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Modernizing our Regulatory Framework: Focus on Authority, Expertise and Long-Term Investor Interests

Philadelphia, PA

Nov. 14, 2019

University of Pennsylvania Distinguished Jurist Lecture


Thank you for providing me the opportunity to deliver this year’s Distinguished Jurist Lecture. This is a special honor for me. Philadelphia is my hometown. Penn is my alma mater—two times. And, I miss teaching here.

In particular, I miss the students and their wonderfully insightful questions. I also miss co-teaching with my good friend, Joe Frumkin. Joe has long supported, and spurred my participation in, the Institute of Law and Economics. Thank you Joe for your friendship and support.

Today, I am pleased to discuss:

(1) the Commission’s actions over the past year, with reference to our “organic” and transparent approach to our agenda setting, and certain key modernization efforts and a more general discussion of modernization as an effective policy-making lens for an administrative agency;

(2) our “engagement agenda” with a focus on market monitoring and a few words about the important topics of investor education and oversight and enforcement; and

(3) how our mission, market realities, the statutory constructs under which we operate, and other factors, including hopefully, a dose of practical wisdom, inform our efforts more broadly, with a specific discussion of the relationship among scope of authority, scope of actions and independence.[1]

The Commission’s Rulemaking Agenda

Rulemaking is, of course, one of the Commission’s key functions. I believe transparency is central to the effectiveness of an administrative agency. Investors, issuers, other market participants, Congress, fellow financial regulators, and our staff, should have a clear understanding of the Commission’s activities and priorities, including contemplated rulemakings.

In this regard, the law provides a helping hand. We are required to publish a Regulatory Flexibility Agenda. This semi-annual undertaking involves disclosing regulations under development or review.

Notably, the Reg Flex agenda distinguishes between rulemakings to be accomplished in the near-term (one year) and the long-term (more than one year). As I have previously remarked, in the earlier parts of the decade—known in the financial regulatory community as the “Post Dodd-Frank Era”—the Commission’s near-term portion of the “Reg Flex” agenda had become too aspirational. On average over that period, only about one-third of the rules listed in the Commission’s agenda to be adopted in the following 12 months were timely completed.[2]

Early in my tenure, I decided to use the “Reg Flex” agenda to enhance transparency, and, in turn, use that transparency as a focal point for cross-agency coordination, as well as internal and public accountability. I asked our Division leaders to identify the most pressing initiatives the agency could reasonably expect to complete over the following 12 months, first individually and then collectively.

As a result of this reset, the near term portion of the 2018 Reg Flex agenda was more focused. At the end of 2018, I was pleased to report that the Commission advanced 23 of the 26 rules in the near-term agenda, or 88% of all items. Of those 26 rules, the 11 listed for adoption by 2018 were all completed.[3]

I was even more pleased with the reaction of my colleagues—our 88% advancement rate was due largely to a collective commitment to the agenda. This collective commitment, in turn, was driven by our “organic” approach to building the rulemaking agenda. In other words, the agenda comprised the actions the women and men of the Commission believed were important and achievable. This organic approach also embodies a focus on the interests of long-term Main Street investors—the people virtually every SEC staff member has in their mind when they come to work. I hope this perspective remains etched in the minds of staff for years to come.[4]

The Commission’s results in 2018 gave us momentum. So how did we do in 2019?

First, I’ll note that the number of items on our near-term agenda increased to a, perhaps aspirational, 39.[5] As of today, the Commission has advanced 33 of those 39 rulemakings, or nearly 85% of the items—even though our rulemaking efforts were stalled for more than a month as a result of the lapse in appropriations earlier this year.[6] Of those 39 rulemakings, 18 were scheduled for adoption by this year and we completed 16 of the 18, or 89%. In addition to the 39, the Commission also advanced more quickly than expected several other proposed rulemakings.

Of course, we must be judged on the impact of our efforts and not just the number of rules proposed and adopted. So, the question is, did our efforts meaningfully advance the Commission’s tripartite mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation?

How do we make this qualitative assessment? One metric is whether we our rules embody both our core mission and the realities of today’s markets. By this measure—modernization—I believe we did well, but as always, there remains much to be done.


I believe modernization very often is a particularly effective means to advance each component of our tripartite mission simultaneously. In other words: (1) identify aspects of our regulatory framework that are out of step with our ever-changing capital markets ecosystem; and (2) bring those aspects back into line with market realities in a way that advances all aspects of our mission.

The broad 85 year-old structure of our regulatory framework embodies genius.[7] And, like a great building, like our own Silverman Hall or, my favorite Penn building, the Furness-designed, Fisher Fine Arts Library, if we keep up the maintenance and do a renovation—modernization—every now and then, all aspects of our mission will be well served.

I want to pause and emphasize part of that last phrase “all aspects of our mission.” Yes, we can simultaneously advance investor protection and enhance capital formation. Yes, we can make markets more efficient, orderly and fair in ways that provide lasting benefits to investors and issuers.

