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Wolves and Wolverines: Remarks at the University of Michigan Law School

Ann Arbor, MI

Sept. 24, 2018

Thank you, Professor [Gabriel] Rauterberg, for that kind introduction. I appreciate the opportunity to be here today to talk to you about two issues that have gotten a lot of attention lately—namely arbitration between public companies and their shareholders and digital assets. Before I begin, I must issue my standard disclaimer, which is that the views I express today are my own and do not reflect the views of the Securities and Exchange Commission or my fellow commissioners.

As a native Ohioan, I feel a bit disloyal for crossing the border into Michigan, particularly during football season. Legendary Ohio State football coach Woody Hayes is reported to have refused to buy gasoline in Michigan, even if that meant pushing a car on empty across the border to Ohio.[1] My Ohio loyalties run deep, but not that deep, which is why I am delighted to be here at the law school today.

It is exciting to be among people with so much enthusiasm for making our society a better place and such wonderful career possibilities in front of you. As a relatively unfocused law student without much of a plan, I remember being impressed by my classmates who had mapped out with great precision how they were going to use their law degrees to change the world. Many of them have continued to impress me; they have not lost their enthusiasm and have been changing the world.

As with most other aspects of life, however, the impact people have does not usually exactly match their youthful plans. It is not that people do not change the world, they just do not change it in the way they anticipated they would. Many of my classmates planned to do public interest work after law school. In their minds, public interest work meant joining a nonprofit or working for the government. Confronted by the reality of law school debt, a good number of my classmates instead ended up at law firms representing corporate clients.

I suspect that some of you might similarly find yourselves—either wittingly or unwittingly—with a corporate clientele. Perhaps you will feel a sense of disappointment as you don your white shoes to step through the doors of a law firm. Once in the door, as you apply the law Professor Rauterberg taught you so well, you might long for the stuff of your now faded public interest law dreams.

I want to encourage you today to rethink this perspective. It is not that I want to talk you out of traditional public interest law, which does offer great opportunities to learn from and help others, often at the most difficult times in their lives. Instead, I want to urge you to expand your vision of how one can serve the public as a lawyer. Representing corporations also can be a form of public interest law because companies contribute so much to the well-being of society. I am not referring to corporate sponsorship of the local minor league baseball team, food bank, or youth orchestra. These charitable activities are laudable, but, to find something good, we need not look beyond the core profit-making activities of the corporation.

The hunt for profit drives companies to strive to identify and meet people’s needs using as few resources as possible. Companies communicate with their customers and suppliers through the price system.[2] People tell companies what they value when they pay for the products and services those companies offer. Suppliers, by raising or lowering prices, tell companies how valuable the resources are that the companies use. Companies respond to what their customers and suppliers tell them. In this way, companies help to ensure that people spend their time wisely and that resources are used for the things society values most. Companies combine the diverse and complementary talents of their employees to research, develop, explore, produce, sell, and provide services to willing customers. In these activities, corporations play an important role in expanding scientific and technological knowledge, enabling people to profit from their hard work, and ensuring that society’s resources are allocated to the uses we most value.

As a lawyer representing companies in the courtroom, the boardroom, or the contract negotiating room, you are helping to build mutually beneficial relationships between companies and their creditors, shareholders, employees, suppliers, and communities. You are part of the process for ensuring that resources and human ingenuity are being put to their best use. It is easy to lose sight of the importance of your role particularly when you are an overtired attorney mired in a document-intense business dispute or interminable contract negotiation.

The bottom line is that you can make a difference for society even if you are representing a client that pays you well for your work. Without ethics and good sense, of course, no matter where you work, you cannot serve the public interest. Being paid well carries with it particular responsibility to use sound judgment. This time I will draw on the wisdom of a legendary Michigan football coach. Coach Bo Shembechler commented, following the Enron scandal, that a corporation’s leaders who disclaim responsibility for bad things that happen on their watch are admitting that they are not worth the large salaries they earn.[3]

In part because of scandals like Enron and the financial crisis of a decade ago, the SEC is increasingly being asked to substitute its judgment for that of people working in the private sector. Regulators, the thinking goes, are not tainted by profit-making, and thus will exercise better judgment than people in the corporate world. This trend is dangerous. Regulators are not superhuman. The information to which they have access is limited. They are subject to a set of incentives and pressures not faced in the private sector. Regulators have an important role in setting ground rules, but responsibility for decisions needs to lie with the people closest to the relevant facts and those upon whom the consequences of bad decisions will fall most heavily. It is not in the public interest to concentrate decision-making in Washington at regulators like the Securities and Exchange Commission.

