Thank you, Will [Luther]. It is such a pleasure to be here this morning. I have a number of disclaimers. My first disclaimer is that I am not an economist, and this is not an academic presentation. Second, the views I express are my own as a Commissioner and not necessarily those of the Securities and Exchange Commission (“SEC” or “Commission”) or my fellow Commissioners. My third disclaimer is that my high-school French is very rusty. Members of the Académie Française might want to tune out.

On a trip to France last summer, I had a fascinating conversation with a ride share driver. He spoke admiringly of the United States as the land of opportunity and freedom. In the U.S., he explained, the question you get when you want to try something new is “Pourquoi Pas,” “Why not?” By contrast, in many other countries, the question posed to the person trying to do something new is “Pourquoi?,” “Why?” One system encourages you to strive; the other challenges you for even wanting to do such a thing. One system admires people who try something new, even if they fail. The other punishes people for daring to be different, even if they succeed. When people want to do something new or different, the American spirit is inclined to respond with a laissez-faire “why not?”

The driver’s enthusiasm for the American system—one in which people are able to stand out from the crowd, take risks, bring ideas to the market, benefit from their own labor and ingenuity, and, yes, to fail and try again—inspired me to consider how the SEC can support the free spirit of the country whose capital markets it regulates. How can we contribute to the legal framework that makes the United States the place about which so many people, including my French raconteur, dream?

Regulators help define a country’s openness to new endeavors, new competitors, and new ideas. The SEC is only one of many regulators, but, because of the critical markets we regulate, we play an important role in determining how open this country is. The SEC establishes the ground rules for the capital markets that form the basis of the American economy, which in turn supports a healthy, prosperous, welcoming society. Effective securities regulation clears the pathways that allow people to access our markets by, for example, promoting transparency, protecting from fraud, manipulation, and other misconduct, and overseeing intermediaries who handle other people’s money. Regulation that does these things naturally creates space for individuals and companies to develop new ideas and new business models, on which investors and customers can then pass judgment. This kind of regulation creates an environment in which investable capital meets people’s plans for building new businesses or expanding existing ones. Not only do the particular businesses raising funds benefit, but their shareholders, customers, communities, and employees share in those the benefits too. Sensible regulation can encourage people to build and expand businesses and to invest in other people’s companies. Careless regulation, by contrast, can drive businesses away, squelch entrepreneurs’ dreams, and make investors skittish about committing their capital.

Getting regulation right requires establishing and enforcing clear ground rules within which people have broad latitude to make decisions for themselves. The clear ground rules give people the confidence to participate in the marketplace; they can trust that other market participants generally are acting in good faith because there is an effective outside disciplining mechanism. A good regulatory framework affords latitude to individual decision-makers and thereby ensures that the markets are responsive to people’s actual needs, rather than to regulators’ perceptions about what people need.

Securities regulation in the United States generally falls in the sensible regulation column. The United States has long been the place where the most interesting and dynamic companies in the world are born and where free-thinking iconoclasts bring their great ideas to life and build their lives. It also is the place where people from all over the world choose to invest their money. In a room full of economists, I dare not give securities regulation full credit for the magnetism of the United States—economists have disagreed on how much credit is due.[1] I am comfortable saying that the American securities regulatory framework has helped to create the environment within which businesses and investors thrive. That said, there is still room for improvement. I want to walk you through why I believe our securities regulatory framework is fundamentally sound, why it is trending in the wrong direction, and what we can do to turn it back in the right direction.

When prudently pursued, the SEC’s mission—protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets—helps to cultivate a healthy environment for investing and raising capital. We achieve this mission by carrying out the mandates set forth in several statutes,[2] which give us responsibility for regulating companies selling securities, investors, stock exchanges, broker-dealers, investment advisers, mutual funds, and other participants in the equities, options, bond, and security-based swap markets.