This is the Institute of Law and Economics, so I will say that again in a different way: multi-objective decision making—investors, markets and capital formation—is not a zero sum game at the Commission. Our staff has proven time and again that, particularly in a dynamic environment, “this or that” and “us versus them” dichotomies often are false and stale; and, I tell myself, if you are seeing a zero-sum game, you should take a fresh look at the board.

The dynamic ever-changing nature of our securities markets requires us to regularly take a fresh look at the board. This is both a responsibility and an opportunity, an opportunity to advance all aspects of our multi-part mission.

I’ll provide some examples of our recent modernization efforts. Let me start with a 2018 initiative that put the wind in our sails.

Modernizing the Delivery of Fund Reports to Investors (Rule 30e-3):

In 2018, the Commission adopted new Rule 30e-3 under the Investment Company Act of 1940, which provides funds with an optional “notice and access” delivery method for making shareholder reports accessible to investors on a publicly available website.[8]

Rule 30e-3 was an important and positive step toward modernizing the delivery of fund disclosures. Website accessibility and electronic documents provide investors numerous tools that are not available with paper documents: search functions, and the ability to hyperlink and move quickly within a document, and the option to more conveniently save a document for future reference. I also note that it has been estimated that Rule 30e-3 will save a forest the size of Manhattan each year.[9]

Standards of Conduct for Investment Professionals:

This year, the Commission adopted a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers.[10]

These measures bring legal duties and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.

This rulemaking package was a long time coming and was finally completed in large part because it embodied decades of staff experience inspecting firms and enforcing the law in the retail investment space. These actions will significantly benefit Main Street investors. Retail investors will know what they are buying, and how much they are paying, and they will know how their broker or adviser is getting paid. Retail investors also will know that their investment professional, whether an investment adviser or a broker dealer, is prohibited from putting their interests ahead of the retail investor’s interests.[11]

JOBS Act Extensions:

The Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) passed Congress with broad bipartisan support.[12] I believe the JOBS Act was instrumental in slowing down the dramatic shift from companies raising growth capital in our public equity markets to raising growth capital in our private capital markets, markets to which our Main Street investors have very limited access.

The JOBS Act provided a category of companies—emerging growth companies—with a number of accommodations to encourage them to enter our public capital markets. Over the past two years, we have expanded several of these accommodations.[13]

Importantly, these measures do not adversely affect our investor protection framework and in many ways benefit all investors. As an example, earlier this year, the Commission adopted a new rule that expands “testing-the-waters” communications—gauging interest from sophisticated investors before launching an offering—to all issuers.[14] This benefits all investors—as a result of these communications, issuers can better identify information that is important to investors and therefore increase the probability of an appropriately priced and otherwise successful registered offering. This ultimately provides both Main Street and institutional investors with more opportunities to invest in public companies. Those companies, in turn, provide ongoing disclosures to investors and the public generally. More and better public companies is a good thing for all, including, in particular, our Main Street investors.

Exchange-Traded Funds:

The Commission approved the first ETF in 1992. Since then, ETFs have become a popular investment vehicle, particularly for the many Main Street investors who buy and hold these products over the long term.

ETFs registered with the Commission have grown to $3.3 trillion in total net assets and provide investors with a diverse set of investment options. However, in order to come to market, ETFs still rely on individualized exemptive orders.

The Commission recently adopted a new rule that modernizes this process by permitting ETFs that comply with certain conditions designed to protect investors to operate without the expense and delay of obtaining an individualized exemptive order from the Commission under the Act.[15] And earlier today, we published a notice of our intent to approve four novel types of actively-managed ETFs.

Recent Proposals

The Commission has also recently proposed several new rules that continue the modernization theme:

15c2-11: Rule 15c2-11 is relevant to our off-exchange or “OTC” market. A market that history demonstrates includes companies that provide value to investors and our economy, for sure, but particularly in the “penny stock” and “microcap” spaces, has long been a fertile ground for fraudsters, operating from boiler rooms around the world.

Rule 15c2-11 was initially designed prior to the advent of modern electronic communications. The rule generally requires broker-dealers to have sufficient information about a company prior to quoting a price for stock in the company—a good thing.

It also provides an accommodation, perhaps appropriate in a world of paper-based communications and three day mail, which allows any broker to quote an OTC stock without complying with the information requirement if another broker has previously provided a quote. This is known as the “piggyback” exception—and I question whether it remains necessary in its current form.

Our proposed amendments, which reflect the significant information technology advances that have been made since the rule was first adopted as well as our enforcement experience, are designed to better protect investors from fraud and manipulation, while at the same time facilitating more efficient OTC trading.[16]

Regulation S-K: This proposal would modernize core issuer disclosure requirements. The proposal recognizes the significant changes that have taken place in our economy in the 30 years since adoption of the disclosure rules for public companies, including that, in certain industries, intangible assets, and in particular human capital, often are a significant driver of long-term value in today’s global economy.[17]

Advertising and Cash Solicitation Rules for Investment Advisers: This proposal would modernize the rules governing investment adviser advertisements and payments to solicitors to reflect changes in technology, the expectations of investors, and the evolution of industry practices. [18]

The rules have not been meaningfully updated since 1961 and 1972, respectively, even though our markets have evolved significantly and investors appear to be thirsting for information, in both form and type, that our existing rules do not accommodate, such as performance information.

