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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks before the Forum for Corporate Directors


Commissioner Kathleen L. Casey

U.S. Securities and Exchange Commission

San Diego, California
March 22, 2011

Thank you, Chris [Cox].

I am so pleased to join you all this evening. I was honored that Chris asked me to speak before your prestigious group of directors and executives. I know the Forum has a long history of impressive speakers, some of whom I know, and respect greatly. So I hope not to disappoint too much tonight.

This will probably be clear to you fairly quickly, but before I get too far along, I should note at the outset the standard disclaimer that the remarks I make represent my own views, and are not necessarily those of the SEC or my fellow Commissioners.

Tonight, I thought I would try and give you some insight into what is happening on the ground, so to say, at the SEC as well as highlight some of the implications and implementation issues flowing from the new Dodd-Frank law. Some of these issues are worth closely noting because I believe they signal important shifts in how we have historically regulated our financial markets and raise serious questions about how such a shift will affect investor choice and protection, U.S. capital formation, innovation and competitiveness.

It’s early Spring in Washington, and while that means March Madness and filling out NCAA tournament brackets to most people, at the SEC it means filling out ambitious Dodd-Frank rulemaking mandates. Personally, I am a hockey fan, so I wouldn’t know better anyway.

That said, in many ways, I think it is hard for people to appreciate the enormity of what Dodd-Frank requires of federal regulators, and, in particular, the SEC. In terms of breadth and scope, Dodd-Frank is arguably the most significant financial legislation in modern history. The legislation ushers in a breathtaking amount of changes that will result in fundamental shifts in the legal, regulatory and policy landscape affecting our markets and our economy in a short period of time. These changes touch every aspect of our financial markets, from consumer credit to proprietary trading at financial firms, from OTC derivatives markets to securitization markets, and from private fund registration and regulation to corporate governance at public companies.

Indeed, when one compares Dodd-Frank to the Sarbanes-Oxley Act of 2002, S-Ox seems almost quaint: Dodd-Frank is more than ten times longer, and mandates more than ten times the rulemakings and studies that S-Ox required. And even when one looks just at the SEC’s burden under Dodd-Frank, the Commission still has to do nearly six times the rulemakings and three times the number of studies it had to do under S-Ox — most of them within one year. The volume of this rulemaking, coupled with the speed at which Congress expects it to occur, poses significant challenges to the agency.

These challenges are set against a brawling budget battle in Congress over taking on our structural deficits and our national debt. As Chris knows well, given his leadership in the House on these issues, reigning in federal spending, reforming entitlement programs and balancing our budget are vital to our financial stability, economic growth, strength and prosperity and national security. Further to this is a corresponding emphasis on supporting jobs and economic growth, and thus a sensitivity to undue or excessive regulatory burdens.

This necessarily underscores active monitoring of the implementation of Dodd-Frank requirements and the impact of the implementing rules. So the debate over appropriate funding levels at the SEC and CFTC post-Dodd-Frank comes at a critical time for policymakers as they grapple with these bigger budget, policy and economic objectives. Thus, for the agency, this means a significant focus of congressional oversight is on issues of accountability, effectiveness, and efficiency as well as implementation of Dodd-Frank requirements. In short, the Chairman spends a lot of time on the Hill and the agency spends a lot of time engaging with policymakers on these important issues.

As I noted, our current agenda is almost exclusively dictated by Dodd-Frank. To date, the agency has produced 30 proposed rules, and adopted seven final rules and two interim final rules since passage of the new law. This is in addition to several studies mandated by the law, some of which contemplate hugely significant changes, such as the regulation of broker dealers and investment advisors.

The sheer amount of required new rules poses particular risks that are less a function of budgetary resources than of the natural limitations on the capacity of the Commission to thoroughly consider often novel and complicated rule proposals. The fact remains that there are only five Commissioners, and we are ultimately charged with considering, proposing and adopting rules. So although these rules are drafted and recommended by the various divisions, they must all be considered and approved by the Commission.