These statutes give the SEC more prescriptive power over the markets and market participants than I would prefer, but Congress did not set up the SEC as the ultimate gatekeeper to the markets either. For example, a company seeking to raise money does not need to get the SEC’s sign-off that it is a good company before selling its shares in the public markets. The company needs only make truthful disclosures necessary for investors to decide whether it is a company in which they want to invest. Similarly, the SEC does not have the authority to test would-be investment advisers on their capability in managing money. Instead, advisers registering with us have to make disclosures about who they are and what they do so that investors can decide whether they want these advisers to manage their money. Mutual funds marketed to the public have great leeway in the type and mix of assets they hold and the strategies they use, as long as fund disclosures accurately reflect them. Credit rating agencies have to disclose what methodologies they use, but the SEC cannot regulate those methodologies. Generally, Congress did not design the SEC to be a merit regulator, and the resulting flexibility for market participants is an important contributor to create the dynamic market environment where entrepreneurs thrive.

Even though Congress did not set the SEC up to be a merit regulator, the securities laws are not hands-off the markets either. Legislation in 1975, for example, gave the SEC authority to “facilitate the establishment of a national market system,”[3] a directive that puzzles me since markets tend to establish themselves organically without a government facilitator. The securities laws also require market infrastructure providers, such as exchanges and clearinghouses, to go through a Commission approval process when they begin operations and whenever they change their rules. Substantive provisions govern mutual fund structure and operations. Broker-dealers generally must be members of a self-regulatory organization. Statutory provisions govern the proxy process, tender offers, and the process for obtaining shareholder input on executive compensation. Congress prohibited certain transactions by investment advisers. In many other instances, the securities statutes prescribe or proscribe specific conduct. Importantly, however, even where there are statutory prescriptions, Congress often provided the SEC the ability to make exceptions to them and to condition those exceptions as appropriate. This escape hatch and tailoring feature of the securities laws is another important tool to achieve sensible regulation.

The statutory background is only one factor in determining the quality of our regulation. The SEC adopts regulations to implement its statutory mandates, and it administers, interprets, and enforces the securities laws. How the SEC carries out these functions is very relevant to the question of whether securities regulation cultivates or suppresses the American spirit that celebrates freedom of enterprise, initiative, and thought.

The SEC’s record on this score was better in the past than it is now. Over its ninety-year history, the SEC has enacted many regulations to implement statutory mandates. Those regulations generally have been principles-based. For example, much of the rulebook governing public company disclosures has embodied an approach that directs companies to provide investors a window into the company through the eyes of management, rather than ticking through a prescriptive checklist of items for disclosure. This framework accommodates all sorts of companies of all sizes in all sorts of industries. Likewise, the SEC’s regulation of investment advisers, consistent with the statute’s grounding in fiduciary duty, largely avoided prescriptions.

In this century, however, the Commission’s regulatory approach has turned increasingly prescriptive as we expand the rulebook at a record-breaking clip. Some of these prescriptions are statutory, but many are a product of the SEC’s discretion. Public companies are subject to an ever-growing list of disclosure rules. Some mandates seem designed to change the way companies operate, rather than to elicit material disclosures. In the past year, for example, we have adopted rules requiring certain companies to make extensive cyber and climate disclosures. Investment advisers, too, have seen their regulatory regime become more prescriptive, including most recently a new set of rules directed at reshaping the relationship between hedge fund advisers and investors. Additional proposals would micro-manage investment advisers’ interactions with their custodians and other service providers. Prescriptive rulemaking is not limited to public companies and investment advisers. Broker-dealers also face proposed prescriptions, including a new rule proposal that would govern how they execute trades. These types of regulations, particularly when they are not scaled for small entities, often act as barriers to entry into the securities industry. Moreover, the complexity discourages innovation since fitting new products, processes, or technologies into a thicket of complex and inflexible rules is challenging.

