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"A Framework of Trust"

Philadelphia, PA

June 7, 2018

Thank you, Cindy [Esparragoza], for that kind introduction and for inviting me to speak at the Girls Who Invest (GWI) Summer Intensive Program.[1] I am very pleased to have been invited to speak to so many bright young women interested in pursuing careers in asset management. As we’ve seen over and over, diversity is a strength. When women, minorities, and people of diverse backgrounds have a seat at the table, decision-making improves, and businesses grow. To achieve that, we need to ensure that young women are shown all of their options and can access the paths to rewarding careers.

For women, building a career in finance and investment has not been easy. As you can see from my background, my path to the Securities and Exchange Commission was not a direct one.

In many ways, my career path has been a strength. Diversifying one’s experience can broaden your perspective and help you see the big picture. But it also means that my path is not necessarily easy to replicate. To make a meaningful difference in the diversity of the investment industry, we need paths that are easier to follow. I hope that, for you and those that follow, this program can be part of that.

I want to talk this evening about two themes. One is the importance of rules in the investment markets. I want to show you how rules play an important role in creating wealth and shouldn’t be seen simply as impediments. The other theme is the role you can serve, as the next generation of advisors and investors, in helping Americans achieve their dreams. I want you to think about these two themes this evening, as you go through the program, and as you make career choices in the future. They have helped guide me in a career that has been satisfying and, I hope, has improved the lives of others. Perhaps they can do the same for you.

Before I dive in, however, let me pause to say that I am speaking today as an individual Commissioner and not on behalf of the SEC as a whole.

Starting with my first theme—why do we need rules? If you decide to build your career in asset management, you will inevitably encounter the rules that govern investment markets. I understand that your curriculum includes instruction on valuation and investment selection, and you’ll be hearing from industry leaders who have enjoyed tremendous success managing investments. Compared to that, talking about rules isn’t very exciting. At first glance, many rules sound like frustrating limitations on what we’d like to do. For example, when you were a child, didn’t you really dislike the rule that you had to go to bed by a specific time? Or the rule that you had to clean your room before going out to play with friends?

But in finance and investment, rules play an incredibly important role—they enable strangers to trust each other. Let’s say you’ve saved $10,000. You could use that $10,000 in a number of ways. You could spend it, invest it, or put it under your mattress. Putting it under your mattress is probably the safest bet, but it won’t do you much good there. Indeed, over time, you will be able to buy fewer smart phones with that same $10,000 that’s been sitting under your mattress. Investing, on the other hand, might help it grow. Investing also could help the businesses in which you invest, may help create jobs for others, and can benefit society as a whole. The problem is, when Jane Doe comes around asking you to invest in her company, how do you know whether to trust her? Maybe she isn’t very good at running a company. Maybe she’ll run off with your money.

The rules that govern investment markets are designed to address this uncertainty. They provide a framework for trust so that businesses can grow and savings aren’t either tucked under mattresses or lost to the dishonest. So, how did we end up with this framework? Where did these rules come from?

To answer that, I’m going to tell you the story of Mr. Edgar D. Brown. Mr. Brown was a local businessman in Pottsville, Pennsylvania. He had recently sold his business and was preparing for a long vacation in California when he saw an advertisement from a bank offering advice. It said, if you’re thinking of taking a lengthy trip, get in touch with us so we can “keep you closely guided” regarding your investments.[2] That seemed just right for Mr. Brown, so he answered the advertisement. Soon after, an advisor from the bank came calling.

Mr. Brown explained to the advisor that he had some money following the sale of his business and he wanted advice on how to invest. At the time, he had cash and some government bonds. The advisor looked over Mr. Brown’s portfolio and came back with some advice. The advice was, essentially, everything you own is wrong—let me sell you some bonds instead. Mr. Brown decided to put his trust in his new advisor. And the advisor began buying and selling bonds for Mr. Brown’s account. He traded a lot for Mr. Brown, including bonds from all over the world, from Germany to Greece to Peru. But the advisor didn’t think this went far enough. So, he started arranging loans secured by Mr. Browns’ investments. The advisor used the loans to more than double the amount of Mr. Brown’s investments. Double the opportunity, but also double the risk.

