Skip to main content

Remarks at the American Bar Association Business Law Section’s Federal Regulation of Securities Committee Fall Meeting

Commissioner Kara M. Stein

Washington, DC

Nov. 22, 2013

Thank you, Cathy [Dixon], for that kind introduction. And, thank you Federal Regulation of Securities Committee for inviting me here today. I’m pleased to join you as the one of the newest Commissioners of the Securities and Exchange Commission, a place where I know so many of you have worked over the years.

Before I begin my remarks, I would like to offer the usual disclaimer, which I’m sure you have all heard before. The views that I am I expressing today are my own and do not necessarily reflect the views of the Commission, my fellow Commissioners, or the staff of the Commission.

Over the past several years, I’ve gotten to know many of you in this room as we struggled with many of the challenging issues facing our economy and the financial services sector. I have always valued the perspective of the securities bar, and I will continue to do so in my new role as Commissioner.

We are here today because we share similar goals. We all believe that resilient, fair, and efficient capital markets play a critical role in our economy. We all believe that smart regulations are critical to protecting investors and promoting capital formation and job creation. And we all believe that enforcement of our securities laws needs to be robust, but fair.

Put simply, we all believe that the SEC needs to do its job well.

I joined the Commission just over three months ago. So I’m still getting the lay of the land. But while I am new at the Commission, I want to share with you today some of my thoughts on how each of us can be doing the best we can for our markets and the millions of investors and businesses who rely on them each and every day.

First, the Commission needs to complete our statutorily mandated rules. The Dodd-Frank Act is the single largest task that has faced financial regulators since the 1930s, and contains about 300 rule-making requirements—with the Commission responsible for more than 90 of them.[1] This is a serious task. I’m here, I’m ready, and I’m going to help get them done. The Commission staff is dedicated to completing them, and so am I. And we need your help. We need your input. We need your best thoughts and advice. So, my first order of business is to help get these rules done with your help.

One of the biggest rules that has not been finalized is the Volcker Rule.[2] There has been a fair amount of press lately on this rule, but I will assure everyone here that all of the financial regulators are working hard to make sure the rule does what it is supposed to do. I know this goes without saying, but finalizing this rule is not an easy task. Five federal agencies are charged with implementing the rule, and the Treasury Department is coordinating the process. Each agency must promulgate a final rule that satisfies its own mission and obligations. Thousands of comment letters have been received, reviewed, and analyzed. Finalizing this rule is a Herculean task, but it will be done.

To be clear, the rule that we are evaluating now is not the rule that I would have written. It is not, nor will it ever be, perfect. But, my hope is that when it comes time to vote on it, that the rule will be strong enough, and faithful enough to Congress’s direction, that I will be able to support it. I hope that by the time you are back here next fall, we won’t be discussing when the Volcker Rule might be finalized, but instead how it is working, and what we should be doing to make it work better.

The Commission is also working to complete other major rules. These rules need to be credible; they need to be fair. They should do what Congress intended them to do. And they should not be unduly burdensome or complex. Firms must know how they can reasonably comply with them, and we as regulators need to get them done.

The American economy deserves no less. Congress directed the Commission to implement them. And it is our job to finish them as soon as we can.

But the Dodd-Frank Act obligations aren’t our only responsibilities. We also need to get the JOBS Act rules done.[3] Before my arrival, the Commission finalized the repeal of the prohibition on general solicitation for Rule 506 offerings.[4] I see you have a panel on that topic this afternoon titled “Brave New World.” I agree, it is a brave new world.

Eighty years ago, in the aftermath of the Great Depression, Congress enacted the ’33 Act to provide investors of public offerings with basic protections. Since then, we have distinguished between securities that have been sold to the public, versus those that have been offered privately. It used to be that to qualify for a private offering exemption from the registration requirement, an offering could only be made to 25 potential investors.[5] That’s offered to twenty five potential investors. The number of actual purchasers could be far fewer. Obviously, that was a while ago.

As you know, since that time, the Commission has greatly expanded the definition of what constitutes a private offering. The underlying statute has remained generally unchanged. And it still says that public offerings must be registered; but decades of interpretations and guidance by the Commission have fundamentally altered what constitutes a public offering. This has greatly impacted the application of the Securities Act, and the important investor protections that come along with it. In fact, just a couple of years ago, even before the JOBS Act, the amount of capital raised in private offerings for the first time exceeded the amount raised in public offerings.[6] The exception has arguably swallowed the rule.

