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Remarks at the “SEC Speaks” Conference: What Lies Ahead? The SEC in 2016

Commissioner Kara M. Stein

Washington, DC

Feb. 19, 2016

Good morning.  It is a pleasure to be part of SEC Speaks.  This conference provides an important forum for the Commission staff, the securities bar, and financial market participants to discuss cutting-edge issues.  As our securities markets continue to undergo change at an incredible pace, this conference helps us to look back and to look ahead. 

Before I begin, I would like to acknowledge the phenomenal and dedicated staff of the SEC, many of whom are present or are participating via video-conference today.  Our staff is over 4,000 strong, across twelve offices and dedicated each and every day to protecting investors, maintaining fair, orderly, and efficient markets, and helping to facilitate capital formation.   

Of course, I would be remiss if I did not remind you that the views I am expressing today are my own and do not necessarily reflect those of the Commission, my fellow Commissioners, or the staff of the Commission.

With that traditional disclaimer out of the way, I will now turn to the substance of my remarks—what lies ahead for our financial markets in 2016? 

As I was reflecting on what to speak about today, two concepts kept coming to mind: transparency and accountability.  Both are critical to the efficient and effective operation of our capital markets.  And both transparency and accountability are central to the efforts of the Commission in 2016.

Let’s start with transparency.  More and more Americans are turning to the capital markets to purchase homes, send children to college, and save for retirement.  According to a recent Gallup poll, over fifty-five percent of Americans are invested in the stock market.[1]  Nearly half of all U.S. households own mutual funds, and over 90 percent of all mutual fund investors indicate that saving for retirement is one of their goals.[2]  Our economy depends on these investors.  And these investors depend on our economy. 

With more than one out of every two Americans invested in the stock market, how are we ensuring that our capital markets provide sufficient transparency to foster confidence?  How are we ensuring that investors are protected, while at the same time still spurring innovation and encouraging capital formation?

One of the most important tools that the Commission uses for investor protection is disclosure, which provides transparency.  All investors, whether large or small, are entitled to a steady flow of timely, accurate, relevant, and reliable information in order to make investment decisions.  Quality information matters.  Quality disclosure matters.  This is especially true given the growing complexity in our capital markets. 

A good example of this increasing complexity is exchange traded funds, or ETFs.  Like mutual funds, ETFs allow investors to pool money into fund vehicles that make investments in a variety of assets.  Unlike mutual funds, which typically are priced once per day after the exchange closes, ETF shares trade and price throughout the day.  ETFs have undoubtedly provided investors, many of whom are mom-and-pop investors, with both benefits and alternatives.  However, the complexity of some ETFs makes understanding such products difficult for the average investor. 

Over the last decade, more and more people are investing in ETFs.[3]  Some ETF sponsors saw growth rates of assets under management of 30 to 35 percent in 2015.[4]  Scores of new and innovative ETFs entered the market.  Indeed, in 2014, the United States ETF market had approximately $2 trillion in assets under management.[5]  This accounts for almost 73% of the world’s $2.7 trillion in ETF assets.[6]  Such growth is astounding and potentially good—as long as risks are identified; market participants and investors are informed; and appropriate safeguards are in place.

ETFs have grown in volume, type, and variety.  ETFs have expanded far beyond their equity index origins to include far more complex offerings.  Retail investors are being introduced to innovative ETFs that may offer attractive yield, but also feature more complex and other higher risk strategies.[7]  These may include currency hedged ETFs, smart-beta strategies, and bank-loan ETFs.[8]  While some new products are being hailed as exotic or innovative within the industry, others have been described as “toxic”.[9]

I fear that the risk presented by some of these new products may not be fully understood by those who have invested in them. 

