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Welcoming Remarks at the SEC 24th Annual International Institute for Securities Market Development

Commissioner Michael S. Piwowar

Washington, DC

April 7, 2014

Thank you, Paul [Leder], for that kind introduction, and I want to welcome you back to the Commission.  Paul previously worked at the Commission for more than a decade from 1987 to 1999 and now has been with the Commission as Director of the Office of International Affairs for almost two months.  I have enjoyed working with you and look forward to continuing to work with you in the international arena to promote investor protection, cross-border securities transactions, and fair, efficient and transparent markets.  I also want to thank the Office of International Affairs staff who worked so hard to organize this two-week training initiative and all of the speakers, moderators, and panelists who have generously invested much time and effort in making this program so worthwhile.     

I am excited to be here with you this morning to welcome you to Washington, DC and to the SEC’s 24th Annual International Institute for Securities Market Development.  In my previous tour at the Commission as an economist in what is now the Division of Economic and Risk Analysis (DERA), I had the privilege of participating in this program.  I, therefore, know from firsthand experience the importance and usefulness of this global training program.  In fact, this program is an integral part of the Commission’s longstanding commitment to promote the adoption of high quality regulatory standards worldwide. 

Before I continue, I need to provide the standard disclaimer that my remarks are my own and that they do not necessarily reflect the views of the Commission or my fellow Commissioners.  As you participate in this great program over the next two weeks, I hope you keep a couple of things in mind. 

First, the benefits from this program are not a one-way street.  This program provides the Commission with the opportunity to build relationships with regulators from around the world that help us in our work to protect our markets and investors.  We often require assistance from regulatory authorities abroad for cross-border enforcement and oversight efforts.  Many of our investigation and enforcement efforts require banking, brokerage or telephone records, testimony, and other evidence from jurisdictions outside the United States.  The contacts we have forged through this program over the past several years have considerably advanced our investigations and examinations, including arrangements for freezing fraud proceeds.  I also hope that the program provides you with the ability to build relationships with other participants as well as with us that will help in your enforcement and oversight efforts.

Second, when it comes to securities markets regulation, one size does not fit all.  The program has been carefully designed to include sessions that use terms like “best practices” and “key concepts,” as well as workshops featuring case studies and panel discussions with regulators from multiple jurisdictions.  I hope that none of you leave the conference with the notion that your markets should have the same regulations as us or as each other.  Rather, each of you should take the lessons that you find valuable from this program and use them to tailor your regulations to the particular characteristics and circumstances present in your own securities markets. 

I would also like to take this opportunity to briefly elaborate on the effects of regulation on securities market development and the importance that these markets have on economic growth.  The participants in the securities markets, of course, include the issuers of securities, the investors that buy and sell those securities, and the institutions – brokers, dealers, exchanges, alternative trading venues, clearing agencies, etc. – that help facilitate transactions in those securities. 

Many of our regulatory efforts are viewed through the lens of investor protection.  It is through this lens that we evaluate the duties of securities issuers to disclose meaningful information to potential investors so that they can make informed investment decisions, and the duties of market participants to treat investors fairly when transacting in securities.  Through the investor protection lens, we also determine the appropriate risk-based methods to monitor compliance with those duties and to enforce them. 

But, the Commission’s core mission goes beyond protecting investors and maintaining fair, orderly, and efficient markets.  The third part of our statutory mission is to promote capital formation.  I hope that, even if your regulatory mandate does not explicitly include promoting capital formation, you always seek to balance the needs of businesses with the needs of investors. 

As U.S. Senator Mike Crapo (R-ID), Ranking Member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which is the authorizing committee of the Commission and the other financial regulators, likes to say “Capital is the lifeblood of…businesses, which in turn are the engines of job creation and economic growth.”[1]  Conversely, regulation that is overly burdensome or restrictive will inhibit capital formation and economic growth.  

 I want to focus the remainder of my remarks on capital markets.  By capital markets, I mean the stock and bond markets.  While capital markets are only a component of the overall securities markets, they are, in fact, the lifeblood of businesses, which are the drivers of economic growth.   