Then, earlier this year, the Commission expanded the private offering exemption to offerings made using mass media, to an unlimited number of potential investors, seeking unlimited sums of money. It’s hard to imagine a private offering being advertised in a Super Bowl halftime commercial, but that’s where we might be.

Given the sheer reach of these offerings, it makes sense that we rethink how to protect investors. We need to make sure that the investing public has a basic level of protection, whether they are teachers from Ohio, lawyers from K Street, or portfolio managers from Boston. We need to make sure that investors can understand and rely on the information they receive.

Just as an example, if two hedge funds with the exact same strategies and investments are able to calculate their returns using two different methods, and advertise using two different sets of numbers, then it might be difficult for potential investors to make informed choices about where to invest their capital. It also seems to put our registered investment companies—who have strict performance standards—at an unfair disadvantage. We need to arm investors with useful information, which may mean that we have to set some basic standards.

In offerings where only accredited investors can participate, we need to make sure that only those who can bear the risks do, in fact, participate.

We also have to finalize rules like Crowdfunding and Reg A plus.[7] Smaller offerings have been deregulated before. And the results have been mixed. In 1992, the Commission loosened the requirements for small offerings under Rule 504.[8] That experiment failed in the face of pervasive fraud, and the SEC reinstated investor protections seven years later.[9] While these changes offer great promise for providing capital to small businesses so that they can survive and grow, they also expose investors to potentially greater risks. Getting the balance right will likely take time and careful refinement. But we must get them done.

After these top-line rulemakings, there are many other challenges.

One of the areas where we all need to focus is market microstructure. It’s something I spent a lot of time thinking about as Staff Director of the Senate Banking Subcommittee on Securities, Insurance, and Investment. And, it’s a continuing area of focus for me.

Now that I’m a member of the Commission, addressing market microstructure is a critical component of my job. Just days after I arrived at the Commission, a major trading venue was forced to halt trading for three hours due to a technical glitch. Glitches and outages seem to be striking our markets on a more frequent basis. And these outages follow a long line of other high profile technical glitches and market interruptions.

In an era in which computers trade at nearly the speed of light in massive, global, interconnected markets, figuring out how to protect them from errant trading algorithms or failure of a critical market infrastructure point is a not a small task. We must begin to think of the health of our entire marketplace as an integrated ecosystem.

As we learned from the May 6th, 2010 “Flash Crash”, technical glitches can unleash unparalleled havoc in the marketplace. In just a few minutes, the Dow lost about 10% of its value. Trades were executed at perverse prices. One trader in Kansas City trading in one financial instrument, on an otherwise volatile day, triggered a massive selloff in countless financial products, only to rebound a few minutes later. [10]

While the immediate damage was limited, the long-term hit to investor confidence has been profound. The strength and resilience of our markets are critical to both investors and businesses that rely upon them. Investors need to know that a computer error won’t wipe out their retirement accounts or kids’ college funds in a few minutes. And businesses should feel confident that their stock price isn’t going to fall 20% because of an error made in some computer somewhere.

Mandating that firms have basic protections in place should be a no-brainer. Yes, firms should have to test their computer systems. Yes, firms should have to oversee their activities so that they can stop their trading in real time, before they impact other market participants.

There will always be human errors and technical issues. We all need to work together to design a system that contains them before they severely undermine the market’s stability or integrity.

Technology has had a profound effect on our markets and their participants. Technology drives innovation, enabling the advent of new products and new strategies. It has also led to the proliferation of execution venues, some of which provide for trading in transparent, lit markets, while others provide for executions at different prices in non-transparent venues. Technology has led to a proliferation of trader classes, each with different access to information. In effect, there are more market participants engaging on more levels, based on different information, than ever before.

Millions of orders and messages flash in picosecond and nanosecond intervals. While most people can’t make use of that information, some sophisticated traders can. In fact, some traders recently spent millions of dollars to literally move a mountain that was slowing down communications between New York and Chicago. The fraction of a second advantage gained by removing that mountain was obviously important to somebody. Of course, that fraction of a second advantage may be overtaken by even faster communications now over microwave towers. I’m sure there are folks thinking right now about what comes after that. We must think about why this technological arms race is happening. And whether it poses any threats to our markets. And we should candidly assess the costs and benefits to both investors and businesses.