Indeed, the real threat posed by such volume is that we are not able to fully consider the rules we are adopting, and that short public comment periods imposed in an effort to comply with Dodd-Frank deadlines may undermine their very function of supporting and strengthening the confidence we have in the likely effects of our rules. As part of this, the cost-benefit analysis of our rules is also severely limited and potentially undermined. As a legal certainty matter, this may make our rules more susceptible to challenge on APA grounds — a result that serves neither the interests of the Commission nor the interests of the investors and markets we serve. For these reasons, I have been encouraged by Congress’s apparent recognition of these implementation risks and its openness to rationalizing and scaling the new law’s mandates by giving regulators more time.

Moreover, the same concerns counsel the SEC to focus at this point on only those Dodd-Frank rulemakings that are expressly required by the statute. Where the agency has been granted discretionary rulemaking authority, we should be judicious in using this authority, as these circumstances are not ideal for considered and thorough rulemaking.

In addition, the breadth of Dodd-Frank makes it increasingly important that policy makers stay mindful of the costs and effects that these regulations will have on our markets. The likely impact of Dodd-Frank will be enormous, and we will have no idea of the actual costs for years to come. If one were to simply add up the cost estimates we have provided in the 30 odd rules we have already proposed or adopted, you get a rough measure of scale and potential impact.

Given prior experience, such as the original estimates about the cost of S-Ox, however, these actual costs will likely prove substantially more significant than legislators and regulators have predicted. Quite frankly, Congress and the Commission are just not very good at predicting costs of new laws and regulation. This error probability is great enough when legislative changes are made discretely, but they are more greatly magnified when changes are made to a dynamic ecosystem such as our financial system and on such grand scale.

But perhaps even more important than seeking to identify direct costs, policy makers and regulators need to be mindful of the indirect costs that the law will impose. We need to be asking questions such as:

  • How will the new regime, which attempts in part to fundamentally alter the operation of our financial markets, affect the health of our capital markets, which ultimately serve to help businesses raise capital and grow?
  • How will our rules impact a company’s decision whether to go public, or, if public, to delist and go private? How will our rules affect foreign issuers’ decisions to consider listing in the United States?
  • How will our rules influence companies’ determinations to organize or reorganize offshore and list on foreign exchanges?
  • In a global economy where capital flows freely, how will our rules potentially alter our competitiveness and place of prominence as the largest capital market in the world?

Again, getting a firm handle on answers to some of these questions can be very difficult, since there are so many moving parts, often involving different agencies and regulators, and the instinct of regulators is to view their rules in isolation. Given the overlapping and concurring actions, however, we need to consider these issues as holistically as humanly possible. I say humanly, because we are of course inherently constrained by our ability to perceive and understand that which we do not know and that which is sometimes simply unknowable. Recognizing these limitations should only encourage further humility and incrementalism in our regulatory approach.

While our pace has slowed a bit and there is a recognition that some Dodd-Frank timetables simply can’t — and won’t — be met, I remain concerned about both the quantity and quality of our rulemaking, including the direction some of the rules have taken.

While the SEC has long had a reputation as a more prescriptive, rules-based regulator vis-ą-vis other regulators such as the CFTC, or even other jurisdictions such as the UK, the securities laws themselves have historically relied on disclosure and transparency as a primary means of regulating market conduct and promoting investor protection. Dodd-Frank signals a significant shift from this approach in key respects and, indeed, reflects a different ruling philosophy regarding the role of the federal securities laws.

With Dodd-Frank you see a continuing trend toward the federalization of corporate law, a tendency toward prescriptive over disclosure-based solutions, a failure to properly identify market failures as a basis for government action, an erosion of the historic differences in approach between regulating private and public markets and the underlying rationale underpinning differences in levels of protections for sophisticated and retail investors, and expansion of the objectives and purpose of the securities laws. These are born out, for example, in the new law’s provisions related to corporate governance, OTC derivatives, securitization, private fund registration and regulation and specialized disclosures.

Further, the Commission itself, in exercising its discretionary authority under the law, has in several instances chosen to go beyond what the statute requires or to be more prescriptive in its rules than required by the law.

Corporate Governance provisions

The SEC has been given substantially expanded authority, and in some cases an outright mandate, to expand the reach and focus of federal securities regulation, including into traditional state law matters of corporate governance.

