Prepared Remarks: “Dynamic Regulation for a Dynamic Society” Before the Exchequer Club of Washington, D.C.
Jan. 19, 2022
Thank you for the kind introduction. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.
I’d like to share with you all that we lost an SEC alum, Robert Birnbaum, this past December. Though I didn’t get to know Bob personally, he accomplished a lot in his remarkable life. After leaving the SEC, he went on to lead the New York Stock Exchange.
While at our agency, though, Bob contributed to a seminal report called the Special Study. This report was published in 1963 — exactly 30 years after Franklin Delano Roosevelt and Congress came together, in the depths of the Great Depression, to think about how our capital markets could work better for the American public.
The 1963 report described our securities laws as “a proven legislative achievement.” And yet, the staff wrote, “no regulation can be static in a dynamic society.” They continued, “unanticipated changes in the markets and the broader public participation should be accompanied by corresponding investor protection.”
Indeed, a lot had changed in the capital markets over the previous 30 years. Based upon that report, Congress would go on to amend the securities laws over the next dozen years, bringing SEC oversight to over-the-counter markets, facilitating a national market system, and banning fixed commissions.
Over the past several decades, our markets have continued to evolve in an even more dramatic way. Policymakers have continued to change our laws and our regulations in response.
We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent about 40 percent of the globe’s capital markets. This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share.
But, as Bob’s team noted, we cannot take this for granted; “no regulation can be static in a dynamic society.” In 2022, nearly six decades after the publication of the Special Study, that core idea still rings so true.
Today, I’d like to share with you a couple of guiding principles I think about when it comes to making regulations “dynamic” in shaping the SEC’s agenda for 2022:
- First, continuing to drive efficiency in our capital markets
- Second, modernizing our rules for today’s economy and technologies
Driving Efficiency in Our Capital Markets
Let me start with efficiency.
Why does efficiency matter?
Efficiency in capital markets is about lowering costs of intermediation for those who use capital — issuers — and those who own capital — investors. This fits directly into our mission, which is to protect investors, facilitate capital formation, and maintain that which sits between investors and issuers: fair, orderly, and efficient markets.
Today, the financial sector, including the capital markets, banking, and insurance, represents about 8 percent of America’s economy. In 1963, when the Special Study was published, the sector had a 3.5 percent share. While a lot has changed in our economy since then, I think the SEC still has a role to play to help drive greater efficiency here.
Further, one study found that the costs of financial intermediation over time were as high in 2014 as they were in 1900. The scholar found this “puzzling,” as advances in technology “should lower the physical transaction costs of buying, pooling and holding financial assets.”
To promote efficiency, over the decades Congress has given us a number of tools to foster competition and transparency. Congress made significant amendments to our statutes in 1975, partly in response to the Special Study. In the very first line of that bill, it says they were “amend[ing] the Securities Exchange Act of 1934 to remove barriers to competition.” That word, “competition,” appears 20 times in the text.
Congress returned to this idea of competition again in 1996. In rulemaking, Congress said, the Commission must consider efficiency, competition, and capital formation, in addition to investor protection and the public interest. Those are tools that, if used correctly, can lead to greater productivity and lower economic rents.
Hence, I’ve directed our staff to make recommendations up and down the capital markets about how we can drive towards greater efficiency through competition and transparency. This includes various sectors: the $50 trillion equity markets; our $23 trillion Treasury markets, whose “issuers” are the American public and the Department of the Treasury; and other aspects of the $25 trillion non-Treasury fixed income markets. It also includes the fund management area.
Let’s take a quick look at one area of fund management in particular: private equity and hedge funds. These funds hold about $17 trillion in gross assets under management. While we don’t know the exact costs of doing business in this sector, there may be around $250 billion in fees and expenses each year.
If we can use our authorities to bring greater transparency and competition into that market, that helps portfolio companies on the one hand, and the pensions and endowments that are investing in that space on the other. Similarly, if we can drive efficiencies across other key sectors of the capital markets, that too would help issuers and investors.
Modernizing Our Rule Set for Today’s Economy and Technologies
Next, I’d like to turn to updating our rule set for today’s economy and technologies.
Markets and business models have long evolved in response to new technologies; as Bob Birnbaum’s team noted, they are “dynamic.” I believe that innovation can bring greater access, efficiency, and innovation to our capital markets, as well as economic growth.
Our central question is this, though: When new technologies come along and change the face of finance, how do we continue to achieve our core public policy goals?
Here again, Bob’s team gives us some insights. By 1963, the development of communications systems after World War II had made it easier for broker-dealers to transact directly. One of the main things Bob and his team were looking at was this over-the-counter market.
They wrote, “In the ‘old days,’ one of the major tasks was to locate a market—a task often performed by mail. Now…markets for most securities can be located almost instantaneously and transactions consummated within a matter of seconds.”
If that was true of 1963, it is true by several orders of magnitude today. “A matter of seconds” can be an eternity in today’s markets!
What does this mean for the 2020s? Some will jump to crypto, of course. I’ll leave that for your questions. Before that, let me raise a couple of other categories as well:
To me, the most dramatic change to our markets is the use of predictive data analytics and artificial intelligence. Predictive data analytics, including machine learning, are increasingly being adopted in finance — from trading, to asset management, to risk management. Though we’re still in the early stages of these developments, I think the transformation we’re living through now could be every bit as big as the internet was in the 1990s.