We also need to examine the role of the proprietary data feeds, the role of so-called dark pools, the role of exchanges, and the role of differentiated trader types. How many exchanges do we need? What’s the value of having over 240 venues to execute a trade? Does it divide liquidity or promote it? What role should self-regulatory organizations play in the modern markets?

These questions should be addressed on both a qualitative level, but also a quantitative one. In order to assess the questions like these, we need data. The Commission’s new MIDAS initiative, which has collected some interesting market data, is a great first step. I encourage you all to go to the website and explore it.[11] These tools are valuable, but MIDAS is just the tip of the data iceberg. We all need to be thinking creatively. We should be thoughtful, yet bold, in exploring ways to improve our capital markets for both investors and businesses. We’re only as good as you help to make us. That’s why it is so important for you to weigh-in.

In order to have a better view into the market, we need better data. We need to know who is submitting orders, who’s trading, and how. We need the Consolidated Audit Trail or CAT. I am working with Chair White and my fellow Commissioners to get the CAT done as soon as we can. And we’re open to your views.

I want to switch gears a bit and talk about a problem facing all of our financial service regulators—how to deal with the mismatch between short-term funding sources and long-term liabilities. As we saw just a few years ago, when companies fund their long-term obligations with fickle short-term funding, we have the potential for problems.

There has been a lot of focus on money market funds. But that is just one part of the funding ecosystem. We need to ensure that our businesses have the capital when they need it. But we also need to make sure that we don’t focus on only one aspect to the detriment of the others. We need to examine the incentives that drive the selection of funding sources such as preferential tax, accounting, or bankruptcy treatment. Addressing these issues will be more than just the SEC’s responsibility. But the SEC must be an essential partner with other regulators in addressing these risks.

As many of you know, I have a strong interest in financial reporting. The Public Company Accounting Oversight Board (PCAOB) was born out of crisis over a decade ago. We all remember Enron and WorldCom. In the aftermath of these accounting scandals, the PCAOB was established, in part, to ensure that auditors live up to their responsibilities to help keep financial reporting accurate.

The PCAOB’s staff is working, along with the SEC’s Office of the Chief Accountant, to improve audit quality. One interesting approach that has been endorsed by a number of academic studies is through increased auditor transparency.

The vast majority of auditors are extremely professional, and perform their work with integrity and diligence. The proposed transparency rule could help those auditors who are providing high quality service take credit for their excellence, and could also help identify those who don’t adequately fulfill their professional obligations.

In most spheres, I’m a proponent of personal accountability. Certainly, that was the approach taken in the Sarbanes-Oxley Act, which mandated CEO and CFO certifications. CEOs and CFOs must individually certify the company’s financial statements.[12] The question of whether audit partners should be named in reports where their opinion appears is a different approach. I hope that everyone will weigh in with robust comments on this issue.

I also want to take a moment to recognize the importance of setting up the Office of the Investor Advocate within the SEC. At the SEC, the longtime slogan of the agency is “we are the investor’s advocate.” But until the Dodd-Frank Act, there was no single point of contact for investors. The Dodd-Frank Act mandated that an office of the Investor Advocate be set up, and we need to get this done as soon as possible.[13]

And once it’s set up, it will be a powerful force for investors.

One of the most interesting things for me upon joining the Commission has been appreciating the sheer volume and complexity of the SEC’s Enforcement efforts. I certainly didn’t have an appreciation for that volume until I joined the Commission.

In my short tenure as Commissioner, and as I review and vote on each case, I’ve observed a few things about Enforcement.

First, the SEC staff is doing incredible work, every day. There is a huge volume of cases, big and small, that may not grab the headlines, but that serve to protect investors. Whether it’s stopping fraud early so that other investors aren’t at risk, or penalizing individuals or firms for hurting investors, the staff of the Enforcement Division are passionately working to protect investors. Letting the world know the volume and quality of the work that the Commission staff is doing every single day must be an important step to assuring investors that we are, in fact, on the beat.