Not only is our rulebook expanding through new rulemakings, but aggressive interpretations of existing rules and statutes also add to the rulebook. For example, we have used an enforcement action to expand disclosure requirements.[4] Recently, we have brought enforcement cases that effectively expand an internal accounting controls rule designed to ensure that financial statements are accurate and reliable when disclosed to investors. Now it also covers issues unrelated to the financial statements, including share repurchases,[5] insider trading,[6] airline flight routes,[7] and workplace harassment.[8]

As I mentioned earlier, Congress gave us broad exemptive authority: when the statutes do not work for an asset class, a product, a transaction, or a type of entity, we can adjust them. We have used this authority to good effect in the past. For example, in the 1990s, the Commission could have forced automated trading venues—known back then as electronic communications networks—into the regulatory framework for national securities exchanges.[9] Doing this would have subjected them to onerous innovation-deterring requirements, such as having to operate as a self-regulatory organization and to seek Commission review and approval of all their rules. Instead, the Commission clarified the regulatory landscape by clearly stating that these venues did fall within the definition of exchange but simultaneously used its exemptive authority to exempt them from regulation as exchanges so long as they satisfied the disclosure-focused requirements of operating as an alternative trading system, or ATS.[10]

We also used our exemptive authority to accommodate a new product in the investment company space—exchange-traded funds. These variants on traditional mutual funds required exemptions from certain rules. We began issuing exemptive orders with conditions to ensure investor protection, and eventually we crafted a rule specifically for exchange-traded funds. Getting from the first, firm-specific exemptive order to a rule that applied to the whole industry took too long, but the SEC showed a willingness to facilitate the introduction of a new product into the market, a product that has revolutionized the investment portfolios of many Americans.[11] After the finalization of the ETF rule, the Commission continued to work with the industry on the introduction of non-transparent ETFs.

Too often these days, we take a different approach—rather than using our authority to accommodate new products, new technology, and new ways of doing things, we reject them out of hand. We ask questions, not out of curiosity to work through the puzzle of finding a compliant way forward for new products and processes, but as part of a process seemingly designed to grind down those who propose an alternative to the status quo.

Let me illustrate with the SEC’s approach to bitcoin exchange-traded products (“ETPs”). In 2013, the SEC received its first application for a spot bitcoin ETP. More than ten years later, we approved the first such products,[12] but only after a federal court effectively forced our hand.[13] During this decade of back-and-forth with bitcoin ETP applicants, our nebulous, unprecedented approval standard shifted inexplicably, and would-be ETP sponsors incurred large costs, in the form of time, money, and frustration. In the meantime, investors could not access a product, one that has exhibited record-breaking popularity.[14] I personally am agnostic on the merits of these spot bitcoin products, but dragging the sponsors seeking to meet investor demand through a grueling ten-year regulatory obstacle course is not the best approach to investor protection.

More generally with respect to crypto, the Commission has failed to use its exemptive authority to good effect. A tailored registration and disclosure regime for crypto projects could have helped to avoid some of the problems we have seen in the market, but the Commission instead insists the existing disclosure regime works just fine for crypto. Insisting on treating tokens offered by tiny crypto projects as if they are shares in an IPO-ready company is wrong-headed. Attorney Steve Lofchie explains: “Crypto firms are not arguing that crypto assets should not be regulated . . . . They are arguing that the SEC regulatory scheme applicable to securities, debt and other ordinary securities that represent ownership in a corporation are ill-suited for crypto.”[15] Consequently, the Commission can point to a long list of enforcement actions as examples of what not to do, but not to any viable path forward for crypto projects in the United States. We did use our authority to create a time-limited, strictly constrained regime for special purpose broker dealers to custody crypto asset securities, but only one firm has been able to register under this Commission guidance, perhaps because it is so restrictive and unwieldy.[16]

I believe the SEC’s motives are generally good; the agency wants to create a regulatory framework that brings investors and companies into our markets. Many of my colleagues at the Commission see much of this rulemaking and enforcement activity and withholding of exemptive relief as justified or even required by our mandate to protect investors.

