I wanted to conclude by talking about how, despite these disruptions, there are certain principles — like a culture of compliance — that are perennial, and vitally important.

Shortly after the Commission was created, the SEC began requiring companies to provide basic information about their securities to investors, including information about the financial performance of the companies. Over the years, the SEC has sought to update and improve those standards to elicit timely, relevant information from companies. Currently, the Division of Corporation Finance is reviewing certain disclosure requirements to consider ways to make them more effective. Today, I want to focus on how companies and market participants are asked to provide disclosure and how technology can improve it for the benefit of all.

As we think about disclosure, it is important to look ahead. How will disclosure be used in the year 2020? How will data be used in 2020? I believe that now is the time to consider a fundamental shift in disclosure - a shift that is driven by a commitment to transparency and an enhanced user experience.

We should be asking several questions about the role that technology can play in disclosure. Can technology enable a new way of communicating with investors and market participants?

Instead of focusing on pushing data and information to investors, can investors and others access data dynamically or in real-time? How can technology and data empower every investor from the least to the most sophisticated?

Technology makes it possible to meet the needs of different types of investors at different points in time. In a data-centric world of nanoseconds, it’s surprising that the Commission’s disclosure regime hasn’t changed all that much.

Our goal should be leveraging data to enhance disclosure and provide greater transparency. For example, in 1995, the Commission launched the Electronic Data Gathering, Analysis, and Retrieval system, known as EDGAR.[2] EDGAR brought about monumental change to how investors obtain information on companies. Paper documents were replaced with electronic documents that could be accessed over the Internet. This was a good start.

However, in the last 20 years, technology has evolved, but EDGAR hasn’t changed much. While our IT staff has made important updates, EDGAR has not kept pace with technological advances.

Going forward, we should be thinking broadly about new and creative ways to make the information contained in the filings more accessible to investors. In short, modernizing this critical disclosure portal should be a top priority to provide benefits to both companies who file and investors who get their information from the filings.

We also should be moving to a world in which investors can request and direct the type and the quantity of data they receive: from basic details about a company to more detailed and robust information. Some investors may only want to know the basics, and that should be provided to them. But, more sophisticated investors may want more detailed, targeted information, and they should be able to “click” and drill down to get that detail. We should be thinking about how investors obtain and use information about companies and how to improve the user’s experience.

Making data available more quickly and in a format that is more usable could enable better decision-making, empowering both investors and market participants. Indeed, with current technology, it is possible to layer disclosure so that those who want to get beyond the basics can do so quickly and easily. We have a precedent for doing that in the mutual fund summary prospectus, which itself should be re-evaluated as part of the disclosure effectiveness project to evaluate how it is working for firms, investors, and other market participants.

And, with the computing and data crunching power available today, additional layers could provide investors with direct access to raw corporate data — for example, loan quality and swaps exposures, for a large bank, or product sales and distribution information for a consumer products company.[3] Further, greater transparency in pricing and transaction data would reduce costs and increase market efficiency.

There are many ways that we can get this done. Perhaps it’s built around a baseline disclosure, and those who want to know more can “click” their way through to deeper and more extensive information. Fundamentally, we should be moving toward data protocols that allow data to be submitted more easily by companies, and analyzed and compared more easily by investors. This would reduce the burden to filers by improving the capture of structured data while at the same time providing all market participants with greater ability to use and share the data.

Data is obviously only useful if it gets used. We should be improving the collection and use of data. Extensible Markup Language (or XML) and eXtensible Business Reporting Language (or XBRL) are globally accepted standards that set the format of data that can be read by machines. They are important protocols for establishing a baseline for the collection and analysis of data. This should make it easier for everyone to provide and access data.

Furthermore, easily comparable and accessible data could have other significant benefits. For example, improving the quality of data available on smaller and medium size companies could lead to improved secondary market liquidity. Improved data and transparency on market quality statistics could empower small and large investors and benefit the market overall. In short, the digital revolution is requiring us to rethink and re-envision disclosure.

Digital disruption also has led to increased innovation. That innovation is at times leading to increasing complexity, which is requiring us to rethink our approach to traditional financial products.