Dodd-Frank does not mark the federal government’s first foray into corporate governance matters. The Sarbanes-Oxley Act of 2002 was the most significant step by the federal government into matters affecting corporate law since 1934. S-Ox, among other things, imposes on CEOs and CFOs the obligation to design and certify an issuer’s internal control over financial reporting, requires issuers to have completely independent audit committees, requires public company CEOs and CFOs to reimburse bonuses and stock trading profits in the event of certain financial restatements, and prohibits loans by public companies to its officers and directors.

Additionally, for decades prior to the enactment of Dodd-Frank, the SEC had been under pressure to adopt some form of proxy access for public companies and, in May 2009, the Commission proposed a substantive proxy access regime that would be imposed on all U.S. public companies. After Dodd-Frank granted the SEC the authority to require proxy access, the Commission adopted a highly prescriptive proxy access regime that, if upheld by the D.C. Circuit, will effectively preclude the sort of private ordering in the proxy access space that was just beginning to take shape under state law.

But if, in S-Ox, Congress “upped the ante” on the bet that the federal government can effectively regulate public corporations in matters traditionally left to state law, then it “doubled down” on that bet when it passed the Dodd-Frank Act. Not only did Dodd-Frank authorize the Commission to adopt proxy access rules, it also, among many other things, requires that the Commission:

  • mandate “say on pay” for all public companies;
  • broaden required executive compensation disclosures, including “pay for performance” information and “pay fairness” disclosures·,
  • consider regulations or guidelines (together with other regulators) that may impose substantive restrictions on executive incentive compensation at financial institutions;
  • require compensation committees at listed companies to be entirely independent; and
  • require listed companies to adopt compensation clawback policies for non-compliance with financial reporting requirements.

As with S-Ox, these provisions are inherently prescriptive in nature even when arguably designed as disclosure-based requirements, resulting in one-size-fits-all standards.

Further, the Commission’s rules implementing several of these provisions, in some instances, go beyond the plain language of what the statute requires, and in others are more prescriptive than required. For example, our final rules implementing the say-on-pay requirements of the Act apply to all public companies, large and small, despite that the Act explicitly mandated that we consider whether the rules disproportionately impact small issuers, whose pay practices had nothing to do with the risk-taking that is regarded as playing a role in the financial crisis.

Notably, the corporate governance provisions that were ultimately included in Dodd-Frank were scaled back from Senator Schumer’s original proposal. I have little doubt, however, that the other corporate governance agenda items from that proposal, including mandating de-staggered boards, majority voting, and split Chairman and CEO roles, will resurface as advocates of a greater federal role in corporate governance move on to future battles.

Furthermore, these pressures toward federalization and prescriptiveness are not purely domestic. Indeed, they reflect the increasing interest of many of our international counterparts to impose corporate governance issues at the international level. A consequence of these developments is that U.S. regulators increasingly are under pressure from our international counterparts to require similar policies for our capital markets and for U.S. public companies.

The recent rules implementing Section 956 illustrate this point well. The SEC has recently proposed rules, based on guidelines issued by the Financial Stability Board for large banks, that will prescribe with particularity how large financial firms we regulate must structure their incentive-based compensation to executive officers. This is so even though we have little idea whether such rules, designed for large international banks, are necessary or appropriate for firms that the SEC regulates, such as large investment advisers.

Like S-Ox, the Dodd-Frank Act was passed in reaction to dramatic market events, crisis and scandal. Indeed, such interventions are most likely to occur under these circumstances. What cannot be said, however, is that these interventions are narrowly tailored to address — or for that matter are even tangentially related to — the crisis or scandal at hand. That is, no demonstrable market failure was identified to justify such broad provisions. Although the financial sector experienced events that could be traced to various failures, the same cannot be said of public companies generally.

And yet, the governance reforms impose substantial new burdens on all public companies, not merely those large financial institutions whose risk-taking activities have been the primary focus of concern. Nevertheless, because the arguments extolling the purported benefits of uniform corporate governance provisions have, heretofore, been largely impervious to analytical rigor, they are readily adopted under the uncritical assumption that they are “good.”

The corporate governance provisions in Dodd-Frank, like those adopted under S-Ox, were adopted in this fashion, in the absence of any empirical evidence that these measures realistically could have prevented scandals or mitigated the crisis, nor even any assurance that these measures will ensure better performance in the future.