Proxy Process Improvements: Improving our proxy voting system is a topic where market participants have a wide variety of deeply held and, in some cases, conflicting views. Virtually all, however, believe modernization is overdue.

We have approached modernization in a systematic manner, recognizing significant changes in, among other things: (1) communications technology and methods (the proxy is just one of many methods that shareholders, companies and other market participants use to communicate with and among each other); (2) the amount and type of institutional holdings (a majority of Main Street investors invest through funds); and (3) market practices (20 years ago, the business of providing proxy advice was virtually non-existent; today there are thousands of investment advisers managing trillions of dollars in assets for our retail investors, and many of these investment advisers contract with businesses to provide proxy voting advice).

In the Fall of 2018, we held a roundtable that brought together investors, issuers and other market participants who raised many issues in this area.[19] We received significant public comment and helpful suggestions to improve our proxy voting system.

In August of this year, the Commission took the first step to address these suggestions when it provided guidance to assist investment advisers in understanding and fulfilling their proxy voting responsibilities.[20]

Last week, the Commission continued its focus on improving the proxy system with two proposals designed to increase the effectiveness and improve the credibility of our proxy process. The first is focused on full and fair disclosure of material conflicts by proxy advisory businesses as well as improving the accuracy of their solicitations.[21] The second is aimed at enhancing the effectiveness of our shareholder proposal process and, in particular, the resubmission process which has not been significantly revised since 1954.[22]

And following our work on these proposals, I expect that the Commission will then address “proxy plumbing” and “universal proxy.”

Now, looking forward to rulemaking in 2020, I expect the Commission will continue to advance common-sense modernization initiatives. We expect our Fall agenda, reflecting rulemakings over the next 12 months, to be published soon. This 2020 agenda was built using the same organic process and covers a broad array of topics, including our continued efforts to build confidence in the proxy process, address equity market structure issues, and improve the fund investor experience. I and the women and men of the SEC are excited about each of these initiatives and we are pursuing them with vigor. More to come.

I want to close the discussion of rulemaking and the importance of retrospective review and modernization with two observations.

First, going back to our strong foundation, modernization efforts should be rooted in our core principles, including: (1) providing investors with disclosure that is information rich, accurate, complete and fair in all material respects;[23] and (2) fostering transparent and liquid markets with robust price discovery, broad access and efficient execution.[24]

In simpler, and somewhat daunting terms, we should ensure that the millions of diverse participants in our markets have access to the information necessary to make the choices that are best for them, and also ensure that the outcomes resulting from the mix of those choices are arrived at fairly.

Second, waiting too long to bring outdated rules up to date inevitably makes the updating more, not less, difficult, including because certain market participants, as well as non-market participants, benefit from the outdated aspects of our rules.

In some cases, the more outdated and inefficient the rules, the more opportunity for idiosyncratic gain. As a result, the impediments to change, some acute, grow.

For example, it has long been technologically possible to provide a retail client with simple disclosure about the fees, costs and other expenses they are paying when they invest—in my words, how much of the retail client’s money is going to work for them. That knowledge is empowering and will lead to better choices. However, resistance to this concept as a core element of our approach to modernize the regulation of retail investment advice came from many sources—some surprising initially, but less so when I thought about their personal and commercial incentives.

Thanks to the concerted effort of staff from across the Commission, our standards of conduct efforts overcame these myriad impediments and we are already starting to see how Main Street investors will benefit, as firms review their practices, develop new compliance programs, and prepare new required disclosures.

The Commission’s Engagement Agenda — Market Monitoring, Investor Education and Oversight and Enforcement

In addition to our regulatory agenda, the Commission has another important agenda—what I call our “engagement agenda.” This involves the Commission’s critical functions in market monitoring, public outreach and investor education efforts, and overseeing market participants and enforcement.

In these areas our efforts also embrace modernization and the interests of long-term Main Street investors. The work of our wonderful staff in each of these areas is worthy of its own speech.

Because this is the Institute of Law and Economics, I am going to focus my modernization remarks on market monitoring. Before I do so, one comment each on investor education and participant oversight and enforcement.

Investor Education

On education, I have personally met with thousands of retail investors in town halls, visits to military bases, and other venues.[25]

The women and men in our Office of Investor Education and Advocacy commit every day to investor education. What do we hear? Two things: I wish I knew more earlier, and I wish I started investing earlier.

We need to do a better job educating our population earlier about the importance of personal financial management, particularly where financial management is not learned at home.

I will close the topic of investor education with an observation: in our credit-based economy, historically, there are people who are paying others 8 to 18% and there are people who are getting paid by others 8 to 18%. Over your lifetime, particularly when you are responsible for your own retirement, you want to transition from a payor to a payee as quickly as practicable. Understand compounding, and the importance of this transition is amplified manyfold. All Americans should have this basic knowledge.[26]

We are modernizing our educational efforts to reach more people sooner, including through videos that I hope are shown in classrooms around the country.