Unfortunately, soon after his advisor sold him the bonds, their value began dropping. Mr. Brown complained. The advisor told him, “that is your fault for insisting upon bonds.... Why don’t you let me sell you some stock?”[3] This went against Mr. Brown’s earlier inclinations, but, again, he decided to trust the expert. Stock trading ensued—a lot of it. Mr. Brown, in his words, didn’t “know whether the companies [the stocks] represented made cake, candy, or automobiles,” but he figured his advisor knew better than him.[4]

After a while, though, Mr. Brown found that he couldn’t get the numbers in his accounts to add up. He went to the bank offices to take it up with management. Management referred him back to the advisor. The advisor told him, here’s what we’ll do, we’ll sell all the stock you have now and buy stock of the bank instead.

And, for the third time, Mr. Brown found himself holding losing investments. Mr. Brown, seeing his savings dwindle, told the bank he wanted to sell its stock while the price was still high. In response, bank representatives treated him as if he were acting foolishly.[5] When Mr. Brown continued to ask to sell the bank stock, the representatives resisted. Until, that is, the day the bank’s stock collapsed. On that day, the bank bought his stock from him at $320 a share. Of course, at the time, it was quoting at $360 a share, and a day before, it had been at $450 a share. In the end, Mr. Brown, who once was a successful businessman with savings, had to return to work as an office clerk.

What went wrong here? A bunch of things. Mr. Brown wasn’t wrong to trust in an advisor. Broker-dealers and investment advisers can play an important role in helping investors understand investments and make good choices. But trust requires honesty and honest motivations. All that trading and the loans were probably “not suitable” for someone in Mr. Brown’s position. In this case, however, the bank had numerous conflicts of interest that motivated acting in its interest instead of Mr. Brown’s. For example, the bank earned fees from some of the bonds sold to Mr. Brown.[6] However, even while the advisor was selling those bonds to Mr. Brown, bank leadership thought the issuer was in bad shape.[7] The advisor and his bank were working in their own interests, and Mr. Brown was left to live with the consequences.

As you may have guessed, Mr. Brown’s story is actually an old one. In fact, these events took place in 1929, in the run-up to the Great Crash. Back then, there were no federal rules for this type of activity, and the SEC didn’t exist.[8] This left a vacuum where fraud could thrive. A Congressional report from the time found that, “in the decade after World War I, approximately fifty billion dollars of new securities were floated in the United States, and half of them were worthless.”[9] These conditions in the 1920s and 1930s made it clear that some discipline and oversight were called for. In 1933, the U.S. government adopted the Securities Act, its first rules for investment offerings. And in 1934, it created the Securities and Exchange Commission to protect and improve the markets.

As far as I know, there was no justice for Mr. Brown in 1929. To be sure, there are still plenty of dishonest people willing to cheat investors out of their savings. Unfortunately, I see such cases every week as part of my job. However, unlike in 1929, we now have rules that help to protect investors, such as those that require investment advisers to work in their clients’ best interests and reveal conflicts of interest. We also have the SEC to police the capital markets. The SEC brings hundreds of enforcement cases each year. When possible, these cases return money to harmed investors. For example, in one case, a large broker-dealer agreed to return more than $25 million to individual customers.[10] Other times, we successfully get bad actors out of the industry. For example, in one case, we charged an attorney, who was offering investors an opportunity to receive what he claimed were 100% to 300% guaranteed returns with “minimal” or “no” risk. In reality, he, along with his collaborator, were selling very risky investments.[11] They ended up spending more than $1 million of investor money on personal expenses, including a loft in downtown L.A. As a result of the SEC’s intervention, the attorney is now barred from the investment industry.[12]

Take note as you learn about evaluating investments—any time you hear someone call an investment “no risk,” walk the other way.

More importantly, the SEC has programs that seek to protect investors before they are harmed. Some of these programs are aimed at industry participants—for example, through the examination of investment advisers or periodic chief compliance officer outreach. Other programs are aimed at investors—for example, rewards for whistleblowers and investor education through websites like, where investors can find information on avoiding fraud. The SEC has also launched the SEC Action Lookup for Individuals, or “SALI,” an online search feature that enables investors to research whether the person trying to sell them investments has a judgment or order entered against them in an enforcement action.[13] And, most recently, the SEC launched a mock initial coin offering website called that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam.[14] These efforts aim to reduce the hidden risks of investing, making investment activity safer.

