Remarks at the “SEC Speaks” Conference

Commissioner Kara M. Stein

U.S. Securities and Exchange Commission

Washington, D.C.

I am pleased to join you today as Commissioner for my first SEC Speaks.  Before I begin my remarks, I would like to 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.

This summer will mark the 80th anniversary of the Securities and Exchange Commission, which is a testament not only to the mission of the Agency, but also to the dedication of the thousands of people who have worked for it over the decades.  Since joining the Commission, I’ve been impressed by the incredible amount of work that the SEC staff-members do each and every day. 

In my office, I have copies of the original securities laws and a picture of the first Commission, with Chairman Joseph Kennedy and Commissioners Ferdinand Pecora and James Landis.  These men were extraordinary public figures.  Ferdinand Pecora led the investigation into the causes of the Great Depression, and used that knowledge to help shape the new Commission.  James Landis helped draft the Securities Act and was instrumental in developing the modern securities regulatory regime.  And Joe Kennedy, who was a leading investor, businessman, and statesman, worked as a powerful chairman driving the new agency.  That Commission was well-informed by the causes of the Great Depression.  And they acted boldly—even during a struggling economy—to help bring stability and fairness to the financial markets. 

Those first Commissioners would likely be surprised to see how much the Commission has evolved over these past eight decades.  We’ve grown quite a bit.  We oversee whole industries that didn’t even exist back then.  And we also now have a little division that I think you might have heard of—the Division of Enforcement. 

One of the greatest surprises for me when I joined the Commission was coming to grips with the vast scope of our enforcement efforts.  As many of you know, each week Commissioners are asked to review hundreds of pages of documents, and pass judgment on as many as two dozen cases covering any number of complex legal issues. 

Chair White and Enforcement Director Ceresney have set a fantastic tone for the Commission’s enforcement efforts.  They have made it clear that the SEC will use its tools to vigorously protect the public interest and investors.    Under their guidance, the Commission is seeking admissions of culpability.  And we are now focusing more than ever before on firms’ internal controls.  That holds true whether at a trading desk, in an accountant’s office, or in the executive suite. 

I am also strongly interested in seeking greater individual accountability for gatekeepers, including executives, compliance officers, accountants, and attorneys.  Just within the last few months, we’ve brought a case against a small auditor for entirely failed audits of shell public companies, a case against a large accounting firm for violating auditor independence rules, a case against a compliance officer of an investment adviser for egregious violations of custody and compliance rules, and a financial fraud case against the CFO of a large public company.  I applaud our Enforcement Staff for bringing these kinds of tough and important cases.

Gatekeepers fulfill a critical role in allowing participants to access the capital markets.  As the Commission is being tasked with overseeing more, with fewer resources, the focus on gatekeepers is both an efficient and effective approach to policing the securities marketplace. 

This focus on gatekeepers will empower securities professionals, compliance officers, accountants, and lawyers to actively look for red flags, ask the tough questions, and demand answers.  Actions will be brought when professionals fail to fulfill their responsibilities. 

I also think we should look at some of the other tools we have in our toolbox to see if they can enhance our ability to protect the public interest and investors.  For example, I think we should review our policies for waiving automatic disqualification provisions, sometimes called “bad actor” provisions. 

Currently, there are over a half-dozen bad actor provisions.  If a firm violates the law or hits some other defined trigger, then it is precluded from obtaining certain privileges, engaging in some types of offerings, or even conducting a certain type of business.  These bad actor provisions exist to protect the public interest and investors, and so we should be very careful in granting waivers from them.  We should consider the initial purpose for the disqualification provision, and we should consider how that policy is impacted by a decision to waive it. 

We must ensure that we have a fair, sound and consistent basis for granting or denying a waiver request.  Firms and investors both deserve to know what factors we, or our staff, will use to evaluate waiver requests, and we must be able to support our decisions to grant or deny waiver requests with documented policies and facts. 

I am pleased to be working with my colleagues to ensure that we have clear waiver policies that I think will buttress our efforts to promote the public interest and protect investors. 

As important as enforcement is, of course, that is not all that we do.  We also write rules.  Like the first Commission, we all come to our work informed by a financial crisis.  In fact, like Ferdinand Pecora, both Commissioner Piwowar and I came to the Commission shaped by our time as Senate Banking aides.

