International Organizations: Learning from the Past to Build for the Future
Armonk, New York
April 11, 2018
Remarks at the 2018 Symposium on Building the Financial System of the Twenty-first Century: An Agenda for Europe and the United States
Thank you for that kind introduction, Hal Scott. I appreciate the invitation from Hal and the Program on International Financial Systems at Harvard Law School to deliver remarks this evening.
Events like this symposium, which brings together people from across the world, facilitate honest and straightforward dialogue. I will offer some brief thoughts on what I believe international organizations have been doing right and how regulators can work across borders to keep pace with market and regulatory developments and thus serve our global markets in the future. Before I continue, I need to provide the standard disclaimer that the views I express today are my own and do not necessarily reflect those of the Commission or my fellow Commissioners.
Because my speech is the last event scheduled before dinner, I will start with a story that is–in part—about food. I spent the academic year after college in Austria. My American roommates and I developed a Sunday afternoon tradition of going to the bakery on the bottom floor of our apartment building and then sharing our pastries over coffee. These were no ordinary pastries—it was the best, most generously sized poppy seed strudel and Linzer torte at the most reasonable prices in all of Vienna. Over time, therefore, we went from sharing two large pastries among the three of us, to three, and then eventually four or more. The result was inevitably Sunday evening stomach aches and debilitating food comas. It’s good that we lived in one of Vienna’s outer rings, which necessitated a lot of walking, but still, more was not better.
That Vienna apartment was not only a place where I learned how much pastry is too much for one sitting. It was also a place where I learned an important lesson about the tensions that arise in connection with intercontinental disputes over privacy. One day, I arrived home to discover that my landlord had come into the apartment unannounced, entered my bedroom, and emptied all my dresser and desk drawers of all my belongings. My roommates, who were home at the time, made it clear to him that I would view that as an unacceptable invasion of my privacy. He would have none of it. To be fair, his motives were good—he wanted to swap one piece of furniture for another. Nevertheless, I was unhappy about the cavalier approach he took to my privacy. In a subsequent, less than civil conversation, I pointed out that landlords in the U.S. would not be permitted to do such a thing. He reminded me that I was not living under U.S. rules, but under Austrian rules. He was right, but I still wanted him to work with me to develop a better approach for averting future privacy clashes.
Both strands of this story from my time in Vienna offer lessons for discussions about the future of international organizations. First, just as a little pastry is a very good thing, but piling pastry upon pastry is not, so too international organizations that try to do too much can end up leaving people feeling lethargic, overloaded, and unable to concentrate on what is important. Better to do a little, do it well, and savor the work well done. Second, differences in how jurisdictions approach privacy, or—for that matter—investor protection and market oversight, can lead to tense moments, but we can work together to come to reasonable solutions.
In our era, international cooperation and coordination is an important part of every financial regulator’s job. As we all know, markets are global, and diversifying portfolios and sharing risks internationally can benefit our investors, our corporations, our financial stability, and our economies. Just as our markets work together, so too must our regulators. We need to share information and insights, cooperate as supervisors of global financial companies, assist one another in enforcement actions, and compare notes on how to regulate.
International efforts on the supervisory front are likely to pay off during future periods of market stress. Supervisory colleges provide regulators the opportunity to share perspectives on firms operating across borders and share approaches to regulatory and supervisory challenges. Relationships and patterns of interaction built through these colleges make communication, cooperation, and mutual respect the norm. We are, therefore, more likely to notice problems as they emerge and more likely to react constructively and cooperatively to them.
At the Securities and Exchange Commission, the energetic staff of our Office of International Affairs—OIA—leads an agency-wide commitment to working bilaterally and multilaterally. Whether it is seeking and providing enforcement assistance, running technical assistance programs, or participating in International Organization of Securities Commissions (IOSCO) and Financial Stability Board (FSB) meetings, OIA has a very active agenda. I am pleased that our Chairman, Jay Clayton, has underscored our agency’s commitment by taking the time to engage personally in international bodies.
In addition to these efforts by OIA and the Chairman, staff from across the SEC’s Divisions and Offices devote many hours to the work of international organizations. Their work fosters mutual understanding and ultimately inures to the benefit of market participants. Just as one example, the SEC’s Office of the Chief Accountant maintains an International Affairs group which works with “international accounting, auditing, and regulatory organizations that share similar financial reporting objectives as the Commission.” International efforts to converge accounting standards and bolster audit standards yield great benefits for investors across the globe as they decide where to put their money.