Effective Regulation Promotes Capital Market Development

An overarching theme of this program is that a jurisdiction’s institutional and regulatory policy framework can strongly influence capital market development.  The notion that there is a close relationship between financial regulation and capital markets is not new.  The specialized field of economics known as “law and finance” has established, for example, that countries with better investor protections, measured by both the character of legal rules and the quality of enforcement, tend to have larger and deeper capital markets.[2]  The academic law and finance literature has produced many other findings with key policy implications.  While I do not have time today to properly review all of the findings in this area, I do want to mention one important paper released last month entitled Capital Markets and Economic Growth: Long-Term Trends and Policy Challenges, which, among other things, looks at a particular interaction involving a country’s financial regulatory system and its tax system, and the resulting effects on capital market development.[3]

In that paper, two German finance professors, Christoph Kaserer and Marc Steffen Rapp, find that the regulatory and tax systems governing retirement savings in an economy play an important role in capital market development.[4]  The professors posit that more favorable tax and regulatory frameworks for retirement savings cause domestic stock markets to be larger and are likely to exert a positive influence on capital market depth.  They estimate that increasing the size of pension funds by 10 percentage points of gross domestic product (GDP) would lead to an increase in stock market size of 7 percentage points of GDP.  Kaserer and Rapp recommend that retirement savings rules and tax laws be designed in a way that encourages a larger part of national savings to be invested through the capital markets.

Capital Market Development Promotes Economic Growth

Capital markets are a significant source of financing for the corporate sector and play an integral role in economic growth.  Equity markets, in particular, are of prime importance for economic development.  More liquid stock markets – where it is less expensive to trade equities – reduce the disincentives to investing in long-duration projects because investors can easily sell their ownership interest in the project if they need their savings before the project matures. Therefore, enhanced liquidity facilitates investment in longer-run, higher-return projects that boost productivity growth.[5]

Due to the limited availability of debt-based financing for high-risk projects, access to equity financing also may spur innovation.[6]  Moreover, the fact that shareholders are residual claimants means they have a much stronger incentive to exert control over the investment decisions of a company than debt holders.  Active investors, including institutional investors, may use their expertise to push for changes that could lead to enhanced performance and stock price growth. 

It is also important to note that stocks, unlike debt in many cases, are information sensitive, which leads to more information gathering incentives by outside investors than debt financing does.[7]  Kaserer and Rapp argue that the availability of funds for long-term risky investments combined with the incentives for improving corporate governance would result in an estimated one-to-one relationship between stock market growth and the long-term real growth rate in GDP, i.e., stock market growth of one-third would increase real economic growth by one-third.[8]  Overall, they estimate that growing capital markets by one-third would increase the long-term real growth rate in per capita GDP by about 20%.[9]

Importantly, the Kaserer and Rapp study shows that the balance between capital market finance and bank lending matters.  An overreliance on banks comes at a cost in terms of reduced economic growth.  The study also documents that capital markets are good for research and development (R&D).  European firms’ R&D intensity is positively correlated with the level of equity financing.  In contrast, firms in bank-based economies have less flexibility in their financing decisions and therefore follow a more conservative financing strategy, which might lead to underinvestment in R&D. 

A Virtuous Circle

To sum up, effective regulation leads to capital market development.  Capital market development, in turn, leads to economic growth.  Economic growth improves standards of living of people in your jurisdictions in a number of ways, including reducing poverty and promoting savings, investment, innovation and job creation.

But, it doesn’t stop there.  Growing your capital markets not only benefits your own economy, but it also benefits markets and economies globally.  Better developed capital markets and more dynamic economies provide consumers with the ability to purchase more products and services from around the world and investors with the ability to invest globally, which provides businesses access to additional sources of capital.  A rising tide lifts all boats.

If we all adopt high quality regulatory standards in our own jurisdictions and work together to promote high quality standards worldwide, we can create what economists call a “virtuous circle” – a positive chain of events that reinforces itself through a feedback loop – in which everyone benefits.  This two-week program represents an important step in establishing such a virtuous circle to improve standards of living worldwide.

Thank you for your attention.  Enjoy the program. 

[1] See, e.g., News Release: Ranking Member Crapo's Statement at FSOC Annual Report Hearing (May 21, 2013), available at

[2] See, e.g., Rafael La Porta et al., Legal Determinants of External Finance (July 1997), available at and Rafael La Porta et al., Law and Finance (Dec. 1998), available at

[3] I thank former SEC Commissioner Kathleen Casey for bringing this paper to my attention.

[4] Christoph Kaserer & Marc Steffen Rapp, Capital Markets and Economic Growth: Long-Term Trends and Policy Challenges (Mar. 2014), available at        

[5] See Ross Levine and Sara Zervos, Stock Markets, Banks, and Economic Growth (June 1998), available at

[6] See Po-Hsuan Hsu et al., Financial development and innovation: Cross-country evidence (Feb. 2013), available at    

[7] See Christoph Kaserer and Marc Steffen Rapp, Capital Markets and Economic Growth: Long-Term Trends and Policy Challenges (Mar. 2014) .    

[8] Id.  

[9] Id.

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