Thank you, [Bill Beatty], for the nice introduction, and for the opportunity to come back and visit many old friends.
Thanks, also, to all of you who participated in the 19(d) meetings this morning.[2] This is an important opportunity for state and federal collaboration, and I would remind my new friends at the SEC that Section 19(d) of the Securities Act provides for much more than a once-a-year gathering. It envisions an atmosphere in which the states are considered partners in certain types of rulemakings, not mere commenters.[3]
Today, I want to talk about the business of regulating, and why it is so important that you do your jobs well. Of course, the views I express are my own and do not necessarily reflect those of the Commission, the Commissioners, or my colleagues on the Commission staff.
As you know, many people start with an assumption that all regulation is bad for business. Some lobbyists and politicians in D.C. certainly believe this, and while they may pay lip service to investor protection, the result of their consistent policy positions would leave investors naked and hungry. I am also aware that, sadly, some of your bosses back home harbor a fundamental belief that your work is an impediment to economic growth.
Unfortunately, we sometimes contribute to this misconception. Over the course of my career, I have often given speeches in which I have portrayed securities regulation as a balancing act between capital formation and investor protection, and I’ve illustrated the point by showing a picture of a scale with capital formation on one side and investor protection on the other. But, I’ve come to believe in a better illustration—one in which investor protection is portrayed as the foundation upon which capital formation is built. In reality, regulation allows capital formation to flourish by giving investors the confidence they need to invest.
The key is that regulation must be smart. Dumb regulation manifests itself in a variety of ways: it puts pointless burdens on business, fails to reflect changing technology, is overly protective of turf, or, even worse, leaves investors as sheep to be sheared. Smart regulation, in contrast, provides a sufficient level of protection to bolster confidence without needlessly burdening the regulated entities.
As you can attest, state regulators are often characterized as bastions of dumb regulation. Unfortunately, you don’t have to look hard to find examples of practices that feed the reputation. However, in large part, states are the places where smart regulation can flourish. You are closer to Mom and Pop investors, closer to small businesses, and in tune with the needs of both. New ideas can be tested and, when necessary, can more easily be discarded.
Often, smart regulation requires coordination between states and a willingness to give up some of your own preferences in order to foster consistent rules from state to state. Toward that end, I applaud your adoption of the coordinated review program for offerings conducted under the new Regulation A.[4] This program is forward-thinking and a potential game-changer in state regulation.
However, smart regulation doesn’t always look the same in every state. For example, while I was General Counsel for the Office of the Kansas Securities Commissioner, I wrote a rule called the Invest Kansas Exemption.[5] It was the first of what could be characterized as an intrastate crowdfunding exemption. It was designed to allow small-dollar offerings to an entire community of interest, without a prohibition on general solicitation. I was comfortable adopting the exemption in a rural state, where the investors and promoters likely know each other, but I would have recommended more conditions on the exemption in a more urban state where the investors and promoters would likely be strangers.
The theme of this conference is “Progress Through Innovation,” and I think state and provincial regulators have an important role to play in promoting economic progress. By innovating in the ways you regulate, whether through multijurisdictional coordination or unique intrastate exemptions, you can spur innovation and entrepreneurship in your states and provinces. And you also provide a layer of protection that investors need, which gives them the confidence to invest in the offerings you oversee.
Because your role is so important, the states need to stay in the game and retain relevancy. Investors are counting on you. And, if they stop to think about it, small businesses are counting on you, too.
Now, let’s take a moment to consider the importance of smart regulation within a much broader context. Let’s look at the really big picture. Here in the U.S., we are motivated by an idea called the “American Dream.” This is a fundamental belief that a person, through hard work, can improve their socio-economic status. NASAA members and their constituents from Canada and Mexico also dream of economic upward mobility, though they no doubt call it something different.
Any parent with grown children has probably preached several times—over groans of protest and eye-rolling—how those children can achieve economic success. It starts with a good education, where we obtain not only knowledge, but we learn to play well with others, get things done on time, and develop other marketable skills. The next step is getting a job, working hard, doing the types of things no one else wants to do, and hopefully catching a break or two along our career path. Then, once the income starts coming in, we must learn to live within our means and become savers. Finally, if we want to put those savings to work for us, we become investors and begin to accumulate wealth.
Imagine, if you will, what happens if everyone in America, or everyone in Canada, or everyone in Mexico, begins to follow those steps. Imagine the powerful economic engine that is created when everyone in a society is striving to work hard, save money, and invest for the future.
But, consider with me what happens when something goes awry. Suppose a person has done all the right things. She has worked hard in school and received a good education, then worked hard in a job and managed to work her way up, overcoming the various obstacles that life threw her way. She gave up a lot of instant gratification in order to save for the future, and she built up a nice nest egg for retirement. Then, on the eve of that retirement, somebody comes along and steals the nest egg from her, or engages in unethical practices that cause her to suffer significant losses.
This is why we have securities laws. J.N. Dolley, the author of the first blue sky law, was a banker who had seen customers withdraw money from banks to chase higher yields by investing in copper mines, Central American plantations, irrigation projects, or other wildcat stocks. Dolley believed that “at least ninety-five percent of all the money put in those stocks was irretrievably lost,” so he proposed a set of statutes to require governmental review of securities offerings.[6]
We still need those laws today. Those in this room, more than most others, are familiar with the devastation brought about by securities fraud. How many in this room have seen retirees go back to work after being fleeced? How many have seen marriages end? How many have seen victims turn to suicide? Don’t ever forget how important your jobs are.