As a Commissioner, I look forward to working with my colleagues at our sister regulatory agencies across the globe. I also look forward to participating in international organizations like IOSCO and the FSB. IOSCO, the members of which regulate 95 percent of global securities markets, is a vital forum for bringing together regulators facing similar challenges. Even a simple action like collecting regulators’ statements on initial coin offerings is an extremely helpful function. Working together, we are better able to understand and respond to market developments that are new to all of us. We can alert one another to potential problems and learn from one another’s efforts to make regulatory space for innovation.
The FSB brings together a broader set of financial regulators and central bankers to consider issues related to financial stability. The financial crisis, with its intertwined origins, reminded us all how important it is to draw from perspectives formed in different parts of the market and different corners of the world. Future financial stability depends on the steps we take now to think through complex issues like central counterparty governance, oversight, recovery, and resolution. International organizations, including the FSB, have been doing a lot of deep thinking on the risks posed by central counterparties—risks that were magnified by post-crisis regulatory developments.
So there is a lot of good in the international organizations we have developed for our financial markets. As with my Vienna pastries, however, good things can become less good in large quantities. International organizations are simply trying to do too much. The flow of reports; work streams; surveys; and proposals for future reports, work streams, and surveys originating from these organizations is astounding. The volume of this flow has increased markedly since I left the SEC in 2008. In the wake of the financial crisis, of course, it is not surprising that international organizations felt compelled to look at what went wrong and identify areas in need of reform. Writing countless pages of reports, however, is not a preventive strategy and may instead numb us so that we cannot perceive the issues that are of true global significance.
Many of the topics addressed by international organizations today are not even remotely related to the last financial crisis or, I will wager, the next financial crisis. Many of the reports focus on issues that are best handled domestically. As an example, IOSCO published a final report in March 2018 entitled “Senior Investor Vulnerability.” As the population ages, we can all agree that regulators need to think of ways to protect senior investors without depriving them of their autonomy. Sharing ideas in an international forum might make sense, but setting global standards seems unnecessary. The “sound practices” in the senior vulnerability report were innocuous—yes, it is a worthy objective to “conduct research projects to better understand the risks and issues facing senior investors”—but there are 75 pages and lots of hard work by smart people that go along with these recommendations. I would rather see these resources devoted to efforts at the national and local level to . . . protect senior investors.
Similarly, in other areas, where there might be less agreement across jurisdictions—such as corporate governance, corporate social responsibility, or executive compensation—it may be best to avoid attempting to come to a global consensus. Indeed, in the United States some of these issues are matters of state law or private ordering. For issues within the SEC’s purview, our administrative procedure requirements require us to propose rule changes and craft any adoption in light of the comments we receive. International efforts in advance of our domestic process can divert staff time from the already time-consuming domestic rulemaking process.
In short, we must be strategic about how we allocate precious time, resources, and mental bandwidth to the projects of international organizations. I am particularly sensitive to how international organizations use their time and resources given that their time and resources are ultimately, in part, the SEC’s time and resources. We are and will remain committed to working with international organizations, but, in this area, as in others, we must be careful in our stewardship. As a result of a hiring freeze at the SEC and compelling, competing demands on SEC funds in recent years, we have to be particularly careful in how we use our people and dollars.
So I urge international organizations to be prudent in deciding which issues to look at and how to look at them. These groups’ best work is work that fits squarely within their mission. As with pastry, too much of a good thing can be harmful. Commissioner Mori of Japan’s Financial Services Agency expressed the point more eloquently several years ago, when, in reference to 140 ongoing work streams of the FSB, Basel Committee, IOSCO and the International Association of Insurance Supervisors, he noted that “[t]oo much medicine might make the patient sick rather than healthy. Work streams have focused on individual trees, but we need to turn our eyes to the forest now.”
One beautiful aspect of the forest that is sometimes obscured by a focus on individual trees is the value in the diversity of regulatory approaches across jurisdictions. Regulators have a keen interest in protecting their own financial markets, investors, and other market participants. We should strive for mutual respect and understanding, but we need not aim for uniformity in our rulebooks. There are certainly areas where harmonization is critically important. In other areas, however, we would do well to let different jurisdictions craft regulatory policies that meet the needs of their citizens and markets.
We can learn from one another’s approaches and draw on them as appropriate. Different regulatory approaches in different jurisdictions can be illuminating. Moreover, a diversity of regulatory approaches can make the global financial system better able to withstand a shock. In a system that is not uniform, regulatory idiosyncrasies and market responses to them are more contained.