One of the lessons the early pioneers of the Commission learned from the crash of 1929 was that complexity and opacity are bad for investors, markets, and capital formation. The famous economic historian John Kenneth Galbraith, in his well-known history of the crash of 1929, described holding companies of holding companies built upon a pyramid of leverage and complexity that ultimately played a key role in bringing the market to its knees.[4]

We learned this lesson yet again during the last financial crisis. We saw loans packaged into bonds and repackaged into bonds of bonds, which were repackaged again into even more complicated and confusing bonds of bonds of loans. The process got so “innovative” that these bonds of bonds of loans were “synthetically” created — almost out of thin air. It got so confusing that one had to wonder how much this added to capital formation. Ultimately, these complex financial instruments imploded in ways similar to what Galbraith described in his history of the 1929 crash.

Technology and the digital revolution have in many ways facilitated the explosion of exotic, synthetic and difficult to understand financial products. These products are often hailed as innovative or disruptive — perhaps some are. But complexity upon complexity does not enhance capital formation. During the financial crisis, we witnessed the collapse of numerous complex, opaque, and ultimately ill-considered financial products.

This had devastating consequences for not only the investors in those products, but also the entire financial system and the global economy. Do we really benefit economically from a more complex financial activity when just about the same thing can be done in a simpler form? We need to continuously to ask whether such endlessly complex products are truly facilitating capital formation.

We also learned during the financial crisis that complexity can mask the interconnections between firms. We should be focusing on ways to improve the transparency of those interconnections. Revealing and understanding those interconnections is not only important for regulators, but it is critically important to market participants. Risk will almost always take new forms and can be hidden by so-called financial innovation. We need to be focused on how the next financial risks will emerge. The mutual fund data gathering project is also another prime opportunity to get greater transparency regarding such interconnections between market participants, including activities such as derivatives and securities lending.

Shifting gears now — I have just spent some time discussing how technology has disrupted the markets and our regulatory regime. I have tried to focus on how we need to stay out on the edge or frontier of this change.

Having said this, it is always important to keep in mind that certain of the Commission’s tools are perennial — whether we are talking about 1930’s Wall Street or today’s digitized marketplace.

For example, the anti-fraud provisions of the federal securities laws are just as important in today’s new digital world as they have been in the past. Charles Ponzi conducted his postage stamp scheme in the 1920s, but those scams still take place, and sometimes with an increasing reach and greater ease in today’s digital market. As investors can be solicited over the Internet without regard to geographic borders, our relationships with other regulators become paramount to halting frauds and returning money to harmed investors.

Also, regardless of the era, a firm’s culture sets the tone for regulatory compliance. This was as true in the past as it is now. The Commission grants certain benefits for companies with a good record of compliance. But, what should the Commission’s response be when there isn’t a good record of compliance?

Enforcement actions are a powerful deterrent. However, the Commission has other tools that can reinforce compliance and be powerful deterrents. That’s where I believe the tool of automatic disqualifications, or “bad actor bars,” plays a role. These bars are triggered because parties cannot be trusted with the more flexible regulatory privileges provided in certain parts of the securities laws. Congress designed them to do that, and that’s how I’ve been seeking to have the Commission apply them.

It thus comes as somewhat of a surprise to me to see that much of the recent focus on automatic statutory disqualifications, colloquially called “bad actor” bars, appears to be coming through the lens of “crime and punishment.”[5] Let me be clear, bad actor bars, including partial bars or conditional waivers, are not intended to be used as “punishment.”

The argument that automatic disqualifications should not be considered a sanction or an enforcement tool[6] is a red herring — a verbal sleight of hand that distracts from the real question. The real question is whether automatic disqualifications are being applied appropriately and effectively. We need not look to punishment as a basis for a strong and thoughtful approach to analyzing waiver requests.

Recidivism and deterrence provide a substantial foundation for such an approach.[7] A fully effective statutory disqualification from something like Rule 506 private placements can have a significant impact on a firm.[8] That is, of course, precisely why it is such a powerful compliance tool — albeit one that has come to be routinely ignored. Ignoring this cannot be defended under the guise of rejecting “punishment.”

The bars provide a forward-looking or prophylactic tool, designed to deter and prevent recidivism and restore trust in the markets. The fact that violation of law is distinct from the particular privilege does not mean that a waiver should automatically be granted. If we were to follow that approach, then we would be simply ignoring the statutory and regulatory requirements that impose disqualifications based on serious misconduct.

More fundamentally, problems of compliance start and end at the top. The degree to which those at the top knew or should have known about a violation or a failed culture of compliance is an important factor in analyzing whether an automatic bad actor bar should occur. I have been urging the Commission to adopt and use this factor in the context of evaluating these bars.[9] And if a firm is so sprawling and large that the top simply cannot manage it at all, isn’t that a problem in and of itself?

