SEC Commissioner Kara M. Stein called on the SEC and market participants to work “together to surf” the “wave of innovation” occurring in U.S. capital markets.
In her remarks at the Harvard Law School Fidelity Guest Lecture Series, Commissioner Stein made the following recommendations to regulators to help them keep up with innovation:
- Being Proactive: A Competitive Necessity in the New Landscape. Commissioner Stein emphasized that regulators will have to determine how to regulate technological advances such as “robo advisors,” bitcoin and “blockchain,” which is a “database network where messages create a digital record of a transaction that cannot be changed once approved in the ‘chain.'”
- Competing on Quality and Innovation in Asset Management. Commissioner Stein said that the main reason for the success of the asset management industry is investors’ “faith in the quality of the product,” which she argued could be jeopardized by exchange-traded funds (“ETFs”) because they “may act quite unusually in stressed market conditions and, frankly, break down in ways that we do not completely understand.” Commissioner Stein urged regulators to examine: (i) whether new rules are needed to address ETFs; (ii) the “roles that all of the individual players in this ecosystem play (such as authorized participants)”; and (iii) “how ETFs trade, as compared to mutual funds, and whether the way algorithmic traders utilize ETFs poses concerns to investors placing their retirement savings in these products.”
- Innovation Drives Competitiveness: How Do We Drive on Our New Market Highways? Commissioner Stein highlighted the “flipside to innovation” and stressed that improved technology, such as algorithmic trading, “needs to be harnessed for the good of the markets, without allowing it to run roughshod over these markets.”
Commissioner Stein closed with a series of reflections on the technological mission of the United States. “Just like the role we played in the development of the Internet,” she said, “the U.S. should strive to be at the center of how the new financial market is framed and regulated. We are at a similar moment in time for financial markets. If we do not lead, someone else will.”
Lofchie Comment: Here are two excerpts from Commissioner Stein’s remarks:
“Why has the asset management industry in this country remained so competitive? There are many reasons, of course. But I believe that chief among them, as I have noted throughout my talk tonight, is that investors have faith in the quality of the product. Although they may not know it, investors are protected by a law called the Investment Company Act of 1940, which ensures that there are basic rules of the road that make these products predictable.”
“As I think about where the markets are being driven by innovation, I keep thinking back to the origins of the Internet and the pivotal role the United States played. Other countries certainly played a role, but the U.S. spearheaded and led the development of the Internet. The U.S. was at the forefront. And because of this leadership role, the United States has benefited immensely.”
These two observations reveal a certain inconsistency. In one of them, success is attributed to government regulation, but in the other, success occurs in an area where there was far less government regulation. There is nothing wrong with using historical events to draw opposing lessons or explore interpretations. That said, it would have been interesting to hear the Commissioner explain why she believes that government regulation is the key to growth in light of her reference to the internet as a place where the U.S. has spearheaded global leadership. Perhaps the common elements in her otherwise disparate examples might lead her to conclude that global market leadership results largely from the efforts of market participants, and that the government plays only a secondary – even if extremely important – role.