Commissioner Daniel M. Gallagher
U.S. Securities and Exchange Commission
April 15, 2013
Thank you Rob [Fisher].
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I am delighted to join in welcoming you this morning both to Washington and to the SEC’s 2013 Spring International Institute for Securities Market Development. You honor us by your presence today and I know I speak for our staff in saying we look forward to a fruitful exchange of ideas over the next two weeks.
I want to underscore that: We look to exchange ideas. We, at the SEC, have been hard at the business of securities regulation for eighty years now.
So I am confident that we have something to say to you about that – and that what we have to say will be of some use to each of you. But that does not mean that each of you should return home eager to adopt the entire SEC rulebook. Your markets are not our markets, and the vast body of rules governing our markets and those who participate in them has taken eighty years to evolve (some rules more than others), as the markets we oversee have evolved.
Conditions change and investment products change; whole new industries emerge. Technologies to enable better disclosure and analysis emerge and evolve – and the manner in which it is appropriate to permit their use also changes, as we have recently recognized in permitting issuers to use various social media tools to enhance their level of public disclosure.
I got a vivid reminder of that reality just last week. I was speaking to a group of about 85 law students who are presently interns at the SEC. (I myself got my start at the SEC as a law school intern, so I am always eager to meet with our law school interns each year.) I had been meeting with a former SEC Chairman, Richard Breeden, who served ably at the White House and later at the SEC during the Reagan and first Bush Administrations.1 And Chairman Breeden agreed to join me in speaking to the interns.
In response to a question, Chairman Breeden told a story from the earliest days after the Berlin Wall fell. He was at the SEC at that time and he’d been asked to host a delegation from a newly unshackled East bloc nation. This struck him as somewhat odd – hosting such a delegation at diplomatically sensitive moments is typically a State Department role – but he agreed. He then was told that a special gift was being prepared for the visiting delegation: All – all – the U.S. securities laws and implementing rules would be translated into the visitors’ native language and given to them.
Well, the point of my story is this: Chairman Breeden says he was horrified, and for a very good reason. Our securities laws and rules were developed for and adapted to conditions in our deep and developed markets – not those of a wholly undeveloped market in a recently emancipated post-Communist economy. The shoe just didn’t – couldn’t be made to – fit. So my message to you is simply this: Our market conditions are probably not those with which you are most familiar and our market participants, practices, and products probably also differ somewhat. You must carry out your mandates in ways suited to conditions and practices prevalent in your own capital markets.
And, at the same time, we at the SEC have a lot to learn from you, and your markets. In particular, it is well worth our time to better understand market and regulatory practices in jurisdictions that did not suffer the fury of the global financial crisis. For example, Asian markets largely avoided the impact of the crisis, perhaps in large part due to lessons learned by market participants and policymakers from crises in the late 1990s. Since I became a Commissioner a year and a half ago, I have made a concerted effort to visit and understand rising capital markets around the world. I have visited with market participants, regulators and other policymakers in Hong Kong, Singapore, Australia, Brazil, Qatar, Dubai, and Turkey.
These visits have confirmed my belief that the United States faces stiff international competition in the financial services area. And it was also confirmed for me that, rather than engaging in a “regulatory race to the bottom,” regulators and market participants alike in emerging markets want high quality, but smart regulation. Oftentimes, that will come by emulating the United States and the European Union. But, importantly, some of the time, especially in this post financial crisis regulatory frenzy, importing U.S. or E.U. rules will not make sense. This is especially true for rules that may not even make sense in their domestic markets! We at the SEC will be wise to stay in close contact with these and other emerging markets as we continue to slog through a long list of Dodd-Frank mandates.
And so I can emphatically say that we look forward to working creatively and cooperatively with you. Financial markets, firms, and products move across national borders to an extent and in ways once literally unthinkable. That’s good. Fraudsters, too, can take advantage of new means of bilking investors of their funds, and capital markets worldwide of their good reputations. And you will always find the SEC a steady ally in combatting that scourge. Sometimes we will be asking you for your cooperation – for example, to investigate malfeasance where suspects, witnesses, or other evidence are present in your jurisdiction. When we do, we look forward to your prompt and effective assistance. We trust that your securities laws and implementing rules will have been devised with prompt and effective international cooperation in mind. And we, in return, look forward to providing such assistance to promote your enforcement and oversight efforts.
We also look forward to an era in which we are able to recognize that compliance with regulations in other markets should, for purposes of certain products and activities that cross international borders, be adequate to meet our own regulatory needs. We have reached the point where we must, it seems to me, accept that no one system can claim to be the exclusive means of regulating financial products, markets, and participants that affect us all.
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I want to add one final thought. I think it has, since the financial crisis erupted in 2008, become especially important to bear in mind that capital markets are about risk-taking – informed risk-taking in pursuit a return on investment. In capital markets, the issuer’s proposition to potential investors is simple: Risk investing in my company, fully informed of the material facts, in an effort to grow your money (and, in the process, my company) – recognizing all the while that we both could fail. You, the investor, could make a bad decision, and my company might not meet expectations and could even fail.
That risk-reward proposition is simple and well understood to capital markets participants. Any effort squeeze risk out of the system, however comforting it may feel after the stress of the financial crisis, is misguided. Eliminating risk in capital markets would be to eliminate opportunity – the very mutual interest and benefit that brings issuers and investors together in capital markets worldwide. The corollary is that to increase the quantity, scope, or restrictiveness of regulation is not necessarily to improve its quality or effectiveness. And that’s an important point for securities regulators worldwide to bear in mind each day.
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Thank you for your attention and I wish you a beneficial and enjoyable visit with us over the next two weeks.
1 Chairman Richard C. Breeden founded the SEC’s International Institute for Securities Market Development in 1991.