Why does all this matter? First, if you decide to work in the financial industry, whether as a portfolio manager or a regulator, I ask that you remember Mr. Brown. There are real people behind the numbers, the calculations, and the financial theories. Don’t forget about them. They have real hopes, real dreams, and real needs.

Second, these are all issues that will personally impact your lives and the lives of your parents and friends. Over the last few decades, investment has become much more important to the well-being of Americans. Unfortunately, jobs that provide a pension have become far less common over the last few decades. Many employers have scaled back pensions or eliminated them entirely. Workers must now save for their own retirements, either in plans their employers provide, like 401(k)s, or in investment accounts they establish for themselves, like IRAs. In fact, we’re heading toward a world in which your investments will be your most significant source of retirement income.[15]

At the same time, for young people today to do better than their parents, they generally face more years of schooling at higher tuition costs.[16] I imagine this part of the story is deeply familiar to all of you. As a result, Americans may be saving for college bills while their children are still in elementary school. Indeed, many are now making investments through 529 plans for this purpose.[17]

Altogether, these changes mean that more Americans have become investors. For many of us, financial security depends, at least in part, on how well our investments meet our needs.[18] In some ways, this is a good development. Investing means putting money to work in today’s economy. And there are a broad range of choices, from individual stocks to mutual funds, from infrastructure projects to municipal bonds. Through investment, a broad range of Americans may now be able to share in the entrepreneurial possibilities of dynamic businesses.

However, without a framework of trust, that investment wouldn’t be possible. Instead, we would all have to make a choice between tucking our savings under the mattress or taking the risk of becoming a Mr. Brown.

So, where do you all fit into the story? At the very least, you will almost certainly be faced with choices about investing your own money or helping your parents navigate their retirement. My hope for you is that, at the end of the summer, you will decide to go a step further and pursue a career in finance and investment. Maybe that will mean becoming a portfolio manager or running a venture capital fund. For some of you, it may even mean spending part of your career working for the government, using your talents to help promote the framework of trust that makes all this investment possible.

Whichever role you choose, you will face a world that has evolved rapidly in recent years. Some of this is really exciting. For example, many new investment opportunities have opened up that allow you to invest not just for short-term profit but also for social impact. You can invest in portfolios designed around sustainability, long-term growth, or quality of corporate governance. The existence of these investment options suggests a desire on the part of a new generation of investors to interact with their investments in a different way.

Technology is also rapidly changing both what people invest in and how people find and make investments. Crowdfunding, robo-advisers, and artificial intelligence are technologies that, while having potential for both positive and negatives effects on the market, are sure to continue making an impact. For your generation, these technologies are a native form of interaction. You will be the first to try the new apps and decide whether they succeed or fail. And you will be the ones who help my generation figure out how to navigate in this new world.

Another significant change, but one I’m less excited about, is the trend toward more complex products being sold to individuals.[19] As we saw earlier, Mr. Brown ended up in plenty of trouble almost 90 years ago with plain old stocks and bonds. If he were seeking investment advice today, what would his advisor recommend? Well, chances are that it would be much more complex than the bonds sold to him in 1929. Perhaps he would be recommended a complex structured note that is linked to an index or that pays interest based on the difference between two swap rates?

My point here is not to overwhelm you with the complexity. What I want you to take from this is an appreciation of how important you can be in this business. We need people with your talents and perspectives to help sort the investments that build wealth from the investments that obscure risk. We need smart women like you, who will promote a culture in which advisors put their clients’ interests first and make level-headed assessments of risk.

Pursuing these opportunities may not be as easy as pursuing some others. You may have to step outside of your comfort zone. You may be in environments where there are not many people who look, think, speak, or act like you. But you should be strong and move forward each time and create your role. Envision where you can, and should, be, and you will benefit all of us.

Even if you choose not to become a portfolio manager or investment adviser, you are still going to be part of the next generation of entrepreneurs, executives, regulators, and investors. You will have an opportunity to shape the businesses in which Americans invest, as well as the business of investing. I hope you will use that opportunity not just to promote growth but to foster growth that sticks. Ten years ago, we unfortunately saw what happens when business becomes focused on profits at any cost.

