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Remarks Before the 27th International Institute for Securities Market Growth and Development

Acting Chairman Michael Piwowar

Washington D.C.

March 27, 2017

Thank you, Paul [Leder], for that warm introduction.

Welcome to the SEC's 27th Annual International Institute for Securities Market Growth and Development. Thank you for being our guests over the next two weeks. It is our honor to host you. The reason why I am so excited that you are here is because the work we can do together is so important to our respective jurisdictions.

The program that has been developed for the next two weeks is comprehensive, informative, and engaging. Looking at your agenda – you will hear from speakers who are some of the top experts that the SEC has to offer and they are very good at sharing their knowledge. I would like to thank the Office of International Affairs for working so hard to put the Institute together.

Why is our work important to our societies? Because capital markets offer tremendous benefits to our respective economies. Studies show that robust capital markets can add percentage points to the economic growth of a country.[1] This means job creation, infrastructure development, and an increased standard of living for future generations. With economic growth comes a direct and measureable reduction in mortality and morbidity rates – so if we do our jobs right, it literally means saving lives.[2] Thus, the lessons from this Institute are tremendously important to the future of our countries. More importantly, how we implement those lessons in our daily work will be the key to economic progress.

The Institute is open to the international counterparts that the SEC works with on a daily basis, seeking and providing assistance for our enforcement cases, inspecting firms that are domiciled in multiple jurisdictions, and coordinating our regulatory approaches through IOSCO and other international organizations. We understood long ago at the SEC that we must give if we expect to receive, and for the next two weeks, we are determined to give you the best possible forum for an international exchange of best practices.

The Shared Dream

In the United States, we often refer to the "American Dream." The American Dream is about the entrepreneur that wants to build something successful, to provide for his or her family. These dreamers have energy and drive, and they are willing to take risks to make their dreams a reality. These dreamers create businesses, innovative products and services, jobs, and prosperity – and sometimes change the world in so doing. Facilitating the American Dream means that an entrepreneur with a good idea can find financing, including in the capital markets, to pursue that dream. This is what drives the American economy forward.

The American Dream is not unique to America. I have seen it in my travels to Africa, Latin America, the Middle East, Europe, and Asia. The drive to create, innovate, and make a better life for our children is within every person on this planet, but too often lies latent, mostly due to lack of opportunity. The challenge for regulators is to create and maintain the enabling environment so this creative energy can flourish.

On the capital side, investors come forward with dreams of their own, to save and invest for their own futures, as well as those of their children. They have the capital and they are willing to take the risk by investing in the entrepreneurial spirit of others, so long as they can properly evaluate that risk.

The World Bank has reported that there are $14.6 trillion in infrastructure financing needed in developing countries by 2030.[3] The good news is that there are $163 trillion assets under management that are looking for places to invest -- so the capital to fund economic growth is available![4]

Core Mission

As capital markets regulators, what is our role?

We have a common core mission – protecting investors, maintaining fair and orderly markets and facilitating capital formation. There are two poles on the capital market magnet: those with the capital, and those that need the capital. Our success lies in maintaining the right equilibrium between the two poles. It is our job to facilitate the enabling environment for capital formation, and not to do so at the expense of investor protection. How do we get that balance right?

One of the most important factors in making capital markets work is the cost of capital. If we lower the cost of capital for business and entrepreneurs, this will lead directly to economic growth. So, how can we all bring down the cost of capital?

I would like to offer some observations on our role in growing and developing capital markets.

Do No Harm

First, our approach should be similar to the adage attributed to doctors' Hippocratic oath: "First do no harm." We must always ask ourselves, is the government facilitating our capital markets or is it interfering with its progress? Capital markets are organic – they are natural, they evolve, and they can recover quite well on their own. Remember, the New York Stock Exchange was in existence for over 140 years before the SEC was created – it started under a Buttonwood tree in 1792.[5] Capital markets will grow with the right environment.

The regulator must have the wisdom to know how to let the industry grow and innovate, and even make some mistakes. Capital markets are all about financing risk. This means that there will be failures along with the successes. The regulator's primary role should be to ensure that there is a framework that creates regulatory certainty and a level playing field, but not to substitute its judgment for that of the market.

At the SEC, we resist creating barriers to entry, unnecessary regulatory approvals, annual licensing, and merit-based regulation. Notably, some of the most important innovations on the U.S. market have prospered through exemptions from regulation, and what we call "no action letters" where the staff will give comfort to the industry that certain conduct will not prompt staff to recommend enforcement action.[6] Regulatory burdens are reduced on small businesses through exemptions.

There are mechanisms you can build into your institutions that will help – like a cost-benefit analysis when considering new regulations, and providing the industry and investors the opportunity to review proposed actions in order to craft smarter, targeted regulations that fix specific problems without unnecessarily burdening the entire market.