That is not to say that those of you who end up working for the SEC—as I hope some of you will—should feel left out of the public interest discussion. You too will contribute to the public interest by helping, albeit indirectly, to ensure that resources and people go to the entities best able to put them to work for society’s well-being.

The SEC is a key part of the institutional framework within which corporations and other market participants operate. The Commission regulates the offer and sale of debt and equity securities and the marketplaces in which those securities trade. We write and enforce rules that help investors get the information they need to determine where and how they want to invest their money. We regulate the relationships between retail investors and their financial professionals. We endeavor to ensure that people have the information they need to make sound investment decisions. Without timely, accurate information, investors cannot make good decisions, which means that people with good ideas will have trouble getting the funding to bring them to life. If companies cannot get funding for their world-changing ideas, society will not benefit from those ideas as quickly as it otherwise would have or, perhaps, at all. In short, the SEC serves the public interest by establishing the regulatory framework within which our capital markets operate efficiently and effectively to keep the rest of the economy working for the benefit of society.

One of the foundational principles of our federal securities laws is that they are designed to create a disclosure regime, which stands in contrast to the approach some states take to securities regulation. When the first federal securities law was passed in 1933, a number of states already had enacted securities laws, which were known as “Blue Sky Laws.” Federal law has not displaced state blue sky laws; state law and state regulators continue to be important in our regulatory framework.

Some state securities regimes embody what is known as “merit review.” Under this type of regime, the regulator assesses—in the words used by many states—whether an offering is “fair, just, and equitable” to the investor.[4] The first such law, passed in 1911 in Kansas, also gave the regulator the responsibility of determining whether the securities were likely to generate a “fair return” for the investor.[5]

When Congress wrote the Securities Act, it rejected “merit review” in favor of a disclosure-based regime. The role of the SEC in administering the Securities Act is to, in the words of an early Commission document, “mak[e] available currently to the investing public, sufficient information concerning the management and financial condition of corporations on which the investor can intelligently act in making investments.”[6]

The Commission serves the public interest not by making decisions for people, but by enabling them to make decisions for themselves. Our job at the SEC is not to determine whether something is a good investment. We are not there to determine outcomes or substitute our judgment for the judgment of investors, business executives, or financial professionals.

Yet now I hear frequent calls for the SEC to be a more activist regulator. We are being called upon to make decisions on behalf of investors and companies, who are not—the argument goes—capable of making good decisions for themselves. Earlier this month, for example, an op-ed in the New York Times titled Small Investors are Prey, Again, for the Wolves of Wall Street, lamented that the SEC has not been more active in imposing its judgment on investors in a number of areas. The op-ed cited my openness to mandatory arbitration in the corporate context as one piece of evidence that the wolves are once again running wild.[7]

For reasons unknown to me, the topic of arbitration between shareholders on the one hand and corporations and managers one the other recently has been foremost in the minds of many SEC watchers. This fascination is interesting because questions about the relationship between companies and their shareholders have generally been the province of state corporate law. States may or may not allow a company’s charter and bylaws to include a mandatory arbitration provision.[8] If permitted under state law, a company, and its shareholders might opt for arbitration as the method by which any disputes, including disputes grounded in securities law, will be resolved. A choice for arbitration might be motivated by concern that shareholder litigation imposes substantial costs—ultimately on the shareholders themselves—regardless of the merits of the underlying claim.[9] For some companies and their shareholders, arbitration may be a more effective, quicker, and less costly way to resolve disputes.