We are also reaching out to traditionally underserved communities and partnering with advocates who are providing important feedback on our content so that we can reach the broadest cross-section of our society. [27]

Overseeing Market Participants

Speaking of classrooms brings to mind teachers and the modernization point I want to make in the area of participant oversight and enforcement.

At the Commission, teachers, active duty military personnel, and the elderly, particularly the cognitively impaired, are close to our hearts.

During our IABD rulemaking efforts, which have, as a key component, the full and fair disclosure of fees, costs and expenses, it became apparent to me and others that these groups, in particular, had little understanding of the fees they were paying.

This lack of full and fair fee disclosure sparked our Teachers’ Initiative and the Military Service Members’ Initiative. We are devoting additional enforcement and investor education resources on behalf of teachers, veterans, and active duty military personnel stationed domestically and abroad.[28] In addition, SEC examinations are prioritizing the protection of retail investors, including seniors.[29]

With today’s technology, there is no excuse for not fully and fairly informing these groups (or anyone, for that matter) of the fees they are paying. Our message here is simple: Deal with these particularly vulnerable groups fairly and, if you do not . . . .

I’m serious. Let me be clear that I am committed to cleaning up problems in this area; and let me also be clear that I believe strongly in “credit” for self-reporting and prompt remediation. If you are an institution and you have a problem in this area, you want to come see us before we find you.[30]

Market Monitoring

Turning to market monitoring, I have emphasized this point on many occasions: The global financial markets of today are substantially different from those of the early 2000s.

However, to say broadly that there is more or less systemic risk, more or less liquidity, more or less volatility, more or less cross-jurisdiction dependence, or more or less reliance on prudential and other actions of government authorities—pick your binary measure or characteristic—is, in my view, not a good place to start. Doing so assumes that, broadly, global equity and credit markets are structurally the same today as they were in the early 2000s. They are not.

We—the world’s financial policy makers and regulators—have made choices that have contributed to profound structural changes in our markets.

These choices, rooted in important government aims—economic growth, market stability, consumer welfare—have, in combination with (1) each other, (2) the actions of market participants and (3) developments in information technology, trade and supply chain management and international relations, changed the landscape of our global banking and capital markets.

I’ll share just a few data points that add context to this observation.

Global debt now totals at least $246.5 trillion, or 320% of the world’s GDP.[31] Focusing on the United States and corporate debt specifically, outstanding nonfinancial corporate debt stands at almost $10 trillion and now sits at almost 50% of US GDP.[32] Debt securities accounted for approximately 62% of money market fund assets (i.e., liquidity-oriented products) as of the first quarter of 2019 and 56% as of the second quarter of 2019, near its peak of 64 percent.[33]

The increase in U.S. and, in particular, global debt is the result of various factors. I’ll discuss a few.

For over a decade, central banks across the world have engaged in monetary easing with interest rates at historic lows for many years and, in some key cases, in uncharted territory. We want businesses to hire and invest and consumers to spend, and globally we are using interest rates, open market purchases and other tools to encourage that behavior, including a greater favoring of debt over equity in corporate capital structures.

To go back to the language of economists, if debt today costs companies less than it did in the early 2000s, absent some form of credit rationing, it is common sense to expect broad debt to equity ratios to be higher now than then.

Contemporaneously, global regulators have encouraged banks to hold less corporate and other debt, particularly less low- and sub-investment grade debt, and to hold—and preserve—highly liquid assets.

In short, combine a growing credit-based global economy with regulatory and other constraints on banks and their balance sheet activities and the result is a broad market shift from bank-held debt to market-held debt.

Again, contemporaneously, we have observed a rise in both passive and structured investing in our credit markets, with a significant shift from debt held directly by investors to debt held through funds, including collateralized loan obligations (CLOs).

The result— and there should be no surprise, I repeat, no surprise—is that a much larger and growing share of debt, including corporate debt, is now held outside of banks, including by funds.

At the Commission, we are focusing on this changing environment and what it means for the structure and function of our markets—equity, credit and related derivatives markets.

I pause here and note that I am not providing advice on monetary or fiscal policy, nor should I. Nor should we pass judgment on debt levels at particular companies or countries. That is the role of others. If you have interest in these matters, including analysis of past policy decisions, our current market conditions and the future of monetary policy, I suggest your reading include the recent speeches of Fed Vice Chair Richard Clarida and Stan Fischer.[34]

Returning, however, to the Commission’s role in the area of market monitoring, I note that we are not alone in focusing on these issues. In addition to drawing on information and resources from across the Commission, we are engaging with our domestic and international colleagues—including through the Financial Stability Oversight Council (FSOC), the Financial Stability Board (FSB), and other organizations.[35]

Over the past two years, for example, Commission staff has been participating in regular calls with our domestic regulatory partners—Treasury, the Federal Reserve, the Federal Reserve Bank of New York and the CFTC to share information on market dynamics and to discuss broader economic and market trends.

With regard to the changes in our debt markets, we and these regulatory partners have been monitoring (1) the size of corporate debt in aggregate and by industry, (2) the location and type of holders, and (3) credit quality. We also are considering the likely actions of market participants if circumstances change.

