A Nonagenarian Talks with a Tricenarian: Remarks at the SEC 30th International Institute for Securities Market Growth and Development

Welcome to the final day of the SEC’s 30^th International Institute for Securities Market Growth and Development. Based on my perusal of the agenda, your curriculum has been interesting and exhausting. I am honored to spend a few minutes with such a remarkable gathering of people who share my passion for securities regulation. Before I begin, I will give you a disclaimer, which you might have heard many times before: My views are my own views as a Commissioner and not necessarily those of the SEC or my fellow Commissioners.

Earlier this month, we celebrated the SEC’s 90^th birthday. Nine decades of regulating the securities markets has taught us many lessons, and I hope that our staff has shared those lessons with you over the last week. These discussions were likely focused and technical, so I want to take a step back and think more broadly about securities regulation and why it matters so much.

A country’s capital markets, by feeding the rest of the economy, can form the basis for its prosperity. These markets drive financing toward the people that need it to build or expand businesses and enable investors to share in the success of these businesses. If capital markets are working properly, a person need not be rich or have wealthy friends and relatives, to get the capital she needs to turn a brilliant idea into a successful business. The more people participate as investors and users of capital, the more effective the markets are at getting capital into the hands of people who can use it best. Widespread participation in the capital markets helps not only the investors and entrepreneurs themselves and the communities in which they live and work, but the broader economy. Well-functioning capital markets ensure that people can make the most of their talents. They also give investors an opportunity to invest in other people’s talents.

The wonder of capital markets is heightened when one realizes that they are organic. Societies, when left to their own devices, create capital markets. Capital markets do not require much government intervention, let alone government orchestration. They are the quintessential market—very responsive to price signals, which in turn reflect what people want and how much they want it. Regulators need only establish and enforce a basic set of market integrity rules. The markets—through the voluntary interactions of participants—will do the rest. Regulators, even when seated on a central perch that allows them to observe what every market participant is doing, cannot replicate the ability of uncoordinated market participants to adjust rapidly and effectively to new marketplace dynamics.

In our nine decades of existence, US capital markets have grown in size and stature. These markets serve not only domestic investors and companies, but their global counterparts. The integrity of the markets is the key to their success. There is, of course, no guarantee that you will make money as an investor or get access to capital on the terms you want. But you can trust that the financial statements, issuer disclosures, and the financial professionals you encounter are accountable if they lie to you. The SEC has played an important role in setting the ground rules for our successful capital markets, but generally has avoided micro-managing them.

One classic government failure is to seek to influence capital flows in the “right” direction. Whether trying to shift capital toward politically favored companies or industries that are perceived to be particularly deserving, government decisions are dangerously distortive. These kinds of interventions damage the capital markets’ ability to serve the economy’s most pressing needs by substituting the preferences of government officials for the preferences of the rest of the population. A handful of government decision-makers is simply no match for the multitude of decision-makers, each with access to a unique reserve of knowledge, that drives capital flows in a competitive free market. Less really is better for a capital markets regulator: facilitate the provision of material information to investors, police the markets for fraud and manipulative behavior, and set some basic investor protection rules for market intermediaries.

We regulators want to intervene. Often the inclination to intervene stems from good intentions. We want to protect people from bad actors and bad decisions and we want to neaten up messy markets. A contractual tweak here, a product prohibition there . . . we look for ways to “make markets better.” We, of course, must regulate the markets in the manner that our elected governments have chosen. When we have discretion, however, we should use restraint. If two market participants voluntarily agree on a transaction or relationship, we ought to be careful about stepping in between them to alter the terms of the arrangement or prohibit it altogether. We should have a good reason for inserting ourselves into markets: a clearly identified market failure that we have determined will not resolve on its own and can be solved by government intervention without causing something worse to happen. If we really take each element of that analysis seriously, government interventions will be rare and sometimes may take the form of eliminating the regulatory instigator of the market failure.

As important as capital markets are, a prerequisite for their effectiveness is the liberty of the people they serve. When people are free to make decisions for themselves and their families, markets work effectively to provide them with what they need. The dignity of each individual, as reflected in the right to make choices for herself and her family, is core to every aspect of a free society, including its capital markets. In that spirit, for those of you who are staying in DC tomorrow, join with us in celebrating Juneteenth, our country’s second independence day. We will commemorate the day in 1865 on which 250,000 Americans in Texas finally were emancipated from slavery, thus ending that abhorrent practice in the United States and underscoring the inalienable right of all people to be free.[1]

Thank you and enjoy your final day of the Institute.