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Thank you for the kind introduction. I am pleased to join you at this year’s National Conference of the Society of Corporate Secretaries & Governance Professionals. Before saying anything else, though, I’d like to remind you that the views I express here today are my own and do not necessarily reflect those of the Securities and Exchange Commission or my fellow Commissioners.
In considering the “shape of things to come” – the theme that focuses this conference – one thing is certain: The regime regulating our financial markets is undergoing dramatic change. The case in point is the Dodd-Frank Act, which represents a historic expansion of the federal government’s power over the economy. The hundreds of rules and regulations that Dodd-Frank demands of the SEC and other financial regulators indicate just how far the government has reached into the private sector and just how heavy the government’s hand will be. Or, stated differently, the regulatory change demonstrates the degree to which government decision making, effectuated as it is through more regulation, will displace and distort private sector decision making.
To put it more directly, I have been and remain troubled that the Dodd-Frank regulatory regime goes too far. Without question, there is a fundamental role for government, including the SEC, in regulating our financial markets and our economy more generally; and we need a regulatory framework that is resilient and that fits our increasingly interconnected and complex financial system. None of us welcomes the kind of hardship and turmoil that the financial crisis wrought. The key question, therefore, is not whether we will or should have regulation. The answer to that question is straightforward: we will and we should. The real question is, “How much?”
When it comes to the question of “How much?”, I am concerned that the present wave of regulation will prove to be excessive, unduly burdening and restricting our financial system and suppressing private sector innovation, entrepreneurism, and competition at the expense of our country’s economic growth and global competitiveness. My concern that we are overregulating is accentuated when instead of evaluating each rule and regulation one-by-one, the totality of the regulation that the private sector must bear is added up. As regulatory mandates mount, I worry that the cumulative impact of the aggregation of rules and regulations will make it more difficult for companies to raise capital and to manage their risks effectively; will make it more costly for individuals to borrow when they need to; will stifle the cutting-edge innovation that we depend on to drive our economy forward; will leave investors with fewer valuable opportunities for building their wealth; and will undercut job creation.
All of which is to say that in thinking about the future, a great deal will turn on how financial regulators craft and implement the financial regulatory regime. The SEC, for example, still has many choices to make as the agency determines the scope and nature of securities regulation, whether it is pursuant to our rulemaking obligations under Dodd-Frank or otherwise. Notwithstanding how far-reaching the sweep of Dodd-Frank is, not everything on the Commission’s regulatory agenda flows from the legislation.
As the Commission continues fashioning the securities law regime, there will undoubtedly be disagreements over policy from time to time – over what shape the regime ought to take. Whatever the policy differences might be, however, there should be widespread agreement over this: That the agency’s decision-making process needs to be robust; that the Commission needs to be thorough and even-handed in assessing the potential consequences of our options; that we need to carefully evaluate whether the intended goals of our actions will be achieved; and that we need to identify and give due regard to the possible undesirable effects and unintended consequences of our choices. In other words, the SEC must engage in rigorous cost-benefit analysis – rooted in economics and the available data – when fashioning the securities law regime.
Simply put, by obligating us to justify our actions, cost-benefit analysis is an argument for regulatory decision making that fully accounts for both the good and the bad – that nets the costs against the benefits – to ensure that we have smart regulation that advances the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
Accordingly, I am pleased that the SEC’s Division of Risk, Strategy, and Financial Innovation and Office of the General Counsel have worked together to develop new guidance for performing economic analysis in the agency’s rulemakings.1 The guidance marks significant progress toward improving the analysis that underpins the Commission’s decisions. As the guidance itself puts it:
High-quality economic analysis is an essential part of SEC rulemaking. It ensures that decisions to propose and adopt rules are informed by the best available information about a rule’s likely economic consequences, and allows the Commission to meaningfully compare the proposed action with reasonable alternatives, including the alternative of not adopting a rule. The Commission has long recognized that a rule’s potential benefits and costs should be considered in making a reasoned determination that adopting a rule is in the public interest.