In particular, we are examining the connections among banks and non-banks through, among other things, (1) credit lines to investment and other types of funds, (2) clearing banks’ supply of balance sheet capacity to permit client clearing, (3) exposure of banks to funds— of all types—public, private, open, closed, levered, etc.—through derivatives, and (4) overlaps in portfolio holdings, particularly those holdings susceptible to similar price and liquidity shocks.

In short, while we can take comfort in increased strength and resiliency in our core banking systems,[36] we should recognize that exposure and risk are rarely eliminated, they often are shifted.

Global government policy has shifted direct credit exposure from the banking sector to the capital markets sector and indirect credit exposure to new channels. Modernizing our oversight means recognizing that shift, analyzing what it means for the application of our regulatory tools, and considering whether new or updated monitoring measures and tools are necessary or appropriate and whether old measures and tools should be retired.

The Commission’s Authority, Actions and Independence

This discussion of some—I repeat, some—of the areas where Commission modernization efforts are necessary or appropriate, illustrates that, at the Commission, there often is more to do than can be done.

This observation leads to the questions: How do we decide which issues need our attention? And how can we most effectively address those issues we take on?

Before I tackle those questions, I must make a comment about the Commission staff. They are remarkable. Our more than 4,300 person staff covers an incredible amount of ground—from monitoring equity trading around the globe, to examining over 2,100 investment advisers per year, to practicing before the Supreme Court, to programs at senior centers—the breadth and depth of their work is remarkable. As one comparative data point, PNC—I picked a Pennsylvania-focused institution—has more than ten times as many employees—in fact, it has one branch for every two SEC employees, has revenues that are ten times our budget, and net income that is three times our budget.

Returning to the questions I have raised, the answers are a result of a continuous three-step process: (1) we identify investor protection, market functioning and capital formation issues that warrant attention; (2) we examine the marketplace to identify various means we can use to address those issues, including the modernization lens; and (3) we pursue the means that are most efficient and effective within statutory and practical constraints.

Our Wharton School friends would call this Management 101. And it is (with the exception of the novel statutory and practical constraints applicable to an administrative agency). I will focus on how these novel factors shape our efforts.

As always, law and context provide illumination. We are subject to the Administrative Procedure Act and are an appropriated agency—we only have the funds Congress provides us.

In addition, as the prior discussion of market monitoring illustrates, we operate in a regulatory ecosystem that includes multiple other participants, at the state, federal and international level, including the Department of Justice and state Attorneys General.

So, with the context, let’s talk about authority, action and “independence” in the continuing pursuit of an administrative mission.

What does “independence” mean? It certainly does not mean isolated. We need to have a good understanding of what the others operating in our ecosystem are doing and it is imperative that they know what we are doing.

Of these three, “independence” gets the most air time. The “independence” of the Commission often is couched in terms of some legal right to act without regard to the views of the executive and legislative branches of our government or those of market participants. A review of the Administrative Procedure Act demonstrates that is an overly simplistic perspective. We are required to consider the views of commenters.

We also need to respect the role of other departments and agencies. The Fed has monetary policy. The Treasury has sanctions. The CFTC has commodities. The Department of Justice and the Federal Trade Commission have competition. The CFPB, Labor, Education, etc.

So, let’s look at independence from the correct end of the telescope. The small end, looking out over a vast landscape.

Independence, true independence, is the ability to act in the way you believe is best and have confidence that those actions will have effect. It is earned in practice over time at least as much as it is granted by law. So, how do you earn it and keep it?

I will pause here and note that, in this setting, on this campus and in this city, I am humbled by the question of earning independence. The founder of this University and his colleagues answered that question and gave birth to a nation of great promise—and one that has managed, time and again, to grow and improve and overcome the impediments to retrospective review, correcting mistakes and modernizing.[37]

Turning back to the Commission, my view is we best earn and maintain our independence by (1) recognizing the broad financial regulatory landscape, (2) identifying our core responsibilities within that landscape and (3) using our expertise and experience to discharge those core responsibilities as promptly and effectively as possible.[38]

If the Commission does that, all those other participants will, or at least will be more likely to, leave our core responsibilities to us and, importantly, where our core responsibilities overlap with those of other authorities, work cooperatively with us.

Said simply, authority, independence and respect go hand in hand and you earn them by doing the job you are assigned well, not doing some other job or waiting for someone to do you yours.

To be sure, not all agree with me on this score. I often hear, we should “stretch our authority,” we should use “all available means” to achieve a particular objective, we should “fill the gap,” even where one or more other federal or state bodies are primarily responsible.

My time at the Commission has made it clear to me these perspectives are often misguided, ineffective, resource intensive (read: wasteful) and serve to erode the scope and effect of our hard-earned authority and independence.

I’ll explain further, first in the abstract and then with a specific example.

Straying from our statutory mission and authority means expending agency resources to advancing initiatives that are more likely to be subject to legal challenges. Legal challenges that we must devote additional valuable resources to defend. Legal challenges where a loss is not only more likely but also may result in having to do work over again or even the restriction of our authority going forward.