During the summer, a reporter asked me whether I thought companies and their shareholders ought to be able to put a mandatory arbitration clause in their charters or bylaws.[10] The Times op-ed was written to express dismay at my affirmative response. Arbitration has long been suggested as a possible mechanism for resolving disputes between companies and their shareholders. More than a decade ago, for example, Senator Schumer and then Mayor Michael Bloomberg issued a report in which they suggested that “shareholders should have the opportunity before the fact to determine whether submitting future securities grievances to arbitration is in their own and the company’s best interest.”[11]

Facts and circumstances matter, of course, but, as far as I can see, the SEC does not have statutory grounds to substitute its judgment for that of shareholders and the companies they own. To the contrary, the Federal Arbitration Act directs federal agencies to respect private contracts that favor arbitration.[12] If corporate charters and bylaws are contracts,[13] the Act would seem to limit the SEC’s ability to override an arbitration clause that comports with state law. The Supreme Court has not hesitated to uphold the Act in other contexts,[14] so it is not clear why the securities context would be different.[15]

It is true that the SEC staff has in the past effectively refused to allow domestic companies’ registration statements to go effective with a mandatory arbitration clause in its charter.[16] I do not understand the basis for the staff’s position, which has been couched in broad public interest language.[17] Were the staff to recommend that the Commission prohibit another company from registering an offering because of a mandatory arbitration provision in the future, I would want to understand the legal basis underlying the recommendation. I also would want to understand how such a prohibition lines up with the fact that foreign companies that have decided to resolve disputes through arbitration already trade on our exchanges.[18]

Absent a reason consistent with our limited statutory mandate, I am loathe to substitute my judgment for that of private market participants closer to the relevant facts. As with other material information, any public company arbitration clause would need to be disclosed.[19] Any shareholder displeasure with such an arrangement would be reflected in a lower stock price.[20] Other shareholders and companies then would take the potential stock price effect into account when deciding whether to opt for arbitration as their dispute resolution mechanism.

Arbitration arrangements are not the only issue in which we are being asked to substitute our judgment for that of investors. Another area that has drawn much attention recently is our decision with respect to the Winklevoss Bitcoin Trust. The SEC recently considered and rejected a proposed rule change for an exchange that would have enabled the listing of a Bitcoin exchange-traded product—a security that would give investors indirect exposure to bitcoin.[21]

While a majority of the Commissioners disapproved the proposed rule change—meaning the security cannot trade on the exchange—I dissented from this decision. My full dissent is available on the SEC website,[22] but I would like to touch briefly on some of the issues that informed my thinking. To me, the rejection was a product of the pressure the Commission feels to make decisions for investors in order that they will not hurt themselves. The Commission’s decision focused on purported flaws in the bitcoin markets. A request for comment issued by the staff last week in conjunction with another bitcoin exchange-traded product raised similar concerns about the underlying bitcoin markets.[23] One problem with such an approach is that it means if we ever do approve a bitcoin-based security, investors will interpret that approval as a blessing on bitcoin itself and the markets in which it trades. In the meantime, investors will seek out other markets—markets not governed by our disclosure rules—in which they can get access to bitcoin and other cryptocurrencies.

I raise my recent dissent here not to hammer on arguments I have made elsewhere, but because I worry my colleagues’ misdirected attention may influence how other new products are evaluated. Bitcoin, and the bitcoin market, because of their novelty and volatility—which, incidentally, are almost inextricably related—send shivers up the spine of the average securities regulator. The fact that an investment is new, volatile, or even downright unadvisable is, frankly, none of our business.

As I noted earlier, the federal securities laws are a disclosure regime. Congress was aware of merit review because it existed in many states at the time the Securities Act was drafted. Yet Congress rejected that path and instead opted for a system in which the regulator ensures that investors have the information they need and that market actors, such as exchanges, create and follow certain procedures. When determining whether a product can list on an exchange, we look to the exchange’s capabilities, not to any feature of the product.