Indeed, even plain-vanilla, equity index ETFs may present risks that are not always anticipated or fully understood, as evidenced by the events of August 24, 2015.  Commission staff and market participants are continuing to assess what happened.[10]  However, one fact that is crystal clear about August 24 is this —many ETFs behaved in an unpredictable and volatile manner.  As a class, ETFs experienced greater increases in volume and more severe volatility than corporate stocks.[11]  Nearly 20 per cent of all ETFs trading on the morning of August 24 exhibited abnormally high volatility.  Over 40 percent of the 499 ETFs invested in U.S. equities experienced a trading pause.  These pauses varied, depending on an ETF’s focus, size, and capitalization.[12]     

Is this a sign of what could occur in the worst case scenario or is it something we need to understand as typifying ETF movements in times of stress?  Will we be able to make generalizations regarding how certain types of ETFs behave during periods of market stress?  Why do ETFs behave differently than their underlying basket of securities?

Fundamentally, these questions lead to the same place—we need to take a holistic look at these products, their transparency, and how they interact in our capital markets. This should include not only looking at ETFs, but other exchange traded products that hold commodities, currencies or derivatives.  These products are not traditional equity securities.  They do not always behave in the same manner as equity securities.  The attempt to fit such non-equity products into the rules designed for traditional equity securities has left potential gaps in investor protection and also raised questions about market integrity.    

How then do we move forward in creating greater transparency and accountability, while being mindful of the possible benefits that stem from innovation in the ETF space?

First, we need to carefully review the roles of authorized participants and market makers in facilitating ETF operations and trading.  For example, do ETFs face a greater risk of market makers stepping back during times of extreme volatility?  Is there too much concentration among authorized participants and should that be a cause for concern?  Is there sufficient capacity among market makers and authorized participants to ensure that ETF markets operate efficiently and behave as investors expect?  Do investors have adequate disclosure of these risks?

Second, we must continue looking for opportunities to enhance accountability as well as investor protection with respect to ETFs, particularly those that pose the greatest risk to retail investors.  We should re-invigorate SEC staff working groups and provide them with the resources they need to examine the products that are being offered.  We should work with FINRA and other self-regulatory organizations to take a look at how these products are being marketed and by whom.[13]  We should assess whether certain products are even suitable for buy-and-hold investors.

We also need to finish analyzing the events of August 24 and work with the exchanges and other market participants to take appropriate action.  Perhaps such an analysis will lead us to the conclusion that trading rules for ETFs should actually differ from those for equities.  We also need to think about how our national exchanges list these products, and the criteria used to assess their eligibility for listing and trading. 

Finally, we need to think about a roadmap for holistic regulation of ETFs and other exchange traded products, given their explosive growth and evolution.  We also need to anticipate how these products may interact in the markets.

One of the issues that became particularly apparent to me on the morning of August 24 is the complexity and the build-up of the rules that govern our exchanges.  For example, some market participants believe that exchange rules on August 24 actually limited pre-open pricing information, which may have contributed to increased trading volatility.[14]  As a result, I think the Commission, working with market participants, needs to undertake a comprehensive review of both the exchange rule filing process and of the effectiveness of the rules that are in operation today.  Are these rules contributing to an orderly and efficient market?  Or are these rules contributing to increased volatility and fragmentation?  Ultimately, how effective are these rules at ensuring transparency, accountability, and protecting investors? 

Now I would like to address the importance of a Board’s accountability to its shareholders.  Good corporate citizens are those who are accountable, open, and have an effective group of stewards at the helm.   Accountability is enhanced each time shareholders exercise their right to vote for the stewards who can manage their companies best. 

Last February, the SEC held a discussion about proxy voting mechanics and how we could amend the proxy rules to facilitate a more effective and robust shareholder voice.[15]   Our rules have created an anomalous situation between shareholders who physically attend a meeting and those who do not.  Shareholders in physical attendance can receive a universal ballot that allows them to pick and choose from all the candidates nominated for the board, regardless of whether the nominees were put forward by management or a shareholder.  In contrast, shareholders voting by proxy, who do not physically attend the meeting, generally are limited to choosing from among either the company’s nominees or the shareholder-proponent’s nominees.  This is due to the “bonafide nominee rule,” which allows only nominees who have consented to be named in the proxy statement to be included on the proxy card.[16]  I do not think we should be treating investors differently and limiting their voting rights based solely upon whether they are able to attend a meeting in person or vote by proxy.[17]

It is time to amend our proxy rules and to facilitate more robust shareholder enfranchisement.  