OTC Derivatives

As a former director of the Division of Corporation Finance, Alan Beller, said recently, the SEC and CFTC have been tasked in the OTC derivatives world with creating a market framework in one year that has taken more than 60 years of refinements in the equity markets to create.

Although Dodd-Frank is quite specific and prescriptive in some instances — for example, creating enhanced duties and obligations for counterparties in swaps transactions with “special entities,” and dictating the role and responsibilities of the Chief Compliance Officers within clearinghouses, SEFs, swap dealers, and major swap participants — it also leaves a fair amount of discretion to the SEC and CFTC in filling out the law’s clearing, trading and trade reporting mandates.

Here, notably, we have seen an instinct to be more prescriptive than is required or necessary. For example, the Commission at the proposing stage has heavily relied on ownership and governance restraints as a primary means of mitigating potential conf1icts, which could operate to reduce or prevent access to clearing or trading. This is so even though such requirements are not mandated by Dodd-Frank and even though there are other provisions of the law expressly designed to ensure access to clearing and SEFs. Moreover, in several instances, the Commission has decided to micromanage the operations of clearing agencies and SEFs and to propose additional requirements for their Chief Compliance Officers beyond what Dodd-Frank requires.

There is no doubt that enhanced transparency and resilience of this market is beneficial, but it is also essential that we get the rules right. Most critically, we must let our developing experience and understanding of these markets inform the development of the regulatory regime. An overly prescriptive regulatory architecture designed with little understanding of these markets, and the products and participants in these markets, could have severely harmful effects on American competitiveness.

If addressed imprudently, we may end up with a highly prescriptive regulatory regime and no regulatees. Not only will our competitors in Asia and Europe be more than happy to have the business, and the jobs, we will make it more difficult and expensive for American companies that use derivatives to hedge their business, interest rate, credit, and currency risks.


The financial crisis highlighted weaknesses in the asset backed securities market and called into question the efficiency and operation of this market. These weaknesses included, among other things, a lack of market discipline by participants in the securitization process, including insufficient independent due diligence, analysis and understanding of the risk of loss in structured financial products.

Enhancing the strength of these markets is clearly an important regulatory objective, and the Commission has proposed rules, including the disclosure of loan-level information, to improve the transparency of information provided to investors in ABS to facilitate independent analysis. Nevertheless, we have also seen a significant shift of focus in our rulemaking — from reliance on disclosure to an increased emphasis on substantive requirements. For example, in January we adopted rules that go beyond the requirement in Section 945 of the Act, which requires simply that an issuer perform a review of the assets underlying asset-backed securities and disclose the nature of that review. Instead, the Commission adopted rules that require that the issuer’s review satisfy a minimum, substantive, performance-based standard.

Furthermore, concerns about the adequacy of protection for even institutional and other sophisticated investors have led to a blurring of the differences between public and private market requirements. In the Commission’s pre-Dodd-Frank proposal to revise Regulation AB, for instance, we proposed to require, as a condition to the availability of the private placement safe harbors provided by Rule 144A and Regulation D in ABS offerings, that issuers commit to provide to investors, up-front and on an ongoing basis, the same information that would be required in a registered transaction.

I supported this proposal as an effort to address concerns relating to the amount and quality of information available to sophisticated investors about these structured products. But, as I noted when we proposed these rules, it is critical that our rules do not disincentivize or relieve institutional investors of their obligations to conduct appropriate due diligence before investing in these securities. Moreover, the answer to a failure by some investors to analyze their investments is not to regulate to the “lowest common denominator,” and thus to eviscerate the private placement market for ABS that is critical to our capital markets and, indeed, to our economy.

More troublingly, we are required to adopt rules that would implement Section 621 of Dodd-Frank, which prohibits underwriters, sponsors and similar parties in securitization transactions, for one year, from engaging in any transaction that would “involve or result in any material conflict of interest with respect to any investor in a transaction arising out of such activity.”

Sounds simple enough, right?

But, what is a material conflict? What is the universe of transactions we are talking about prohibiting? The more questions you ask, the more questions are raised that must be answered.

The potential ramifications of this provision are too broad to discuss meaningfully in the time we have available to us; suffice it to say that, improperly implemented, this provision could thwart beneficial — even necessary — market activity in these transactions and otherwise make securitization transactions too risky and expensive for securitization parties to undertake.