In my short time as a commissioner, innovations such as blockchain, cryptocurrencies, and digital assets have moved from technological novelties to policy flashpoints. Technology has continually reshaped, and often immeasurably improved, our lives from the beginning of human history. The capital markets are no exception. They have been the origin of some technological innovations and heavy users of others. Technology in the capital markets, though, is often derided as a source of problems, not a place to look for solutions. I hope that, with careful—but not paralyzing— deliberation, we at the SEC can foster an environment in which truly useful developments can flourish without either undue intrusion on our part, or, of course, undue harm to investors or other market actors. Once again, we must not fall into the trap of substituting our regulatory judgment about which technologies will succeed in transforming our markets for the judgment of people in the marketplace.

New technologies could upend, among other things, how securities transactions are conducted, how companies are governed, and the way retail investors engage in the financial markets. For those concerned about “wolves” in the financial industry preying on retail investors, new technologies offer great promise. Technological change is leading to better products and services for retail investors, greater ease for investors seeking to trade and monitor their investments, and opportunities for new competitors to challenge the incumbents. Technology, if we allow it, can make the capital markets more competitive and more investor-friendly.

How much these new technologies, in addition to changing the way capital markets serve investors, will upend corporate and securities law is an open question. Initial Coin Offerings, or ICOs, are one area in which the SEC has been thinking about how well old law fits new facts. You may have encountered the “Howey test” for determining whether something is a security in a 1946 Supreme Court case that features prominently in every securities law syllabus. Although the Florida oranges at issue in SEC v. Howey are far removed from the tokens in our increasingly virtual world, the case is extremely useful when we are considering whether something that, on its face, looks nothing like a stock or bond, is nevertheless a security.

In Howey, a developer offered investors the opportunity to buy into the orange grove with a chance to share in the profits when the oranges were later sold. There were no stock certificates, no bond coupons. There were simply contracts concerning some oranges in Florida. In finding that these contracts were in fact securities, the Court applied what is now the test we use daily at the SEC to determine whether an investment contract is a security.

A security under Howey is an investment in a common enterprise with the expectation of profits solely through the efforts of another. That is, if you and some other people put something of value into a project, hoping to get more value out later because some other people are going to work to make the project profitable, you have bought a security, no matter the enterprise and no matter the form that your agreement or payment take. We look to function, not form, to determine how to apply our laws and regulations.

So, are tokens issued in ICOs securities? In a typical ICO, an organization—I will not use the term corporation, since some arrangements are quite hard to define—seeking to raise capital issues digital tokens instead of issuing stock or bonds. In some cases, the company chooses to issue tokens because the capital will be used to build out an environment in which the tokens can be used to buy a product or service in that environment. ICOs have proliferated in recent years, and that popularity inevitably raised questions about their legality. All securities sold in the US must be registered or exempt from registration. In 2017, applying the Howey test, the SEC issued a report of investigation concluding that tokens issued by a project known as The DAO were indeed securities.[24]

Although neither the members of Congress who wrote the Securities Act in 1933 nor the justices who decided Howey in 1946 could have imagined digital tokens, they would undoubtedly take pride in how easily the old law has gone digital. In fact, the DAO report’s analysis finding the tokens to be securities includes sections drawn directly from Howey, titled: “Investors in the DAO Invested Money;” “With a Reasonable Expectation of Profits;” “Derived from the Managerial Efforts of Others.”[25]

Nevertheless, the application of Howey to one particular ICO does not answer every question. Do the DAO report and subsequent SEC enforcement actions mean that all ICOs are securities offerings? Or that all tokens are securities? Or that once a token is a security, it always will be? Not necessarily.

The last question is particularly interesting. Tokens that are issued in ICOs may later be used to execute smart contracts or perform other functions within a virtual environment. Some have argued that these tokens are no longer securities, but instead are “utility” tokens. Many of us at the SEC are thinking through this question: is there a possible scenario in which a token that is issued in an ICO—and that is a security under Howey at that time—becomes something other than a security later on? If so, what factors determine that it is no longer a security?

We are still in the process of answering this question, but it seems to me that we will ultimately need to delve into foundational questions such as: Why do we regulate securities the way we do, compared to the way we regulate, for example, commodities or bank loans? What is the problem inherent in a security or securities offering that our laws and regulations are designed to address? In the context of securities offerings, often we talk about information asymmetries. The company insiders have information about the company that potential investors cannot access absent disclosure by the company. We ask the company’s officers to sign their filings with the SEC because they have access to this information and can attest to its accuracy (and be held accountable if the information proves to be false).