I fear, however, that actions that may seem beneficial to investors in the short-run may harm investors and our capital markets in the long-run. Operating from deeply ingrained aversion to risk, the SEC often focuses its efforts on discouraging people from investing in projects that might fail to pan out, prohibiting firms from pursuing technologies or business models that we do not fully understand, and excluding new firms with which we are not familiar. Whether intentional or inadvertent, we end up persuading companies and market participants with new ideas that our markets are not for them. A disproportionate focus on preventing failures can fence out the upstart, disruptive entrepreneur who lacks an army of lawyers on retainer or rich friends on speed dial. Investor protection can morph into incumbent protection.

We should modulate our regulations to ensure that we are doing our part to keep America open to innovators, entrepreneurs, and upstart competitors. Some basic principles can guide that new regulatory approach. First, foster regulatory predictability so people have the space to make reliable educated assessments of regulatory risk. Second, take a prudent, humble, and iterative approach to regulation that can respond nimbly to innovation and that can identify and correct regulatory missteps. Third, relish the intellectual challenge of dealing with novel legal questions raised by innovative companies and products. Fourth, explore ways in which new technologies can make us a better regulator. You, as academics, can hold us accountable to regulating according to these and other sensible regulatory principles.

First, the Commission should focus on fostering a predictable regulatory framework. Rules need to keep up with changes in the market, but predictability is an essential precondition to a vibrant entrepreneurial culture. Rules may change, but they should do so after adequate time for public discussion about the wisdom of such changes. Only after a sufficiently long compliance period, during which the regulator has worked with the industry on implementation, should the government enforce a rule. This kind of predictability in the rule set gives people the confidence to invest in building a new company, product, or service. If, instead, rules can change on a dime to outlaw previously lawful activities or sometimes to make legal what was once illegal, people will be reluctant to do things that turn on what the law is. Just as a homeowner under threat of eminent domain will not remodel the kitchen in her house, a financial firm will not invest in a new product line that it fears could be taken away by a sudden regulatory change or an enforcement action premised on an unprecedented interpretation of an existing rule. Unlike the homeowner who is bound by geography, the company can roll out that new product line in a jurisdiction where regulation is predictable. Regulatory predictability gives entrepreneurs the confidence to try something new. A would-be entrepreneur in the jurisdiction of a regulator that acts arbitrarily and unpredictably is likely to settle into a conventional profession, which is less likely to attract regulatory attention. My French ride-share chauffeur would have to shelve his dream, or move elsewhere to pursue them.

Some of the SEC’s recent crypto cases illustrate the problem that a lack of predictability brings. These cases struck many, including me, as arbitrary. The Commission, for example, recently brought a case against ShapeShift, an online crypto trading platform that had been operational since 2014. As Commissioner Uyeda and I noted in our dissent:

It is entirely unclear how ShapeShift was to discern that the Commission would consider crypto assets generally—and any crypto asset in particular—a security in the form of an investment contract. Even now, ten years on, it is hardly more discernible. But perhaps that ambiguity is exactly the result the Commission wants. Now the next person who comes up with an idea for building something to help other people buy or sell crypto will think twice. Why spend time and effort creating something only to face an enforcement action ten years later?[17]

Similarly, the SEC sued LBRY, a small crypto-project run by an enthusiastic team that had built a functional blockchain on which a video-sharing service operated. LBRY lost a company-crushing lawsuit—not based on fraud, but on a failure to anticipate how the Commission would apply registration rules designed for traditional equity or debt securities to a completely new genre of business enterprises.[18] The case sends a message to the next aspiring set of entrepreneurs, and it is not a message about America being the land of opportunity. While we are quite predictable now (in the SEC’s eyes, just about every crypto asset is a security and just about every person that works with crypto-assets must somehow register), we let an entire industry languish for years in uncertainty as to how it should engage with us and our regulations. As a result, the bold were punished, and the timid never even tried.