Allowing regulators to decide how to protect their markets and investors requires restraint, not only on the part of international organizations, but on the part of other jurisdictions. Jurisdictions must take steps to avoid application of their rules to transactions, markets, and people in other jurisdictions.
Admittedly, privacy and other regulatory issues in the financial space are a good deal more complicated than a privacy dispute I had with my landlord in Vienna. I fear, however, that our rule proposals have evoked some feelings similar to my own outrage at that time. Some observers are asking whether we are trying to reach into desk drawers and servers far across the world that are not ours to rummage through.
I am committed to looking at ways in which our own rules—proposed and adopted—step beyond our shores in inappropriate ways. Our rules should embody a proper balance between protecting U.S. markets and U.S. investors and respecting the interest of other jurisdictions in doing the same thing for their own markets and investors.
For example, we need to work with our international counterparts to think through the impact of rules in the security-based swap space before final rule adoption and implementation. Among other things, we need to address the European Union’s new General Data Protection Regulation. International data transfers are critical for global markets and for regulation and supervision in those markets. While navigating this issue will require cooperation between the United States and European Union, I am hopeful that U.S. regulators can find a way to work with the new data protection framework in a way that ensures that the SEC receives what it needs to do its job. I want to find a practical solution that does not cause foreign firms to feel they have no choice but to abandon U.S. markets.
We also want to make sure that U.S. firms can operate in foreign markets. My colleague, Brett Redfearn of the SEC’s Division of Trading and Markets, will be speaking tomorrow about MiFID II, so I do not want to steal his thunder. MiFID II, as all of you know, created a conflict between the European and American regulatory regimes regarding research. Both jurisdictions took steps to address the problem. The European Commission published guidance to clarify how firms subject to MiFID II can obtain research services from other jurisdictions. I commend Chairman Clayton for his successful efforts in ensuring that SEC staff responded in a timely manner with no-action relief to allow firms to comply with the research requirements of MiFID II in a way that is consistent with U.S. laws. Market certainty requires longer-term solutions for this issue, and I look forward to working with my U.S. and European colleagues to find them. As we move forward, it is important that U.S. and E.U. regulators remain committed to respecting one another’s regulatory choices, while working to cabin their cross-border impact.
As difficult as the Brexit conversations are – and believe me, I am grateful that neither the E.U. or U.K. teams have attempted to pull me into those negotiations – they do provide a rare opportunity to think through the allocation of regulatory responsibility.
How can multiple regulators with an interest in a particular entity share responsibility for and insights into that entity?
How can we collaborate, rather than compete, in the regulation and supervision of cross-border entities that are important to financial markets in more than one jurisdiction?
How can we ensure that each regulator has what it needs to protect its markets and its investors?
How can we ensure that businesses are not forced to reorganize or relocate in order to satisfy regulatory whims?
I offer my concerns so that we can have an honest dialogue about where and how international organizations should allocate their time and resources in the future and how we can work together for mutual benefit. In closing, I again would like to thank Hal Scott and the Program on International Financial Systems at Harvard Law School for the opportunity to share my thoughts this evening. As the conference continues tonight, tomorrow, and into Friday, I hope participants have a chance to talk with old friends and to make new friends to discuss their work. I firmly believe that international regulators and market participants need to get to know one another and to share ideas. These relationships will pay off in addressing areas where our rules overlap or conflict; meeting supervisory challenges with global firms; and confronting financial market stress, when it occurs.
As we approach the eight o’clock hour, I will end my remarks as I know many of you – especially our international friends whose stomachs are not set to the Eastern time zone – are hungry. I am happy to take some questions now or over dinner. Best wishes for a productive and enjoyable few days here in Armonk, and thank you for your time.
 Wesley R. Bricker, Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission, “Statement in Connection with the 2017 AICPA Conference on Current SEC and PCAOB Developments” (Washington, D.C., Dec. 4, 2017), https://www.sec.gov/news/speech/bricker-2017-12-04.
 IOSCO Senior Investor Vulnerability Final Report, March 2018, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD595.pdf.
 Id. at 32.
 Nobuchika Mori, Commissioner, Japan Financial Services Agency, “You cannot see the forest for the trees” (speech, Tokyo, Nov. 25, 2015), https://www.fsa.go.jp/common/conference/danwa/20151125/01.pdf.
 MiFID II: Interaction with Third Country Broker-Dealers, https://ec.europa.eu/info/system/files/non-eu-brokers-dealers.pdf.