Issues of transparency and accountability also arise in connection with the market structure improvements that are currently being proposed to the Commission.  How do we support greater transparency amidst the rapid and significant technological innovations going on in our financial markets?  How do we instill greater accountability? 

I think the first order of business is to finish the remaining rules under Title VII of the Dodd-Frank Act of 2010.[18]  The security-based swap market is global, with counterparties located around the world.  Estimates peg the global notional amount outstanding in single-name credit default swaps (CDS) at over $9 trillion.[19]  The large market remains largely unregulated until we complete our Title VII rules.  We made some progress last year and earlier this year, with the adoption of the final rules regarding the registration of security-based swap dealers and major security-based swap participants.[20]  But, many rules remain outstanding.  Some of these unfinished items need to be completed prior to even initiating the dealer regime, including the requirements for capital and margin, obligations for segregation and recordkeeping, and standards for business conduct.  In addition, further work must be done to finalize reporting to repositories and dissemination of swap trading data.  Each day we delay finishing our swap rules affects the transparency, efficiency and resiliency of our markets.  I look forward to the staff’s recommendations in all of these areas.  Hopefully, we will have the final rules in place by this time next year.

Another area of focus in 2016 should be the Consolidated Audit Trail or the CAT.  During the 2 1/2 years I have been a Commissioner, I have repeatedly voiced my concern about the lack of movement toward completion of the CAT.  Each year, I find myself talking about the importance of getting this long-overdue project done—of making it a top priority.  How many more Flash Crashes, mini-Flash Crashes, and August 24s will we have before the CAT is up and running? 

Although our staff has released some of the data from August 24, the deep dive and analysis into the why, how, and what are not there, or have been delayed, because there is no CAT.  To properly understand August 24, we need a system that sees across the capital markets and examines in a very detailed manner the various order types and order flows.  We should be able to look back at a consolidated audit trail to make data-driven conclusions about what is going on in our markets on any given day at any given point in time, particularly when there are periods of stress.  It has been six years since the CAT was proposed. [21] The SEC and the SROs must simply get it done.  By not doing so, we are hampering the Commission’s efforts of maintaining fair, efficient, and stable markets.  The Commission needs to use all of its tools to ensure there are no further delays.

I commend the action by Chair White in assigning a project manager who is tasked with shepherding this project along.  My hope is that the additional oversight will speed the project.

Another initiative which will help promote efficiency and reduce risk in our markets is the shortening of the settlement cycle for securities transactions.  With input from, and the support of, both industry representatives and our Investor Advisory Committee, my fellow commissioners and I have advocated moving settlement from T+3 to T+2. [22]  Protracted settlement times are costly, increase risk, and are simply inefficient.  Given the consensus behind T+2, we certainly should be able to make it a reality this year.  With the current state of technology, I believe that the settlement cycle could be even further shortened, but I support the industry’s consensus.  I look forward to working with my fellow Commissioners to get this done.

The concepts of accountability and transparency also emerge when we discuss the private/public market divide.  Studies have shown that a sizable amount of capital is now raised in the private markets.[23]  In fact, amounts raised through unregistered offerings have outpaced the level of capital raising via registered offerings in recent years.  More than $2 trillion, in fact, was raised privately in 2014.  Regulation D offerings accounted for more than $1.3 trillion of this amount.[24]  In comparison, registered offerings amounted to approximately $1.35 trillion in 2014.[25] What lessons should we take from this? What effect is private capital raising having on the public markets?  What should we watch for as we evaluate the panoply of new rules enacted pursuant to the JOBS Act mandates?  Are these private markets the best places for capital formation AND investor protection?

I think the answer depends on whom you ask, and perhaps what, or whom, you are seeking to protect.  There is no doubt in my mind that we need to encourage and foster capital formation.  It is the cornerstone of what has made the American markets and the American economy great.  However, we should thoughtfully assess the sheer volume and dollar value of capital raising in the private realm and derive lessons from this space.  Undoubtedly, there are both risks and rewards that flow from private markets.