While these developments can increase access and choice, they also raise important public policy considerations, including conflicts of interest, bias, and systemic risks.
Innovation doesn’t come just from updating software and hardware; it also comes from the manner in which products are offered. One example today is around how many issuers have sought alternative ways to access public markets through special purpose acquisition companies (SPACs) and direct listings.
Beyond the innovations and technologies, our economy is changing in other ways. Today, investors are demanding additional information from companies beyond what they’ve sought historically, with respect to climate risk, human capital, and cybersecurity risk. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures.
All of this is exciting. Innovation and evolution keep our markets the most robust in the world. Our role at the SEC, though, is to help ensure that we still achieve our public policy goals as mandated in our mission.
Again, “no regulation can be static in a dynamic society.”
Before I conclude, a few thoughts on 2022.
We made good progress in 2021, finalizing a handful of rules and proposing many others. We have much more to come on the SEC’s Agency Rule List.
I’m often asked to prioritize the remaining items on our rulemaking agenda. When will we vote on what?
At their core, those questions are more about sequencing than prioritization. Staff is working hard on proposals. When they and my fellow Commissioners think they’re ready, we’ll put them out for public comment and, when appropriate, finalize items.
The process is intentionally flexible; it’s about getting proposals right, based upon the economic analysis and our legal authorities, and learning from public feedback. I encourage you all to weigh in on those proposals when they’re available. We also have an Open Commission Meeting next week, so stay tuned for that.
I just want to say something about this incredible agency.
Since joining the SEC last spring, I have been struck by the sheer breadth and scope of the agency’s work. We oversee every corner of the $100-trillion capital markets — all of its sectors, from equity markets to municipal bonds, and functions, from accounting and auditing to disclosure to fund management. Nearly half of our agency works as cops on the beat in our terrific Divisions of Examinations and Enforcement. Behind the scenes, so many folks are making our operations hum. All this, despite the challenges presented by this pandemic.
They make me proud to be their colleague; they do right by the American public every day. I know they made Bob Birnbaum proud as well. I am grateful to call them teammates and look forward to continue collaborating with them in 2022.
Thank you and I’m happy to answer any questions.
 See Emily Flitter, “Robert Birnbaum, Architect of Modern-Day Financial Markets, Dies at 94” (Jan. 2022), available at https://www.nytimes.com/2022/01/08/business/robert-birnbaum-dead.html.
 “Report of Special Study of Securities Markets of the Securities and Exchange Commission” (1963), p. IV, available at https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_01_1.pdf.
 See Securities Acts Amendments of 1964, available at https://www.congress.gov/88/statute/STATUTE-78/STATUTE-78-Pg565.pdf.
 See Securities Acts Amendments of 1975, available at https://www.govinfo.gov/content/pkg/STATUTE-89/pdf/STATUTE-89-Pg97.pdf.
 See Securities Industry and Financial Markets Association, “Research Quarterly: Equities” and “Research Quarterly: Fixed Income – Issuance and Trading” (Oct. 2021), available at https://www.sifma.org/resources/research/research-quarterly-equities/ and https://www.sifma.org/resources/research/research-quarterly-fixed-income-issuance-and-trading/.
 See World Bank data: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD.
 See chart of Bureau of Economic Analysis data in Paul Kiernan and Dave Michaels, “SEC’s Gensler Aims to Save Investors Money by Squeezing Wall Street” (Oct. 5, 2021), available at https://www.wsj.com/articles/secs-gensler-aims-to-save-investors-money-by-squeezing-wall-street-11633426201
 See Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation” (2015), available at American Economic Review, 105 (4): 1408-38, https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.20120578.
 See Gary Gensler, Prepared Remarks Before the SIFMA Annual Meeting (Nov. 2, 2021), available at https://www.sec.gov/news/speech/gensler-sifma-110221.
 See Securities Acts Amendments of 1975.
 “Whenever pursuant to this title the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.” See Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisers Act of 1940, and Investment Company Act of 1940.
 See Gary Gensler, Prepared Remarks at U.S. Treasury Market Conference (Nov. 17, 2021), available at https://www.sec.gov/news/speech/gensler-us-treasury-market-conference-20211117.
 See Gary Gensler, Prepared Remarks at the Institutional Limited Partners Association Summit (Nov. 10, 2021), available at https://www.sec.gov/news/speech/gensler-ilpa-20211110.
 See Special Study, Chapter VII, p. 558-559, available at https://www.sechistorical.org/collection/papers/1960/1963_SSMkt_Chapter_07_1.pdf.
 See Gary Gensler, Remarks Before the Aspen Security Forum (Aug. 3, 2021), available at https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03.
 See Gary Gensler, Prepared Remarks at DC Fintech Week (Oct. 21, 2021), available at https://www.sec.gov/news/speech/gensler-dc-fintech-2021-10-21
 See Gary Gensler, Remarks Before the Healthy Markets Association Conference (Dec. 9, 2021), available at https://www.sec.gov/news/speech/gensler-healthy-markets-association-conference-120921.
 See Gary Gensler, Prepared Remarks Before the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar (July 28, 2021), available at https://www.sec.gov/news/speech/gensler-pri-2021-07-28
 See Agency Rule List, Fall 2021, available at https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤tPub=true&agencyCode&showStage=active&agencyCd=3235.