Private Fund registration and regulation

Dodd-Frank also eliminated the exemption from registration for certain private fund advisers in an effort to ensure that advisers to larger, more interconnected, private funds — such as hedge funds — would be registered with the Commission. The goal of this expanded registration was to bring these potentially riskier funds within the ambit of the Commission’s regulatory framework, in order to allow the Commission to better monitor those risks and to enhance the protection of private fund investors.

At the same time, Dodd-Frank established three new exemptions from registration: exemptions for venture capital fund advisers; private fund advisers with between $100 and $150 million assets under management; and foreign private advisers. In particular, as the legislative history makes clear, Congress recognized that venture capital funds do not present the same risks as the larger funds that must register with the Commission and, indeed, play a significant role in supporting innovation, capital formation and economic growth.

The Commission has proposed rules to define these categories of advisers in an effort to give effect to these exemptions. But the Commission has given with one hand, while it has taken away with the other. On the same day we proposed the rules to exempt venture capital fund advisers and others from registration, the Commission also proposed rules that would require these same unregistered advisers to submit information via Form ADV, the same reporting framework as do registered advisers. Although Congress gave the Commission the authority to require such reporting, it was not mandated. Instead, reporting and recordkeeping would be imposed only “as the Commission determines are necessary or appropriate in the public interest or for the protection of investors.”

While it is true that the proposed rule did not require these “exempt reporting advisers” to submit the full range of information as do registered advisers, our release clearly left open the possibility that the Commission could do so in the future. Moreover, the scope of the reporting requirements was premised, at least in part, on the belief that these exempt reporting advisers could be subject to examination by Commission staff.

I believe that the reporting requirements (which will be followed by recordkeeping requirements in a subsequent rulemaking) blur the line between a “registered” and an “exempt” adviser. While purportedly exempt from registration because they do not present the same concerns as do the larger, registered funds, these advisers will still be subject to reporting, recordkeeping, and examination. Consequently, what is left that can distinguish these so-called “exempt reporting advisers” from those fully registered with the Commission? The answer is, very little, and could easily become a distinction without a difference.

But it is not only the collapse of the distinction between registered and unregistered advisers that concerns me in this space. Although one can argue that submitting limited information via Form ADV will not impose significant costs on these advisers, that misses the cumulative effect of these regulatory changes: a proposed regulatory approach that contemplates exams and active oversight via reporting and recordkeeping will inevitably require these exempt advisers to absorb the additional costs of robust compliance functions and associated compliance personnel. The specter of these increased costs is particularly concerning given the significance venture capital funds have for the ongoing growth of our economy and their vital role in facilitating innovation. This overall approach threatens to make it more costly and burdensome to advise a venture capital fund without a strong corresponding regulatory purpose or rationale.

Specialized Disclosures

Finally, Dodd-Frank includes a number of “specialized disclosures” — related to Conflict Minerals, Mine Safety, and Resource Extraction Payments. These provisions, according to their statutory language, are intended to achieve different policy objectives that, while noble in intent, depart from the traditional focus and purpose of financial disclosure in providing information material to investors’ analysis of their investment alternatives. Such expansion of purpose threatens the usefulness of disclosure to investors and challenges one of the primary means by which our laws seek to inform, empower and protect investors.

Risk/Costs of such approaches

So what are the likely implications of such approaches on our markets? Investors? Our competitiveness? Financial stability?

As a starting point, it seems to me that the mistake of such approaches is that they operate on the presumption that regulators generally have better insight or solutions to market problems.

This is not a lesson from the crisis. Indeed, regulatory decisions played an important role in fostering, facilitating and exacerbating the conditions of the crisis.

The role of, and reliance on, credit ratings illustrates this well. In the name of investor protection, the SEC began requiring credit ratings as a condition for investing, as a proxy for creditworthiness, embedding them in our rules and expanding the purposes they served. Other regulators and supervisors followed suit. Over time, official references and uses of ratings had found their way into every aspect of our financial markets. This official reliance created a government sanctioned oligopoly which insulated the big three ratings firms from market discipline and competition, making it more likely that failures or weaknesses in their ratings or ratings processes would have systemic effects.