Now, in case you aren’t depressed enough, let’s look at this from a collective viewpoint. If all Americans are getting a good education, working hard, saving money, and investing, we have a powerful economic engine, but what happens if something occurs that makes us lose hope in the American Dream — for example, the stock market crash of 1929?
This is why the federal government began to regulate the sale of securities. After the stock market crashed, a Congressional investigation revealed widespread manipulation of the markets and rampant insider trading.[7] As a result of the crash, people began to hoard their money and the economic engine lost steam in a rather dramatic fashion. Thus, when President Franklin D. Roosevelt recommended the passage of what became known as the Securities Act of 1933, he expressed his desire to “give impetus to honest dealing in securities and thereby bring back public confidence.”[8] The point of the ’33 Act, then, was not to punish businesses for getting us into the Great Depression, but rather to get us out of the Depression by restoring investor confidence. This new regulatory structure gave us a foundation upon which capital formation could occur.
Fast forward to the 21st Century and the financial crisis of 2008. As a result of the crisis, median household net worth fell almost 39 percent.[9] At least three significant factors contributed to the loss of net worth. Home values fell almost 29 percent from their peak in April 2006 to the end of the recession in June 2009, wiping out about $9 trillion in home equity.[10] Stock values plunged, too. The S&P 500 lost 55 percent of its value between its high in October 2007 and its trough in March 2009.[11] Finally, unemployment peaked at about 10 percent in October 2009 and stayed above 8 percent for 3 years.[12]
Although the economy has improved significantly in recent years, these hits to ordinary Americans continue to have a significant impact on our faith in the American Dream. According to a New York Times poll last December, less than two-thirds of Americans (64 percent) now believe they could be born poor, work hard, and get rich in America.[13] This percentage has declined steadily since 2011, which was after the worst of the crisis, when 81 percent still believed it.[14] That’s a 17 percent decline in just a few years.
In addition, almost half of Americans now expect future generations to be worse off. Another one-fourth think future generations will wind up being “about the same,” which means that only about one-fourth of Americans expect future generations to have better lives.[15] And, according to a November NBC/Wall Street Journal poll, 56 percent of Americans think the country’s economic and political systems are stacked against people like them.[16]
This loss of hopefulness, I believe, presents one of the greatest challenges of our time. And I don’t come here today to suggest that it’s up to you to solve all of our problems. Just as you were not in a position to create this mess, you aren’t realistically in a position to solve everything.
But, don’t minimize the importance of the things you can do. Through smart and innovative regulation, you can spur economic development on a level playing field. And your visibility as local cops on the beat will be a reassuring presence to those who have become cynical of the system.
I hope I’ve set the table for the rest of your conference by highlighting for you the importance of the topics you will be discussing. In many ways, you are guardians of hopes and dreams of the people in your state. For their sake, I encourage you to maintain your vigilance, maintain your zeal, and keep up the fight.
Thank you.
[1] The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues on the Commission staff.
[2] Section 19(d) of the Securities Act of 1933, 15 U.S.C. § 77s(d), requires the Commission to conduct an annual conference and other meetings as may be necessary with any association of state-level securities regulators, self-regulatory organizations, agencies, and private organizations involved in capital formation, in order to achieve maximum effectiveness and uniformity in federal and state regulatory standards with minimum interference with the business of capital formation.
[3] “The purpose of [subsection 19(d)] is to engender cooperation between the Commission, any such association of State securities officials, and other duly constituted securities associations in the following areas: (A) the sharing of information regarding the registration or exemption of securities issues applied for in the various States; (B) the development and maintenance of uniform securities forms and procedures; and (C) the development of a uniform exemption from registration for small issuers which can be agreed upon among several States or between the States and the Federal Government.” Securities Act Section 19(d)(2), 15 U.S.C. § 77s(d).
[4] NASAA Coordinated Review Program for Regulation A Offerings, available at http://www.nasaa.org/industry-resources/corporation-finance/coordinated-review/regulation-a-offerings/.
[5] Kan. Admin. Reg. 81-5-21, as modified by Special Order dated June 21, 2013.
[6] Will Payne, How Kansas Drove Out a Set of Thieves, SATURDAY EVENING POST, Dec. 2, 1911.
[7] Larry Bumgardner, A Brief History of the 1930s Securities Laws in the United States—And the Potential Lessons for Today, The Journal of Global Business Management, available at http://www.jgbm.org/page/5%20Larry%20Bumgardner.pdf.
[8] Message from the President—Regulation of Security Issues, Presented to Senate Mar. 28, 1933, 77 Cong.Rec. 937 (1933).
[9] U.S. Government Accountability Office, Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act (Jan. 2013) (hereinafter GAO Report), at 20 (citing Federal Reserve Survey of Consumer Finances).
[10] Id. at 20-21.
[11] Steve Santiago, Should Investors Over Age 50 Own Stocks?, BANKRATE, available at http://www.bankrate.com/finance/financial-literacy/do-stocks-make-sense-for-the-50-plus-crowd-1.aspx
[12] GAO Report, at 17.
[13] Andrew Ross Sorkin and Megan Thee-Brenan, Many Feel the American Dream Is Out of Reach, Poll Shows, N.Y. Times, Dec. 10, 2014, available at http://dealbook.nytimes.com/2014/12/10/many-feel-the-american-dream-is-out-of-reach-poll-shows/?_r=0
[14] Id.
[15] Chris Cillizza, Work Hard, Get Rich? Maybe Not Anymore, THE WASHINGTON POST, Dec. 11, 2014.
[16] Americans of All Stripes Agree: The System Is Stacked Against Them, WALL STREET JOURNAL, Nov. 20, 2014.