At the end of the day, though, the argument that we should grant a waiver whenever the reason for automatic disqualification is “unrelated” to the waiver defies common sense.

And the same logic holds true for securities law violations. If you manipulate LIBOR, enable offshore tax evasion, or launder drug money, should we wait for you to defraud a pension fund before barring you from raising money outside of strict Commission oversight?

This last point is important. I don’t just view automatic disqualifications as a tool for protecting investors or ensuring fair and orderly markets. Effective application of bad actor bars is fundamental to facilitating capital formation as well. Capital formation depends on trust.

So where do we go from here? We need to bring both rigor and transparency to this process to give businesses, investors, and the public a clear sense of the rules of the road. I do not support returning to the time when Commission staff rubberstamped waivers for the largest, most well-connected firms. The fact that, until very recently,[10] there were only two examples of large firms losing only one of their privileges (WKSI), speaks volumes.

A focus on establishing a transparent, consistent process is paramount — something that did not exist when waivers were routinely granted. Indeed, much of my initial interest in bad actor bars comes from an SEC Inspector General’s report that sharply criticized the Commission’s waiver process.

That report discussed concerns about the “clarity and consistency of the Commission’s waiver process” and strongly encouraged the Commission to establish waiver criteria and apply it consistently.[11]

We need to continue to complete our policies and procedures so that we can be transparent to all parties, including those subject to a potential disqualification, regarding how the Commission will handle a waiver request. I appreciate the work that has been done in beginning that process, but we can and should take the next steps to complete it. In most cases, I believe it ought to be public.

In conclusion, digital disruption is a new force in our securities marketplace. It disrupts the status quo and drives new and powerful innovations. However, it also disrupts our regulatory paradigm. We can and need to do more to keep pace.

As I mentioned, how we encourage regulatory compliance is a perennial concern. I have spoken several times now, both in speeches and statements, about the importance of using all of the Commission’s tools to promote a culture of compliance. Now, it is simply about moving forward and applying these principles as consistently and transparently as possible.

Thank you very much for your time and attention today. It was a pleasure being here with you.


[1] Joel Seligman, Foreword: In Honor of Harvey J. Goldschmid, 106 COLUM. L.REV., 1479 (2006).

[2] The SEC began building an "electronic library" in 1984, under then-SEC Chairman John Schad. The SEC awarded the first contract to build EDGAR, as a source of information for investors, in 1989, under then-Chairman David Ruder. In 1995, the Commission launched, which provided investors with access to electronic filings by corporate issuers.

[3] See generally, Hu, Henry T.C., Disclosure Universes and Modes of Information: Banks, Innovation, and Divergent Regulatory Quests, 31 Yale J. on Reg. 565 (2014).

[4] See generally, Galbraith, John K., The Great Crash 1929, Houghton Mifflin Harcourt, 1954.

[5] See, e.g., Peter J. Henning, The S.E.C.’s Hazy Approach to Crime and Punishment, N.Y. Times Dealbook, Feb. 9, 2015, available at (accessed Feb. 20, 2015).

[6] See Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-9414, at p. 126 (July 10, 2013) (noting that “bad actor disqualification may change how settlement negotiations are conducted . . . [and] the Commission may grant an appropriate waiver from disqualification based on settlement negotiations”).

[7] See Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-9414, at pp. 112-113 (July 10, 2013) (stating that the bad actor bar is intended to and should reduce recidivist participation in offerings and deter future fraud).

[8] The Commission considers this impact with respect to each waiver request. See, e.g., Revised Statement on Well-Known Seasoned Issuer Waivers (noting that severity of impact on the applicant is a factor), available at

[9] See Dissenting Statement In the Matter of Oppenheimer & Co., Inc., Commissioner Luis A. Aguilar and Commissioner Kara M. Stein, February 4, 2015, available at; see also Commissioner Kara M. Stein, Remarks Before the Consumer Federation of America’s 27th Annual Financial Services Conference, December 4, 2014, available at

[10] See Order under Rule 506(d) of the Securities Act of 1933 Granting a Waiver of the Rule 506(d)(1)(ii) Disqualification Provision, November 25, 2014, available at

[11] SEC Inspector General Report of Investigation, Case No. OIG-522, available at

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