Also like that first Commission, this Commission has received strong direction from Congress on how to help address the underlying causes of the crisis.  Following years of investigations and dozens of hearings detailing the causes of the crisis by the Senate Permanent Subcommittee on Investigations, the Senate Banking Committee, the House Financial Services Committee, the Senate Agriculture Committee, and the House Agriculture Committee, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

That ground-breaking law built upon the lessons from the collapse of AIG, and created a new regulatory regime for derivatives.  It built upon the lessons from the collapse of the housing and securitizations markets, and established new rules to make mortgages and securitizations safer.  And it built upon the explosive losses at many of the largest banks and placed new limits on banks’ risky trading. 

These are only a few parts of the Act that were designed to make our financial system safer, more transparent, and more fair. The Dodd-Frank Act directed the Commission to write or modify over 90 rules, and authorized the Commission to write dozens more.  Over three years later, the Commission’s work to implement those rules is not complete.  We need to finalize, this year, our derivatives reforms, including the cross-border application of our rules and our business conduct rules. 

We also need to finalize rules about executive compensation, including provisions requiring issuers to have policies in place to claw back compensation.  We should be empowering shareholders to take money back from executives who put their own personal gain ahead of the interests of shareholders and the firm.  And we should be working with the banking regulators to finalize a rule that would help ensure that our largest financial firms don’t have executive compensation structures that encourage risky and potentially disastrous behavior. 

We also need to finally and firmly address the conflicts of interest in asset-backed securitizations and the provision of credit ratings. 

We should move carefully but quickly to finish these rules.  And if a rule is rejected by a Court, we should dust ourselves off, make the rule better, and finish it.  We should not be intimidated into backing off our obligation to implement the law.  We should not be leaving any of our statutorily required rulemakings behind —even those that some of us may not like.

Our lessons from the financial crisis are not exclusively addressed by the Dodd-Frank Act.  We must also think proactively of ways to mitigate threats to our financial system.  During the depths of the financial crisis, the true fragility of our financial system was revealed as financial tidal waves washed over the global economy.  I was working in the Senate as the crisis unfolded, and I can assure you that I will forever remember those frightening times in 2008 and 2009. 

Our government took extraordinary measures to save the world economy, pouring trillions of dollars into the markets and financial firms.  Many of us remember the Troubled Asset Relief Program, which provided billions of dollars in capital to banks.  But that was just one small part of the picture. 

As financial institutions struggled for funding amidst the sharp pullback of the short term lending markets, the Federal Reserve eased the rules, and expanded the ability of firms to tap the discount window. It created several unprecedented programs out of thin air with technical-sounding names, such as the Term Auction Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility.

To help provide liquidity directly to borrowers and investors in key credit markets, the Federal Reserve also created the Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Money Market Investor Funding Facility, and the Term Asset-Backed Securities Loan Facility. 

Some of these programs worked, and others didn’t.  But collectively, these and other efforts helped stem the tide of the credit crisis.  I also note that most of these markets, and those who participate in them, are regulated by the Commission.

Now, several years removed, some seem determined to forget what happened, arguing that we should ignore the inter-relationships that nearly caused global economic collapse.  I cannot forget.  I will not ignore the relationships between banks, broker-dealers, funds, and investors.  Nor will I forget how those relationships nearly unwound our financial system.

For example, the short term funding market is a complex ecosystem in which investors, including money market funds, interact with broker-dealers, banks, and non-bank issuers.  Behavior by one sector in the market will have repercussions for the rest.  For example, if the demand provided by money market funds for short term paper dries up, even if there isn’t a so-called “run,” what happens?  Similarly, if lenders refuse to accept even high-quality, stable-value collateral, to support their short term loans, what happens? 

We learned that supposedly well-capitalized firms could quickly fall victim to liquidity crises.  And we learned that highly leveraged, affiliated broker-dealers can threaten even some of the largest banks.

Since the crisis, regulators around the world have been working to improve capital, leverage, liquidity, and margin rules.  There is a reason why Congress and regulators have been working to tighten the definition of what constitutes “capital” in the years since the crisis.  There is a reason why our fellow regulators care deeply about the risks posed by securities lending and the tri-party repo markets.[1]  And there is a reason why the Financial Stability Oversight Council (FSOC) has been working with the Commission to address risks posed by money market funds.  Our government put trillions of dollars on the line to bail out, directly and indirectly, our entire financial system, and each of these areas played a key role in the crisis.