It is a dangerous cycle, but one that is in danger of playing itself out again in different parts of our market if we follow similar approaches to regulation. Indeed, despite requiring the removal of credit rating references on the one hand, the new law includes several other, conflicting, provisions that would put the government back in the business of essentially endorsing ratings and rating agencies.

Overly prescriptive, static, one-size-fits-all rules in a dynamic system run the risk of design failure, and promoting homogeneity that can lead to greater systemic risk. They burden investors to the degree that they do not meaningfully enhance decision-useful information or protection. They increase regulatory costs, discriminate disproportionately against smaller firms, and can act as barriers to entry minimizing the disciplining effect of competition.

To the degree this results in greater consolidation, you have greater concentration of risk. To the degree the rules hardwire structures and outcomes, they stymie innovation, capital formation and growth.

Going public has historically been viewed as a significant and positive step in the lifecycle of a company. IPOs have been viewed as opportunities for companies to gain access to large pools of capital that will allow the company to grow in directions that may not otherwise have been possible. IPOs have also been viewed as enticing opportunities for investors to share in potentially outsized rewards associated with investing in young, dynamic, growing companies. To the extent that a result of the new law’s requirements and the SEC’s rules is that the costs of being a public company are greater than the benefits, private companies will be at a competitive advantage compared to their public company rivals, and alternatives to going public will become relatively more attractive than undertaking an IPO. Thus, some companies that may have sought to expand through a capital infusion may choose not to expand.

Many more companies would likely elect to raise capital through private placements instead of through a public offering. As a result, retail investors have far fewer opportunities to invest in earlier stage companies with significant growth opportunities, and instead are largely relegated to investing in more mature, lower-growth public companies.

Yet, if our regulations inadvertently drive IPO candidates into the private placement market, we should question whether we have the regulatory balance right. We should ask whether we are accomplishing our mission of protecting investors and promoting efficient capital markets if we make the public markets unattractive to companies looking to grow and to investors seeking investment opportunities.

That said, private placements are an essential element of our capital markets and are vital to our economy, and the SEC and other regulators should actively support and encourage a robust private market. We should be just as sensitive to ensuring that our answers to a shrinking public market are not to seek to restrict the private market by chasing the very capital and investors that unduly onerous regulations have driven out of the public market.

Of course, increasingly, companies’ options for raising capital are not limited to public and private offerings in the United States, but may also include organizing and raising capital outside the United States. It remains unclear what the full impact of Dodd-Frank will be on our international competitiveness. To be sure, increasing costs of compliance, capital raising and liability provide incentives to avoid or minimize these added burdens.

Once again, S-Ox is instructive as a point of comparison here. Even though S-Ox was considered to be a purely domestic statute and was focused on issuers listed in the United States, the international implications of S-Ox were huge. Dodd-Frank, on the other hand, recognizes the global nature of the entities, activities and markets that it seeks to regulate domestically. This recognition reinforces the observation that significant changes to our legal and regulatory regime, by either strengthening or weakening our domestic markets, will correspondingly affect our international competiveness.

While Dodd-Frank was considered to be a part of a broader effort internationally to address the causes of, and weaknesses exposed by, the financial crisis, there have, naturally, been differences in how jurisdictions have chosen to regulate their markets.

Thus, while cooperation and coordination at the international level has been viewed as vital to the success of certain reforms aimed at supporting global market financial stability, policy differences are already emerging that may put the United States at a competitive disadvantage.

In particular, to the degree that Dodd-Frank has overreached in its response to the crisis and increased the overall burden and cost on our financial markets, without minimizing or effectively addressing real problems identified in the crisis, our competitiveness may be unduly harmed.

We are already seeing key jurisdictional differences in approach to regulating the OTC Derivatives market that could have just such an adverse impact. As noted, how the SEC and CFTC implement these new provisions will be particularly relevant to such a result.

Mitigating risks/costs of these approaches

Because of the lack of specificity of the Act in key areas, and the latitude afforded regulators to interpret and implement the Act, regulators’ greatest opportunity to have a significant effect on the markets and the economy — for good or for ill — is in how they exercise their authority under the Act.