Regulatory vacillation was on full display in the adoption of Rule 30e-3 in June 2018 and its quick subsequent rescission.[19] Rule 30e-3 allowed certain funds to an optional method to satisfy their obligations to transmit shareholder reports by putting required documents on their websites and sending a paper notice to investors that notified them of the online availability and their right to request a paper version. If existing funds wanted to take advantage of the new rule, they needed to put their investors on notice for two years. Starting on January 1, 2021, funds could rely on the rule. The following year, in October 2022, the SEC adopted a new tailored shareholder reports rule that, along with many good changes, quite controversially prohibited funds from relying on Rule 30e-3.[20] After a multi-year process, funds would now have to spend extensive resources to adopt a completely new process and likely field inquiries from frustrated and confused fund shareholders. Proposing to unwind a rule we had just adopted before that rule was fully implemented is hardly an example of regulatory predictability.

Second, the Commission should exercise prudence and humility when taking regulatory action. Regulatory prudence arises out of serious consideration of the limitations of our knowledge, whether of new technologies or of investor preferences or, simply, of the future. These limitations mean that abrupt, comprehensive changes are unlikely to produce satisfactory results. Accordingly, before proposing new rules, the Commission needs to do the hard work of identifying discrete problems that are susceptible to being addressed through regulation. We need our large team of economists to identify whether the benefits of the proposed solution to those problems are larger than the cost of that solution. We need the public’s help too. And when the Commission has done this work and decides to propose new rules, it should do so in an iterative manner. A staggered approach allows the SEC to identify problems in a way that leaves space for the Commission to respond nimbly to continued experimentation, for new entrants to disrupt incumbent firms, and for the Commission to correct regulatory errors without significant market disruption.

Prudence does not describe the Commission’s approach to proposing market structure reforms in December 2022. On a single day, the Commission proposed four rules that, if adopted, would bring sweeping changes to our equity markets. These proposals would make changes to how execution quality is reported, to minimum tick sizes for quoting bids and offers and executing orders, to the standards defining “best execution,” and to the way retail customer orders are required to be handled, including mandating that they generally be sent to a periodic auction.[21] Among other concerns with this approach, the Commission had difficulty pinpointing an actual problem it was trying to solve—retail investors, after all, are getting better execution quality at lower cost than ever before. Moreover, determining whether these simultaneous sweeping changes actually would improve execution quality for retail investors is difficult. The most controversial component of the proposed set of solutions—the retail auctions—would impose uniform, mandatory rules on how these untried auctions must be structured. The proposed prescriptive mandate came just as the Commission was beginning to receive proposals for innovative, voluntary ways of conducting such auctions.[22]

A prudent regulator, by contrast, looks to learn from industry experimentation rather than declare a premature end to experimentation by imposing a mandatory framework. Prudence counsels engaging with innovators early and often. We must acknowledge that project funders and employees working on the project cannot wait for commercialization indefinitely. Consequently, large, well-funded firms that can finance the wait have a leg up over smaller firms. The latter, unfettered by a history of doing things the old way and the red tape that is inevitable in large organizations, may be much better at timely spotting problems and quickly developing solutions. We should facilitate small scale experiments early, which can then be expanded, adjusted, or ended depending on the results of those experiments. These experiments can be very instructive in helping us to understand how markets work.

Third, the Commission as an agency needs to embrace and relish the challenge of dealing with the intersection of new technologies and new business models with the financial markets. Determining how to apply a longstanding regulatory framework to 21^st-century technologies can present extraordinarily difficult challenges, but developing new rules to advance our three-part mission in the regulation of firms using the latest new technologies is also a difficult task. Although creating and maintaining a nimble approach to financial markets regulation is difficult, the Commission attracts a smart and talented workforce in part with the promise of being able to spend one’s workday looking for solutions to hard problems. The Commission should expect and empower its staff to approach these issues creatively.