Why, when applying Howey, do we insist that the profits be created solely through the efforts of another? It seems that that is getting at some of this information asymmetry. If you are reliant on another, you will want information about that person’s work to determine whether your expectation of profits is justified, and you will want to hold that person accountable for whether she uses your money as she said she would.

Crypto tokens are still evolving, and there are many people thinking through these issues right now. I do not want to suggest that I or anyone else has arrived at an answer. I do think, however, that to answer these questions, we will have to think carefully about the purpose of our regulatory regime, and how these rules should be applied to fulfill our statutory obligation to promote fair and efficient markets, capital formation, and investor protection. I urge you, perhaps in a law school research paper, to join us in thinking through these questions.

As we have been discussing, the outside trappings should not be a distraction when applying securities law. We should look through the form and consider the function, to determine how to apply existing regulations and statutes.

The reason this principle is so important is two-fold. First, while the SEC certainly has its share of talented securities experts, we are no better equipped to evaluate the potential of any security than anyone else in the market. Many securities experts, including my former SEC Commissioner Paul Atkins, in whose office I served as counsel, likes to tell the story of one example of merit review gone terribly wrong. In 1980, the Massachusetts securities regulator determined that an IPO for a new computer company was too risky for the people of Massachusetts and therefore did not permit the shares to be sold within the Commonwealth. (Changes in the securities laws since then have removed the power of state regulators to oversee IPOs, so this precise scenario could not happen today.) The company that was too risky? It was Apple. A recent article estimates that a $990 investment in Apple in 1980 would be worth more than $500,000 today.[26]

Second, merit review renders the regulator’s opinion something of a seal of approval. Investors may believe that securities that pass muster are all good investments without conducting further research. As I mentioned earlier, I worry that the SEC’s recent decision on the bitcoin ETP may have just that effect. The market, not regulators, should assess whether and how any particular asset fits into people’s portfolios. It is beyond both our knowledge and our authority to make pronouncements about the merits of specific asset classes. Limitations on our knowledge and expertise make it especially essential that we stick to basic principles when approaching innovative concepts.

In focusing on basic legal principles, I do not want to give the impression that regulation must remain static no matter how the market changes. Far from it. There may indeed be changes that require the SEC to review and revise long-standing rules, and I hope we are open to such changes. What I do want to emphasize is the fact that we write regulation to solve problems. The essentials of a well-functioning market do not change because the technology changes. Merit review does not become a good idea because a product is new. An investment does not cease being a security because it has a new wrapper.

We hear a lot at the Commission about concerns of fraud in the ICO market. I am not persuaded that there is more fraud because of anything inherent in the ICO structure. Fraud is an ancient crime, and our own fraud law has deep roots in the common law. The fact that fraudsters put on hoodies emblazoned with crypto-sounding words does not change the fact that they are the same wolves wearing slightly flashier sheep’s clothing. Fraudsters always have co-opted the latest trends to dupe their victims. In its essentials, ICO fraud is no different from other securities fraud, which is little changed from frauds perpetuated hundreds of years ago.[27] The industry, on its own, is developing methods of signaling whether an ICO is legitimate.[28]

I am confident, however, that new technology will make our capital markets work better for investors, open new opportunities for a whole generation of innovators, and enable us as securities regulators to be better at tracking down the wolves and holding them to account.

Thank you all for the opportunity to spend some time with you today. Even as a Buckeye among Wolverines, I have felt most welcome. I hope that some of the issues we discuss today will inspire you to wrestle during your law school years and after with this generation’s most difficult and interesting issues in corporate and securities law and policy. Your insights and fresh perspectives are needed. I look forward to our discussion.

[1] Woody Hayes Quotes, 247 Sports, (last visited Sept. 25, 2018),

[2] For a lighthearted discussion of the role prices pay in allocating resources, listen to

[3] Bo Schembechler Quotes, Goodreads, (last visited Sept. 25, 2018).