Straying into areas covered by others without their cooperation can lead those bodies or Congress to challenge those actions directly—and, therefore, our authority and independence—via various means, including restrictions on funding.

Speaking more broadly, aggressively straying from our mission, particularly into areas overseen by others provides potentially potent ammunition for those who argue independent agencies operate well beyond, and in a manner inconsistent with, their New Deal promise.

If you, like me, believe the Commission has added great value, please pay attention to this issue.

Now for a few examples. I have frequently been asked to introduce regulations to effectively restrict capital allocation decisions – what a company should do with available funds.

We are not in the business of dictating a company’s strategic capital allocation decisions, such as whether to buy or sell another company or whether to borrow money or whether to buy or sell their own stock or pay a dividend. We do not regulate strategic capital allocation decisions in even the narrow way that prudential regulators do—e.g., banking and utility regulators. This is clear. We do require extensive disclosure regarding these decisions that is accurate and complete in all material respects.

On the intersection of (1) capital allocation (a largely state law fiduciary duty issue with important disclosure implications for us), (2) executive compensation (a key disclosure issue for us and again a fiduciary decision that is impacted by many factors including tax policy), and (3) securities transactions by companies and executives (a disclosure, market integrity and insider trading issue for us)—I will make an offer today that I have made many times since my first days at the Commission. Bring together these issues, with people who are responsible for them and understand their complexity and interdependency with an eye toward improving disclosure, market integrity and outcomes for our long-term Main Street investors, and I will gladly participate.

Also, in our core areas, to be sure, if there is manipulation, insider trading, improper disclosures or other malfeasance prohibited by the securities laws, including in connection with the market execution of a capital allocation decision such as a buyback, we have and will continue to pursue and remedy that conduct.

I receive similar requests to “stretch”, in both expertise and authority, in the area of competition policy. I know Assistant Attorney General for the Antitrust Division Makan Delrahim and FTC Chairman Joe Simons well enough to know that each of them is focused on rooting out violations of our antitrust laws. I am here to help them. We have helped them. But I will defer to them on antitrust policy and enforcement, and I expect them to defer to us on securities market function and structure and to help us with their expertise—and they have.

I close with an anecdote, well more of a too often repeated observation, that in most cases amuses me. We often hear the request and comment “You should do X, Y or Z. . . Act independently.” This subtext often is “Listen to me, not others.” Sometimes the subtext includes “stretch beyond your expertise and even your authority.” This approach is rarely constructive.

Focusing on substance, core mission and the long-term interests of our Main Street investors has proven, time and again, to be a constructive approach. It is the organic approach our staff has long followed, it is the approach that has solidified our authority and independence and it is the approach that has enabled us to act on a remarkably large and diverse agenda over the past year.

I will continue throughout my tenure at the Commission to encourage staff to follow this approach—to use their deep knowledge of our markets to advance common-sense, mission-focused proposals that build on our proven regulatory framework. And to not put that hard-earned and well deserved independence at unnecessary risk by straying from our expertise and mission.

Thank you very much for inviting me to speak today. But for the education I received here—inside and outside the classroom, as a student and a professor—I would not have this wonderful opportunity to serve our long term Main Street investors.

I would be happy to take questions.

Appendix A

FY 2019 One-Year Agenda (Published in the Fall of 2018)
(Strikeouts Reflect Completion of Indicated Stage of Rulemaking)

Agency Agenda Stage of Rulemaking Title RIN


Prerule Stage

Harmonization of Exempt Offerings



Prerule Stage

Earnings Releases/Quarterly Reports



Prerule Stage

Modernization of Investment Company Disclosure



Proposed Rule Stage

Amendments to Financial Disclosures About Acquired Businesses



Proposed Rule Stage

Business, Financial and Management Disclosure Required By Regulation S-K



Proposed Rule Stage

Guide 3 Bank Holding Company Disclosure



Proposed Rule Stage

Filing Fee Processing



Proposed Rule Stage

Disclosure of Payments by Resource Extraction Issuers



Proposed Rule Stage

Extending the Testing the Waters Provision to Non-Emerging Growth Companies



Proposed Rule Stage

Accelerated Filer Definition



Proposed Rule Stage

Regulation A



Proposed Rule Stage

Exchange-Traded Funds



Proposed Rule Stage

Enhanced Disclosure for Separate Accounts Registered as Unit Investment Trusts and Offering Variable Insurance Products



Proposed Rule Stage

Use of Derivatives by Registered Investment Companies and Business Development Companies



Proposed Rule Stage

Amendments to the Marketing Rules Under the Advisers Act



Proposed Rule Stage

Fund of Funds Arrangements



Proposed Rule Stage

Offering Reform for Business Development Companies under the Small Business Credit Availability Act and Closed-end Funds under the Economic Growth, Regulatory Relief, and Consumer Protection Act