Particularly where regulators have broad authority, they should carefully consider whether each new regulation is truly necessary, and resist the temptation to view any rule that is not, by itself, onerous or burdensome as therefore “free.”

Where we have a choice between prescriptive and disclosure-based solutions, between uniformity and flexibility and scalability, we should err on the side of the latter absent compelling reasons and demonstrated need. This mitigates the risk of hardwiring, of static solutions, of homogeneity and of regulatory design failure, while promoting transparency and competition.

Further, when we consider each new or expanded disclosure, we should ask what the true value of that additional disclosure really is, rather than taking the view by default that it is “just one more disclosure.” We must avoid the instinct to try and solve for problems that our disclosure regime was not designed to achieve or that investors do not value in making investment decisions. We must avoid turning our financial reporting into the equivalent of the tax code, driving social or other policy goals under the guise of disclosure.

Rules do not operate in a vacuum, and an accumulation of relatively small requirements can be as burdensome and costly as a significant new requirement. This is particularly true for small businesses, which have more limited human and financial resources to absorb the impact of these incremental regulations.

I noted with great interest President Obama’s Executive Order requiring that Executive Agencies review their existing regulations to ensure that their benefits justify their burdens. I was heartened by his comments on the impact of regulations on small businesses and his stated preference for disclosure over prescriptive rules where they may be effective. While I understand that the Order is voluntary and would not necessarily apply to independent agencies such as the SEC, I believe the Commission should reinforce its commitment to these principles — both retrospectively and prospectively — as we continue to write new rules.

I have discussed some of the primary shortcomings in regulatory approach found in the Act and in our rules, and I believe the genesis of those shortcomings is found in the process that led to its adoption — in fact, the content of the final statute was largely driven by the process by which it was created, rather than by problems that were identified as bona fide causes or contributors to the financial crisis.

In addition, I believe the Act was born from a view of the world as it existed prior to the crisis, without accounting for market responses, changes in the behavior of market participants, regulators’ ability to address some issues under existing authority, and regulatory responses that were taken or already under consideration during and soon after the crisis. As a result, there is a real risk of overcorrecting for perceived flaws in the financial system, and imposing costs and burdens on the market that may not lead to improvements in the market.

I spoke earlier about the important role of economic and cost/benefit analysis. This is one means, one mechanism of checking poor regulatory instincts, first demonstrating where and how market failures exist, then identifying and balancing likely consequences of regulatory solutions and establishing greater confidence that they are likely to be effective in their intended purpose.

This is a discipline that the SEC still needs to perform better. While I am pleased that the Chairman has expressed a commitment to ensuring such analysis informs our decision making more fulsomely, it still needs to be incorporated into our rule writing function more seamlessly and at the inception stage.

I want to commend Chris here for what he tried to do to achieve this when he was Chairman. The crisis intervened in many ways to prevent the fruition of these efforts. It is my hope that we will be able to build on his conceptual work and establish processes that ensure economic analysis plays the critical role we all suggest it needs to in our rules.


The Dodd-Frank Act is a massive law, and implementation of the Act will require massive regulatory effort.

Notwithstanding the Act’s broad grant of authority, implementation requires that regulators exercise circumspection and humility. We must implement the Act with a healthy appreciation not only of the goals we seek to achieve, but also the consequences that we cannot foresee. Regulators should focus on areas where we know we can be effective — for instance, in establishing disclosure guidelines that will elicit information that will truly be decision-useful for investors.

The Act is also an imperfect law. It is vague in some areas. It sets forth timelines that are in some cases unrealistic. And in some areas the law is simply unworkable. Where necessary, regulators cannot hesitate to press Congress for changes.

Finally, regulators, Congress, market participants and investors must have a healthy appreciation of the limitations of the Act and of regulations generally. Markets are obviously extremely complicated, and there is no magic, silver bullet that can fix the problems that led to the financial crisis. Neither investors, nor regulators, nor market participants, nor or our financial markets are served by unrealistic expectations of the protections afforded by the Act.

Nevertheless, it is my hope that, with thoughtful implementation of those provisions that can truly support our markets, and the flexibility to change the law where necessary to avoid undue burdens, we can ultimately strengthen the U.S. capital markets and preserve their competitiveness.



Modified: 08/01/2011