Reliance on the industry's strong incentives to self-police, subject to proper oversight, is a best practice. You will hear from FINRA, our self-regulatory organization, several times during the Institute. FINRA licenses the broker dealers, has a robust inspection and enforcement program over broker dealers, conducts the market surveillance for the entire equities market, conducts the industry's arbitration and mediation, and is active in investor education.[7] All this work is done in the private sector.

I do not want to suggest that we always get it right in the United States and I hope our speakers during this institute do not either. We have no monopoly on good ideas. Capital markets are all about financing change and innovation – so what works today may be obsolete in the future. While we have had our share of successes in the US market, but we have also had our share of crises, so we also know a lot about what not to do.

I have had the honor of travelling to a number of jurisdictions, including Panama, to work with the SMV on its efforts to join the IOSCO Multilateral Memorandum of Understanding ("MMOU"). I have travelled to Taiwan, Hong Kong, Korea, and Japan to discuss market oversight issues, and most recently to Kenya, Rwanda and South Africa to discuss market development. I learned so much on these trips. This Institute is an opportunity to gather ideas not just from the SEC, but from an impressive group of delegates representing 50 jurisdictions in this room.

Disclosure is the Key

One of our approaches, however, is steadfast reliance on disclosure of material information. One of our former Supreme Court Justices famously wrote that "sunlight is said to be the best of disinfectants" and the "electric light the most efficient policeman."[8]

Disclosure is our most effective tool – it is the sunshine that grows our markets. Perfect disclosure would lead to a perfect allocation of capital to the most efficient industry and services. While we will never achieve perfection, our primary role is to promote the disclosure of material information. Disclosure protects investors and it lowers the cost of capital.[9]

Because a disclosure-based system is so powerful, we must resist the temptation to substitute our judgment for the market, for when we do, we invariably discourage innovation and stifle the markets.

There is the tendency we often observe, both domestically and internationally, to impose bank prudential regulation in the capital market space. This is a misplaced idea for numerous reasons, but foremost because while banks are in the business of minimizing risk, the capital markets are in the business of allocating risk.

The disclosure regime focuses on ensuring disclosure of material information that shareholders would consider important. This approach provides market discipline that no governmental authority can hope to achieve, and provides investors and the public with the information on which they may evaluate a company's financial health. Investors, domestic and international, will come to your market, and they will stay, if they feel sufficiently informed that they can properly evaluate the risk of the enterprise. No one is in a better position to evaluate those risks and allocate capital better than the investing public.

This approach will even work for banks. I call this, "market-based prudential regulation." Requiring banks to comply with the disclosure-oriented focus of market based regulation would provide better protection to the international financial system than what we have now. Prudential regulation has been used to ensure safety and soundness and to avoid bank runs. However, the opacity and lack of transparency associated with prudential regulation means that investors in banks have little insight into the stability of those banks. We need a better way for investors to assess the true stability of banks. A disclosure based regime works for the capital markets, and it can improve the banking system as well.[10]


Financial technology ("FinTech") is also revolutionizing our industry. FinTech can bring tremendous benefits – streamlined market operations and more affordable ways to raise capital and advise clients.

Fifty-nine percent of all adults in developing nations do not have a bank account – but this is changing fast. With cell phones now in the pockets of many individuals in even the poorest of nations, mobile technology has greatly cut down on barriers to accessing capital. In Kenya, for example, I saw firsthand the transformative power of FinTech. Sixty-eight percent of Kenyan adults use their mobile phones for monetary transactions.[11] In 2013, over 25% of the Kenyan GNP was transferred via M-PESA, the leading mobile money transfer service in the country. Services like M-PESA are not only for the transfer of money, but also can be used to take out micro-loans that would have been previously unavailable to small businesses.[12]

The question for us regulators is how can we encourage this innovation and all the potential benefits that it promises, while also managing the risks? At the SEC, we started a FinTech working group. Not surprisingly, FinTech firms report that their greatest struggle is navigating a complex regulatory environment. The SEC, and other securities regulators, should take the leading role in working with the FinTech community to adapt longstanding laws and regulations to newfangled technology.[13]


The next key element to market growth and development is enforcement. There is a reason why we devote nearly half of this Institute to enforcement topics. Investors are willing to risk their own futures and that of their children in the success of a stock issuing company, so long as they can properly evaluate the risks. Nothing will drive away investors from your capital markets faster than fraud. If investors perceive that the issuers are cooking their books, or that the market is rigged with manipulation and insider trading, or that their brokers are not held accountable for unauthorized trades, then investors will demand a higher cost of capital, if they do not pull out altogether. All of these frauds, by the way, have a lack of full disclosure at their core.

The SEC has one of the strongest civil and administrative enforcement programs in the world. While we have no criminal authority, we have tremendous investigative powers. As you will hear, we routinely compel production of bank records, emails, cell phones and take testimony under oath. We have the capacity to file emergency asset freezes within 24 hours of learning about an ongoing fraud to protect investors. The beauty and efficiency of enforcement is that it focuses our limited resources on a risk based approach to addressing the problems in the market, in contrast to burdensome and ultimately futile attempts to regulate away the problems.