As I mentioned earlier, the SEC has met inquiries about blockchain technology with a stubborn and decidedly uncreative insistence that existing rules work just fine. We have not worked seriously with people in the industry to figure out how to achieve our regulatory objectives in a way that is tailored to the opportunities and risks of the technology.

Technology does not always require new rules. Sometimes existing rules, paired with some technology-specific guidance, work just fine. One example someone recently pointed out to me was when the Commission, in the mid-to-late 1990s, took an iterative process to respond to the regulatory issues raised by the rise of the internet. It gathered industry feedback on where clarity might help registrants and issued responsive no-action letters[23] and interpretive releases.[24] To take one instance, in 1995, the Commission issued guidance under various existing Commission statutes on how market participants could use electronic media to deliver information. The Commission “appreciate[d] the promise of electronic distribution of information” and aimed to “encourage continued research and development and use of such media,” because this approach could help investors.[25] Accordingly, the Commission never issued sweeping rules that either overregulated the industry or locked in technologies or processes that became obsolete with time.

The Commission faces a similarly disruptive technology today in the form of artificial intelligence, and a similar approach could be appropriate here. Artificial intelligence may transform aspects of many industries, including the financial industry. Rather than attempting to adopt a sweeping new rule to deal once and for all with AI, we may be better off approaching it in a manner similar to how we treated the internet last century. If regulated firms need guidance on how particular AI practices interact with the securities regulatory framework, we should listen carefully without prejudice or hostility and provide timely, meaningful feedback rooted in law.

Fourth, the Commission should embrace, as appropriate, new technologies in its work to enhance our ability to execute our mission and to give our staff the familiarity with these technologies so that they can have fruitful conversations with market participants. Regulatory agencies often find it difficult to keep up with the pace of technological development in the industries that they regulate, which can easily turn them into reactive, suspicious regulators. They are reluctant to engage in frank discussions of the benefits and risks of new technologies, much less to accede to their use by firms they regulate.

AI again provides an opportunity to put this fourth principle to work. To figure out how AI might be useful, we should educate our employees in how the underlying technologies work and how to use AI. Armed with the employees’ suggestions on how AI might help them do their jobs faster and better, we can then examine whether AI can enhance the work experience and work product of SEC employees. We can look at how it might streamline how the SEC consumes information. Perhaps it could help reduce human error. Perhaps automation of routine tasks, such as reviewing filings by registrants, could free our staff’s time to think deeply about thornier disclosure issues and other difficult and urgent legal questions from market participants. Using AI ourselves will sharpen our understanding and thereby make us better able to regulate the technology sensibly.

Importantly, as we put AI and other technologies to use at the SEC, we must avoid the very real temptation to misuse it. Because technology makes it easier to identify violations, it might be tempting to punish every foot fault. That approach to regulating the securities markets misses the forest for the trees. AI also makes it easier to engage in mass surveillance of marketplace activity. Indeed, we are doing that already with our Consolidated Audit Trail, which watches everyone’s trading activity. If we are to be regulate consistent with the American spirit, we must restore our commitment to our fellow Americans’ privacy.

The SEC’s commitment to these principles of regulation is not alone enough to maintain America’s status as the land for people willing to think for themselves and take risks to bring their dreams to life. The SEC and other parts of the government play an important role in creating the right environment, but the dreamers and doers are essential to cultivating the American spirit. To that end, I encouraged our Parisian driver to move to the United States. When he emigrated to France from Algeria, he could have come to America, but had chosen France because of the language. I tried to convey in my French, which was undoubtedly worse than his English, that he already had an American mindset—a love of freedom, a dislike of conformity (he was not, as he put it, part of the “flock” of sheep), a passion for hard work, an overflowing well of business ideas, and a determination to see that his son has greater opportunities than he has had. Rolling out the welcome mat for him includes ensuring that our regulatory environment fosters, rather than stifles, the American spirit.