As you think about a possible career in finance and investing, I want you to come back to the two themes I’ve discussed this evening—how can smart rules help promote healthy investment? And what is your role, as an investor, adviser or entrepreneur, in helping Americans achieve their dreams? If talented women like you focus on those questions, I am confident that we will be in good hands as your generation steps into leadership roles in the years to come.

With that, I want to open it up to your questions and thoughts. What have you learned so far that is interesting? What questions do you have for me?

[2] Stock Exch. Practices: Hearings Before a Subcomm. of the Comm. on Banking and Currency, 72d Cong. 2170, 2170 (1933) (testimony of Edgar D. Brown) (“Brown Testimony”). For additional commentary, see Ferdinand Pecora, Wall Street Under Oath (1968) (“Pecora”); Michael Perino, The Hell Hound of Wall Street 254 (2010).

[3] Brown Testimony, supra note 1.

[4] Id.

[5] Id.

[6] See Stock Exch. Practices: Hearings Before a Subcomm. of the Comm. on Banking and Currency, 72d Cong. 2087 (1933) (testimony of Hugh G. Baker, President of the National City Co.) (“Baker Testimony”) (noting the bank continued underwriting Peruvian bonds through 1928, when it was doing business with Mr. Brown).

[7] The bank had taken the view for several years that the country was, “flat on its back and gasping for breath.” Baker Testimony, supra note 5; see also Pecora, supra note 1.

[8] Elizabeth Keller, Introductory Comment: A Historical Introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934, 49 Ohio St. L.J. 329 (1988).

[9] Id.

[10] U.S. Securities and Exchange Commission, Exchange Act Rel. No. 80070 (Feb. 21, 2017), available at

[11] Complaint, SEC v. PLCMGMT LLC (CDC 2016), available at

[12] U.S. Securities and Exchange Commission, Exchange Act Rel. No. 78160 (Jun. 27, 2016), available at

[13] See U.S. Securities and Exchange Commission, SEC Launches Additional Investor Protection Search Tool, Press Release (May 2, 2018), available at

[14] See U.S. Securities and Exchange Commission, The SEC Has an Opportunity You Won’t Want to Miss: Act Now!, Press Release (May 16, 2018), available at

[15] See Barbara A. Butrica et al., The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers, 69 Soc. Sec. Bull. 3 (2009), available at (noting that, from 1980 to 2008, “the proportion of wage and salary workers participating in [defined benefit] pension plans fell from 38 percent to 20 percent”); see also Diane Oakley & Kelly Kenneally, Nat’l Inst. on Ret. Sec., Retirement Security 2017: A Roadmap for Policy Makers (2017) (noting that, in 1975, 88% of private sector employees with retirement plans had pensions); John J. Topoleski, Cong. Research Serv., R43439, Worker Participation in Employer-Sponsored Pensions: A Fact Sheet, tbl.1 (2017) (27% of full-time civilian workers have access to a defined benefit plan, while 58% have access to a defined contribution plan).

[16] From 1991 to 2015, accounting for inflation, the average cost of a four-year degree increased by over 50%, from $14,107 to $25,409. Nat’l Ctr. for Educ. Statistics, Inst. of Educ. Sci., Digest of Education Statistics, tbl.330.10 (2016), available at Over that same period, however, again accounting for inflation, the average salary of an individual 25 or over with a bachelor’s degree increased his or her annual salary by only 1.72%, from $61,231 to $62,304. U.S. Census Bureau, Historical Income Tables: People (2016), tbl.P-16, available at

[17] See U.S. Securities and Exchange Commission, An Introduction to 529 Plans (2014), available at (“A 529 plan is a tax-advantaged savings plan designed to encourage savings for future college costs. . . . [They] are sponsored by states, state agencies, or education institutions and are authorized by Section 529 of the Internal Revenue Code.”) As of 2016, $282.2 billion was held in 529 plans, up over tenfold from $26.8 billion in 2002. See Inv. Co. Inst., 529 Plan Data (2016).

[18] Today, more than 90 million Americans have defined contribution retirement plans, and those plans have over $6.7 trillion in assets under management. Vanguard, How America Saves 2016: Vanguard 2015 Defined Contribution Plan Data (2016), available at

[19] See Commissioner Kara M. Stein, Increasing Product Complexity: What’s At Stake?, Remarks at SEC Speaks (Feb. 23, 2018), available at

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