Second, the Commission is really beginning to use all of the tools in its toolbox. Just this month, the Commission announced the first deferred prosecution agreement with an individual who cooperated voluntarily and significantly in a Commission matter.[14] And last month, the Commission announced the largest award, over $14 million, to a whistleblower, whose information led to an action that recovered substantial investor funds. [15]

The Commission is incentivizing cooperation in new ways to lead to better intelligence, better cases, and better investor protection.

We also need to take a hard look at some old tools. Imposing penalties on individuals and corporations is important. As you all know, the Remedies Act expanded the Commission’s authority to seek civil monetary penalties in enforcement cases. Some have argued that in the corporate context, we shouldn’t punish shareholders by imposing penalties on the firm’s they own. But, I believe that culture is important. If a firm’s culture is wrong at the top, then sometimes the best way to effectuate change is to incentivize the shareholders to make the change. Ultimately, the owners of the company are responsible for its actions. Penalties should help to deter others from similar violative conduct. And as companies and transactions grow, maybe penalties should grow to reflect to the nature and extent of the wrongful conduct. Shareholders should take notice. And shareholders should hold their management accountable.

I believe that the culture of a firm stems from the top. And a chief executive with personal accountability, will have a strong incentive to keep the company on the right track. So, it should not surprise you that I will continue to press for more direct accountability. We need to leverage our limited resources, and requiring executive attestations of compliance with rules is an extremely effective way to do that.

Third, we need to use our enforcement powers to influence gatekeepers. That means we need to be bringing the tough cases against those who could have prevented misconduct. Chief Compliance Officers, Chief Financial Officers, the accountants, and the lawyers who help individuals or firms violate the law need to be sanctioned. As we learned from the Enron case and later business scandals, gatekeeper failures became a recurring theme and contributed to significant losses for investors.

We need to be particularly focused on gatekeepers when there is misconduct and hold them accountable when appropriate. We need to send a strong message of instilling personal responsibility and accountability. These standards should apply equally for the CFO of a global bank and the CFO of a 20-person company.

The SEC is vitally important, with a proud history of protecting investors while helping businesses access the capital they need to grow, to innovate, and to create jobs. It is important that the SEC continue to work with market participants, large and small. And it is crucial that we listen to investors and issuers. And, that we listen to you.

All of you here today have worked with the staff, my fellow Commissioners, and others, both at home and aboard, to ensure that our markets remain fair, resilient, and robust. As a Commissioner, I will be working to help carry on that tradition.

Thank you again for inviting me to join you today.

[1] See Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, available at

[2] Release No. 34-65545, Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds, available at

[3] See Jumpstart Our Business Startups (JOBS) Act, available at

[4] On July 10, 2013, the Commission adopted amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act to implement the requirements of Section 201(a) of the JOBS Act. The amendments were effective on September 23, 2013.

[5] Securities Act Release No. 285 (Jan. 24, 1935)

[6] See Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Regulation D Exception, available at

[7] Release No. 33-9470, Regulation Crowdfunding, available at

Title IV of the Jobs Act amended Section 3(b) of the Securities Act of 1933 by adding section 3(b)(2), which requires the Commission to adopt regulations that provide an exemption from registration for offerings of up to $50 million. The anticipated Section 3(b)(2) Regulations are often referred to as “Regulation A Plus.”

[8] Release No. 33-6949, Small Business Initiatives, July 30, 1992; Release No. 33-6996, Additional Small Business Initiatives, July 29, 1993.

[9] Release No. 33-7644, Revision of Rule 504 of Regulation D, the “Seed Capital” Exemption available at

[10] See Findings Regarding the Market Events of May 6, 2010: Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues available at

[11] MIDAS is the SEC’s implementation of a new system that combines advanced technologies with empirical data to promote better understanding of markets available at

[12] Release No. 33-8124. Section 302 of the Sarbanes-Oxley Act requires the principal executive and financial officers of a company filing periodic reports to certify in each quarterly and annual report, among other things, that the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading, and the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the company.

Section 906 of the Sarbanes-Oxley Act adds a provision to the U.S. criminal laws that contains a separate certification requirement. This provision expressly created new criminal penalties for a knowingly or willfully false certification.

[13] Section 915 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 4(g) of the Securities Exchange Act of 1934 to establish within the SEC and Office of the Investor Avocate.

Return to Top