Proposed Rule Stage

Transfer Agents



Proposed Rule Stage

Harmonization of Certain Title VII Rules



Proposed Rule Stage

Volcker Rule Community Bank Relief and Removing Naming Restrictions



Proposed Rule Stage

Amendment to Rule for Nationally Recognized Statistical Rating Organizations



Final Rule Stage

Disclosure of Hedging by Employees, Officers and Directors



Final Rule Stage

Modernization of Property Disclosures for Mining Registrants



Final Rule Stage

Disclosure Update and Simplification



Final Rule Stage

Amendments to Implement FAST Act Report



Final Rule Stage

Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures to Retail Communications and Restrictions on the use of Certain Names or Titles



Final Rule Stage

Amendments to Securities Act Rules Under the Fair Access to Investment Research Act of 2017 (Covered Investment Fund Research Reports)



Final Rule Stage

Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation



Final Rule Stage

Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Capital Requirements for Broker-Dealers



Final Rule Stage

Reporting and Recordkeeping Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants



Final Rule Stage

Definition of "Covered Clearing Agency"



Final Rule Stage

Disclosure of Order Handling Information



Final Rule Stage

Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for Statutorily Disqualified Associated Persons to Effect or Be Involved in Effecting Security-Based Swaps



Final Rule Stage

Transaction Fee Pilot



Final Rule Stage

Prohibitions and Restrictions on Proprietary Trading and Certain Relationships With Hedge Funds and Private Equity Funds[39]



Final Rule Stage

Regulation Best Interest



Final Rule Stage

Amendments to Municipal Securities Disclosure



Final Rule Stage

Auditor Independence With Respect to Loans or Debtor-Creditor Relationships



Final Rule Stage

Amendments to the Commission's Whistleblower Program Rules


[1] My words are my own and do not necessarily reflect the views of my fellow Commissioners or the SEC staff.

[2] For example, only 35% of the rules listed in the Commission’s Fall 2010 agenda to be adopted in the following 12 months were completed by 2011. Similarly, 30% of the 23 rules listed in the Fall 2013 agenda to be adopted in the next 12 months were completed by 2014. See Securities and Exchange Commission, Agency Rule List (Fall 2010), available at (listing 29 items in the “final rule stage” to be adopted within the following 12 months); Securities and Exchange Commission, Agency Rule List (Fall 2013), available at (listing 23 items in the “final rule stage” to be adopted within the following 12 months).

[3] See Chairman Jay Clayton, SEC Rulemaking Over the Past Year, the Road Ahead and Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks (Dec. 6, 2018), available at

[4] Chairman Jay Clayton, Observations on Culture at Financial Institutions and the SEC (June 18, 2018), available at

[6] See Appendix A.

[7] See Chairman Jay Clayton, Remarks at the Economic Club of New York (July 12, 2017) (“In sum, I believe in the regulatory architecture that has governed the securities markets since 1933. It is abundantly clear that wholesale changes to the Commission’s fundamental regulatory approach would not make sense.”), available at

[8] Press Release 2018-103, SEC Modernizes the Delivery of Fund Reports and Seeks Public Feedback on Improving Fund Disclosure (June 5, 2018), available at Rule 30e-3 preserves the option of paper delivery of fund shareholder reports for those who prefer it by requiring paper delivery upon request.

[9] See News Release, Independent Directors Council Applauds SEC Approval of Online Delivery for Fund Shareholder Reports (June 5, 2018) (“This move to allow default web-based delivery is a boon to fund shareholders, saving them extraordinary costs incurred under the antiquated system of paper-based delivery in place until now. It preserves important choice for investors who prefer to receive paper disclosures. And the change heralds great benefits for the environment, on which the paper-based system exacted steep costs—with a forest of trees the size of Manhattan cut annually to support that regime.”), available at; see also Comment Letter of Investment Company Institute (July 8, 2016) (estimating that adoption of the rule would save 1.87 milliontrees annually), available at

[10] Press Release 2019-89, SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals (June 5, 2019), available at

[11] For further discussion of the standards of conduct for broker-dealers and the fiduciary duty of investments advisers, see Chairman Jay Clayton, Regulation Best Interest and the Investment Adviser Fiduciary Duty: Two Strong Standards that Protect and Provide Choice for Main Street Investors (July 8, 2019), available at

[12] Pub.L. No.112-106, 126 Stat. 306 (2012).

[13] See, e.g., Press Release 2017-121, SEC's Division of Corporation Finance Expands Popular JOBS Act Benefit to All Companies (June 29, 2017), available at; Press Release 2018-297, SEC Adopts Final Rules to Allow Exchange Act Reporting Companies to Use Regulation A (Dec. 19, 2018), available at

[14] Press Release 2019-188, SEC Adopts New Rule to Allow All Issuers to “Test-the-Waters” (Sept. 26, 2019), available at

[15] See Press Release, 2019-190, SEC Adopts New Rule to Modernize Regulation of Exchange-Traded Funds (Sept. 26, 2019), available at

[16] Press Release 2019-189, SEC Proposes Amendments to Enhance Retail Investor Protections (Sept. 26, 2019), available at See also Publication or Submission of Quotations Without Specified Information, Exchange Act Release No. 87115 (Sept. 26, 2019), 84 Fed. Reg. 58206 (Oct. 30, 2019), available at, for a discussion of representative enforcement actions involving OTC securities and OTC issuers.