For example, when we look back over 2015, we recognize that it was a challenging year for some of the most popular private companies.  Last year, investors in many so-called “unicorns” —which are private start-ups valued at over a $1 billion—began pulling back on financings, or writing down valuations, when they learned that some of the hype surrounding these companies was just that –hype.  This demonstrates that, in the private space, balance is needed.  Transparency on some level might be helpful.  We need an approach that rewards innovation but that also balances the need for transparency and accountability. 

Striking the right balance and finding the appropriate amount of oversight is tricky.  I think we will have some insight into whether or not we have succeeded when we begin to assess the impact of initiatives like Regulation Crowdfunding and Regulation A+.[26]  Both of these regulations have look-back features, which may shed light on how they impact capital formation and investor protection.  Under Regulation Crowdfunding, the staff is required to submit a report three years following the effective date.  Under Regulation A+, the staff is required to submit a report no later than five years following adoption.  I look forward to seeing what these reports show us.

I would like to conclude my remarks today by observing that good regulatory oversight fosters and encourages transparency and accountability, while still fostering and encouraging innovation.  We are at our best when we look back and learn, then look forward and act in a balanced and thoughtful manner to accomplish smart and effective outcomes.  I think this holds true in so many of the questions we need to be asking and the work we need to get done in 2016. 

I look forward to working with many of you on these issues.

[1] See Justin McCarthy, Little Change in Percentage of Americans who Own Stocks,  Gallup, available at (noting, however, that prior to the 2009 economic crisis, 60 percent of Americans' reported having money invested in the stock market).

[2] See 2015 Investment Company Fact Book (“ICI 2015 Fact Book”), available at

[3] See ICI 2015 Fact Book; see also, Request for Comment on Exchange Traded Products, available at (“Request for Comment”).

[4] See Cinthia Murphy, ETF Asset Flows Just Misses Record in 2015 available at

[5] See ICI 2015 Fact Book.

[6] Id.

[7] See, e.g., Leveraged and Inverse ETFS: Specialized Products with Extra Risks For Buy-and-Hold Investors, Investor Alerts and Bulletins, available at

[8] See Request for Comment at 5; see also, Hedged-Currency Craze Drives Record New ETFs available at

[9] See Chris Newlands, Is it time to halt the rise of the ETF machine?, Financial Times, Monday February 1, 2016.  

[10] See Commission Staff Research Note on Equity Market Volatility on August 24, 2015 available at

[11] Id.

[12] Id.

[13] See ,e.g., Non-Traditional ETFS FAQs available at

[14]  See, e.g., US Equity Market Structure: Lessons from August 24, Blackrock, October 2015, available at

[15] See Proxy Voting Roundtable, U.S. Securities and Exchange Commission, February 19, 2015 available at

[16] See 17 C.F.R. 240.14a-4(d) and Regulation of Communications Among Shareholders, Exchange Act Release No. 31,326, Investment Company Act Release No. 19,031 (October 16, 1992)

[17] Id.

[18] Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Pub. L. 111-203, § 410 (2010).

[19] See Exchange Act Release No. 34-77104 (February 16, 2016), available at

[20] Exchange Act Release No. 34-75611 (August 5, 2015) available at

[21] See Chair Mary L. Schapiro, Remarks at SEC Speaks: Looking Ahead and Moving Forward (Feb. 5, 2010), available at (“It is like trying to put together a jigsaw puzzle, but only being able to see a small part of the final picture. To see the complete picture, regulators must have access to a robust and effective consolidated order and transaction tracking system.”).

[22] See e.g., Statement Regarding Proposals to Shorten the Trade Settlement Time available at

[23] See Scott Bauguess, Rachita Gullapalli and Vladimir Ivanov, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014, S.E.C. Division of Economic Risk Analysis White Paper (October 2015) available at

[24] This amount represents offerings reported on Forms D filed.  The amount may actually underestimate the total amount raised pursuant to all Regulation D offerings, some of which may not have been reported on a Form D.  Id. at 6.


[26] Exchange Act Release No. 34-7632 (Oct. 30, 2015) available at; Exchange Act Release No. 34-74578 (March, 25, 2015) available at

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