We, at the Commission, are working on rules to prevent runs on money market funds.  Those are valuable efforts, but they do not go far enough to address systemic risks.  Our regulations shape the role that money market funds play in providing short-term funding for issuers, particularly the largest financial firms.  We must consider whether regulations need to be updated. We should consider whether enhanced capital, leverage, liquidity, and margin rules would help mitigate risks at the firms, and in the markets, we regulate. 

And we should also empower market participants to help prevent systemic risks. One way may be to improve disclosures regarding issuers’ reliance on short term funding.  Investors should be aware of a firm’s susceptibility to a liquidity crunch, and be able to demand higher interest rates or other concessions.   That is how the capital markets should work when these risks are understood.

Our efforts to avoid another financial crisis also should not be confined to simply attempting to prevent the last one.  Since the financial crisis, we have also seen new issues emerge in how stocks, options, futures, and increasingly other products, are traded.  In recent years, the plumbing of our markets has evolved dramatically.  Today, there are 16 registered securities exchanges, dozens of so-called “dark pools,” and hundreds of so-called “internalizers.”  Markets and traders are connected at near-light speeds.  Telephone lines have given way to fiber optic cables, microwave towers, and now, laser beams.[2]

When this system works well, futures, options, and equities trade nearly seamlessly around the world.  Yet when something goes wrong, the results can be severe for the businesses and investors who rely on our capital markets. 

As we all know, on May 6, 2010, an investment adviser selling E-mini futures, on a day filled with fears about the European debt crisis, helped trigger collapses in futures, options and equities.  Futures, options, and equities are inextricably linked, and our oversight of them must be too.  While this task may be made somewhat more complex because it involves two primary regulators, it is not impossible.  We simply must work together to oversee these markets.  For example, rules for systems and testing should be coordinated, as should safety measures.

We also must have a comprehensive vision and understanding of the markets.  The Consolidated Audit Trail, or CAT, is desperately needed and long overdue.  But we should not stop with what we have proposed already.  To be most useful, the CAT should be comprehensive, including data from all of the inter-related markets, not just those principally overseen by the Commission. 

Critical market infrastructure should be both reliable and resilient.  It is not good enough to say that the system is operational 99 percent of the time.  It also must not be catastrophic if something unexpected or unknown occurs.  Traders, exchanges, dark pools, clearing firms and others need to anticipate, and plan for, the unexpected. 

All market participants need to have the appropriate systems and controls in place to ensure that they don’t trigger market failures.  We, as a Commission, need to be working on improving expectations and standards for those systems and controls. 

Our Enforcement staff has been doing great work in bringing some of these hyper-technical, often difficult cases against traders and execution venues.  These types of cases help send strong messages that good systems and good people are vital, not only to the health of one market participant, but to all of them.

Efforts to address all of these risks, and prevent the next financial crisis, should not fall victim to agency turf wars.  The FSOC was created to help break down some of the silos and end some of the jurisdictional divides that exacerbated the last crisis.  The Commission needs to be a helpful contributor to the FSOC.  As a Commissioner, my responsibility is to the American public, to investors, and to the businesses who rely on our capital markets every day.  While I work at the SEC, I work for the American people.  In that regard, I have the same goals as our fellow regulators. 

We should embrace our fellow regulators’ efforts and work to improve them.  We do not lose power as an agency by working with other regulators, we leverage it.  We gain knowledge and expertise in new areas.  And other regulators gain knowledge and expertise by working collaboratively with us.  If we are to be successful in protecting American families and businesses from the damage of another financial crisis, we must work together.  And we must be bold.

Eighty years from now, I hope history will show that our Commission lived up to the high standard set by our very first Commission.  I hope history will show that we had the expertise and the courage to think boldly, and act carefully, to reduce risks in our financial system, promote the public interest, facilitate capital formation, and protect investors. 

We have come a long way since 1934, and we have a long way to go.  I know those of us on stage today will be working hard to keep us moving, and ahead of the curve.  I hope you will help us.

[1] See, e.g., Adam Copeland, Antoine Martin, and Michael Walker, Fed. Reserve Bank of N.Y., The Tri-Party Repo Market before 2010 Reforms, (Staff Rep. No. 477, 2010).

[2] Scott Patterson, Race to Zero: Traders With Need for Speed Turn to Laser Beams, Wall St. J., Feb. 12, 2014.

Last Reviewed or Updated: Feb. 21, 2014