[17] Press Release 2019-148, SEC Proposes to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K (Aug. 8, 2019),available at

[18] Press Release 2019-230, SEC Proposes to Modernize the Advertising and Cash Solicitation Rules for Investment Advisers, available at

[19] November 15, 2018: Roundtable on the Proxy Process, available at

[20] Press Release, 2019-158, SEC Clarifies Investment Advisers’ Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice (Aug. 21, 2019), available at

[21] Press Release 2019-231, SEC Proposes Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice, available at

[22] Press Release 2019-232, SEC Proposes Amendments to Modernize Shareholder Proposal Rule, available at

[23] TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (“An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.)

[24] Market structure is integral to each tenet of the Commission’s three-part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, and our regulatory approach takes into consideration each of these tenets when examining market structure issues. For example, how can we ensure that our markets attract a broad range of investors to provide the necessary liquidity to promote efficient markets and facilitate capital formation? How can we ensure that investors have valuable information—price discovery through comparable metrics—about a company’s value? Does our market structure advance the interests of Main Street investors in the myriad ways in which they participate in today’s markets (direct investments in stocks, and also through mutual funds, pension funds, and exchange-traded funds)? Do our regulations promote public access to material information that can empower investors? Are our rules functioning as intended—if not, how can we improve?

[25] See, e.g., Press Release, 2018-125, SEC Chairman Clayton Invites Main Street Investors to ‘Tell Us’ About Their Investor Experience; Roundtables Will Be Held across the Country to Hear from Investors (June 29, 2018), available at; Press Release, 2019-91, Investing in America: SEC Commissioners are Heading to Atlanta to Interact with Investors (May 23, 2018), available at; Senior Airman Joshua Eikren, 375th Air Mobility Wing Public Affairs, Scott Air Force Base, SEC Chairman Clayton offers insights on both investment, financial strategies (Sept. 1, 2017), available at

[26] See Tips for Main Street Investors from Chairman Jay Clayton, available at

[27] See e.g., Press Release 2019-49, Are You Prepared for Your Financial Future? Use the SEC’s Investor Preparedness Checklist to Find Out; Chairman Jay Clayton Breaks Down Investment Basics in New Video Series (April 1, 2019), available at; Tips for Main Street Investors from Chairman Jay Clayton, available at; SEC Meets With Baltimore’s Investors, available at; Miami Regional Office Outreach to Local High Schools, available at; World Investor Week 2019, available at

[28] Press Release 2019-85, SEC Announces Enforcement and Investor Education Initiatives to Protect Teachers and Military Service Members, available at

[29] Securities and Exchange Commission. Office of Compliance Inspections and Examinations, 2019 Examination Priorities, available at

[30] For a discussion of how the Enforcement Division identifies and addresses misconduct and illicit practices that are harmful to retail investors, see Stephanie Avakian, Co-Director, Division of Enforcement, What You Don’t Know Can Hurt You (Nov. 5, 2019), available at

[31] Alexandre Tanzi, Global Debt Quickened in First Quarter, Outpacing World Economy (July 15, 2019), available at

[32] Board of Governors of the Federal Reserve System (US), Nonfinancial corporate business; debt securities and loans; liability; Level [BCNSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis;, Sept. 23, 2019.

[33] Board of Governors of the Federal Reserve System, Table L.121 of the Federal Reserve Financial Accounts, Money Market Funds, retrieved from, September 20, 2019.

[34] See Vice Chair Richard H. Clarida, Monetary Policy, Price Stability, and Equilibrium Bond Yields: Success and Consequences (Nov. 12, 2019), available at, and Stanley Fischer speeches cited therein.

[35] The Commission oversees (1)approximately $96 trillion in securities trading annually on U.S. equity markets; (2) the disclosures of approximately 4,300 exchange-listed public companies with an approximate aggregate market capitalization of $33 trillion; and (3) the activities of over 26,000 registered entities and registrants including, among others, investment advisers, broker-dealers, transfer agents, securities exchanges, clearing agencies, mutual funds and exchange-traded funds, who employ over one million people in the United States. In addition to working closely with the domestic and international colleagues mentioned above in conducting market oversight, the Commission also oversees the important functions of self-regulatory organizations and boards, such as the Public Company Accounting Oversight Board, Financial Industry Regulatory Authority, and the Municipal Securities Rulemaking Board, and works closely with these entities in overseeing market participants.

[36] See Mark Carney, Governor of the Bank of England, What a Difference a Decade Makes (April 20, 2017), available at

[37] See generally Penn’s Heritage, available at

[38] This is not a novel perspective. As my predecessor Chair Mary Jo White explained using different words, “To my mind, the SEC achieves the best results and best fulfills its mission, when it uses its expertise, acts independent, and defends that independence against all comers.” The Importance of Independence (Oct. 3, 2013), available at

[39] The agencies intend to issue a separate proposed rulemaking addressing and requesting comment on additional covered fund provisions and other fund-related issues.

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