[4] See, e.g., Cal. Corp. Code § 25140(a); N.D. Code § 10-04-08.1; Ariz. Rev. Stat. Ann. § 44-1921 (3).

[5] Rick A. Fleming, 100 Years of Securities Law: Examining a Foundation Laid in the Kansas Blue Sky, 50 Washburn L. J. 583, 602 (2011).

[6] Statement of the Purposes of the Securities and Exchange Commission, Accomplishments up to August 13, 1934, and Future Program (Aug. 13, 1934), available at

[7] Susan Antilla, Small Investors are Prey, Again, for the Wolves of Wall Street, N.Y. Times (Sept. 14, 2018),

[8] Zachary D. Clopton & Verity Winship, A Cooperative Federalism Approach to Shareholder Arbitration, 128 Yale L. J. F. 169, 1756–76 (2018) (noting that “[t]he organizational documents of corporations are a core province of state law” and “Delaware state law currently limits the ability of Delaware corporations to adopt mandatory arbitration charter provisions or bylaws,” at least as they apply to state law claims”).

[9]McKinsey Report on Sustaining New York’s and the US’ Global Financial Services Leadership [hereinafter McKinsey Report], available at

[10] Patrick Temple-West, POLITICO Pro Q&A: SEC Commissioner Hester Peirce, POLITICO (Aug. 2, 2018, 1:04 PM),

[11] McKinsey Report, supra note 9, at 103.

[12] Federal Arbitration Act, 43 Stat. 883 (2018).

[13] Some observers suggest they are not. See, e.g., Clopton & Winship, supra note 8, at 177.

[14] Epic Systems Corp. v. Lewis, 138 S.Ct. 1612, 1627 (2018) (“In many cases over many years, this Court has heard and rejected efforts to conjure conflicts between the Arbitration Act and other federal statutes.”).

[15] See, e.g., Andrew Rhys Davies, Should the SEC Allow IPOs When Bylaws Require Arbitration of Federal Securities Claims?, N.Y. L. J. (July 26, 2018, 2:30 PM), (discussing Epic Systems and possible application of the Federal Arbitration Act in the securities context).

[16] Amy Or, Carlyle Drops Controversial Arbitration Clause, Wall Street J. (Feb. 3, 2012, 3:20 PM),

[17] Thomas L. Riesenberg, Arbitration and Corporate Governance: A Reply to Carl Schneider, INSIGHTS: CORP. & SEC. L. ADVISOR, Aug. 1990.

[18] See, e.g., Christos Ravanides, Arbitration Clauses in Public Company Charters: An Expansion of the ADR Elysian Fields or a Descent into Hades?, 18 Am. Rev. Int’l Arb. 371, 389–93 (2007) (analyzing mostly foreign issuers, the shares of which are trading in US markets despite having arbitration clauses).

[19] Id. at 417–18 (discussing possible approaches to disclosure).

[20] Davies, supra note 15.

[21] Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to List and Trade Shares of the Winklevoss Bitcoin Trust; Release No. 34-83723; File No. SR-BatsBZX-2016-30 (July 26, 2018), available at

[22] Dissent of Commissioner Hester M. Peirce to Release No. 34-83723; File No. SR-BatsBZX-2016-30 (July 26, 2018), available at

[23] Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change to List and Trade Shares of SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares; Release No. 34-84231; File No. SR-CboeBZX-2018-040 (Sept. 20, 2018), available at

[24] Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO; Release No. 81207 (July 25, 2017), available at

[25] Id. at 11–13.

[26] Paul Atkins, Great Moments in Financial Regulation, Wall Street J. (Apr. 28, 2010, 12:01 AM),; If You Had Invested Right After Apple’s IPO (AAPL), Investopedia, (last updated Aug. 2, 2018, 2:41 PM).

[27] Press Release, U.S. Sec. and Exch. Comm’n, SEC Emergency Action Halts ICO Scam (Dec. 4, 2017), available at

[28] The Cypherpunk’s Elixxir, Late Confirmation (Sept. 20, 2018), available at

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