Appropriate enforcement efforts facilitate capital market activity because both companies and investors bond to the certainty of a strong regulator that has the capacity to detect violations, promotes full disclosure, keeps the playing field level, and does not hesitate to assess penalties where appropriate and take back proceeds of fraud from the bad guys. The result is a lower cost of capital – and numerous economic studies bear this out.[14]

International Cooperation

On the international cooperation front, I would like to reflect on the tremendous success of the IOSCO MMOU. The MMOU was formed after the events of September 11, 2001. Many jurisdictions, including the United States, had the foresight and wisdom to amend their laws to help assist other jurisdictions with the oversight of their capital markets. There are now 112 signatories to the MMOU. The MMOU was used 3,140 times by IOSCO members in 2015.[15] The MMOU has made the world's capital markets better for investors and has enabled capital markets to grow and prosper.

Our friends in Panama recently amended their law as they seek to become the next signatory to the MMOU, and we applaud that effort by the Panamanian authorities.

There are also new amendments to the securities law in Pakistan that allow the Securities & Exchange Commission of Pakistan (SECP) to assist foreign authorities by obtaining "any information" from "any person" at the request of a foreign authority, even if the potential violation in the foreign country would not violate the law in Pakistan. The SECP has been a signatory to the IOSCO MMOU since 2011, but this new comprehensive assistance available from the SECP goes beyond the minimum standards of the MMOU, and serves as a model for other jurisdictions.[16] We extended a special invitation to the SECP to send twenty representatives to the Institute. I want to welcome you, thank you, and congratulate you on this recent development in your law.

These efforts by IOSCO members demonstrate a race to the top that has provided tremendous benefits to capital markets and investors. Cooperation is a reciprocal matter, so you will also learn later in this institute how the SEC can use its investigatory powers to assist with your investigations.


Our work as regulators is not a "zero sum game." A rising tide lifts all boats. Adopting high quality regulatory standards and cooperative relationships create what economists call a virtuous circle – a positive feedback loop in which everyone benefits. At the SEC, every day we rely on working with regulatory and law enforcement authorities throughout the world. We hope this Institute offers ways to be smarter regulators who help create an enabling environment so that we can tell more success stories about not only those who are achieving the American Dream, but also those who are achieving the Kenyan Dream, the Panamanian Dream, or the Pakistani Dream. Your success is our success.

Thank you for attending the Institute. Now, let's get started!

[1] See Dr. Willem F. Duisenberg, The Role of Financial Markets for Economic Growth, European Central Bank (May 31, 2001), available at

[2] See Javier A. Birchenall, Economic Development and the Escape from High Mortality, 35 World Development. 543, 562 (2007), available at

[3] See World Bank, Developing World's Share of Global Investment to Triple by 2030, Says New World Bank Report, (May 16, 2030), available at

[5] See Ellen Terrell Business Reference Services, History of the New York Stock Exchange, Library of Congress (Feb 25, 2012),

[6] See Securities and Exchange Commission, No Action Letters, SEC (Sept. 21, 2012),

[7] See Financial Industry Regulatory Authority, About FINRA, FINRA (2017),

[8] See Louis D. Brandeis Legacy Fund for Social Justice, Justice Louis D Brandeis, Brandeis University (2017),

[9] See Luis Aguilar, Capital Formation from the Investor's Perspective (Dec. 3 2012), available at,

[10] See Michael S. Piwowar, Remarks Before the Exchequer Club of Washington, D.C. (May 20, 2015), available at,

[11] See Demirguc-Kunt, Asli and Leora Klapper, Who are the Unbanked? Uncovering the Financial Inclusion Gap,

World Bank Policy Research Working Paper 6025 (2012),

[12] See T.S., Why does Kenya Lead the World in Mobile Money?, The Economist (Mar. 2, 2015),

[13] Sam Adriance, SEC Leaders Discuss FinTech Regulation, The National Law Review (Nov. 18, 2016),

[14] See John C. Coffee, Jr., Law and the Market: The Impact of Enforcement, 156 U. Pa. L. Rev. 229, 230 (2007) ("[H]igher enforcement intensity gives the U.S. economy a lower cost of capital and higher securities valuations."); see also Uptal Bhattacharya & Hazem Daouk, The World Price of Insider Trading, 57 J. Fin. 75 (2008) (finding the cost of equity is reduced by approximately 5% if insider trading laws are enforced); Howell E. Jackson & Mark J. Roe, Public and Private Enforcement of Securities Laws: Resource-Based Evidence, 93 J. Fin. Econ. 207 (2009).

[15] See Dr. Willem F. Duisenberg, The Role of Financial Markets for Economic Growth, European Central Bank (May 31, 2001), available at

[16] See Securities and Exchange Commission of Pakistan Act, Act No. XLII, § 42(d) (1997).

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