Reflections of an Economist Commissioner

Commissioner Michael S. Piwowar

San Diego, CA

April 13, 2018

Symposium for Federal Judges on the Economics of Corporate & Securities Law

Law & Economics Center, Antonin Scalia Law School, George Mason University

Good afternoon. Thank you very much for your kind introduction, J.W. [Verret], and for inviting me to speak today. Like its namesake, the Law & Economics Center at the Antonin Scalia Law School has contributed greatly to the economic analysis of the law. For many years, it was said that "Law is law, and economics is economics, and never the twain shall meet…except at the University of Chicago." More recently, that phrase needs to be updated to end with "and George Mason University." Thanks to University of Chicago scholars, like economist Ronald Coase and Judge Richard Posner, the law and economics movement has had a rich history. And, George Mason scholars like former Dean Henry Manne and current dean Henry Butler have brought that tradition into the present. And with current Professor J.W Verret and his Antonin Scalia Law School colleagues, the law and economics movement has a bright future.

In that vein, I am honored that, of all the Commissioners you could have chosen to invite, you picked the only economist to address a room full of judges.[1] As an economist in an agency more commonly associated with lawyers, I certainly have strong views on the topic of this symposium, namely, how to bring the dismal science to bear on the art of law. I am delighted to have the opportunity to address the distinguished participants in today's symposium.

Nearly five years have passed since I was appointed to one of the Republican seats on the Securities and Exchange Commission (the "Commission" or the "SEC") by President [Barack] Obama. Last year, President [Donald] Trump honored me by designating me as Acting Chairman of the Commission for the first three and a half months of his term. Consequently, I am one of the vanishingly few people in Washington, D.C. who can boast of having appointments signed by both Presidents Obama and Trump hanging on his office wall. As I entered office, I suppose you could say that I came seeking "Hope and Change" as far as the economic analysis of securities law is concerned. I will leave office at the end of my term satisfied that we have "Made Economic Analysis Great Again."

As I mentioned, I am an economist, not a lawyer. In fact, I am only the third Ph.D. economist—following in the footsteps of Charles Cox and Cynthia Glassman—ever to serve as an SEC Commissioner in the almost 84-year history of the agency. Although, as I will explain, economists can bring a distinctive perspective to bear, I should note some important similarities and complementarities between law and economics. Good law and good economics are twin pillars of a healthy society. Both tend to promote efficient outcomes. Both modes of analysis are at their best when they hew closely to evidence and faithfully employ deductive logic. And straying from these principles leads to bad economics and bad law, with negative consequences for society. Economists and lawyers are fellow travelers on the road to a freer, more prosperous world.

A Commissioner's Role

As an economist, I think of the myriad federal securities law violations as falling into three basic categories—lying, cheating, and stealing. Even after all these years and the 2,735 cases on which I have so far been called to vote (I checked), it continues to astonish me how many different ways people find to lie, cheat, and steal from investors.

Consequently, while I have had my differences with respect to certain types of cases over the years, I have always believed that our enforcement program is a core part of the Commission's functions. Enforcement supports all three aspects of our statutory mission: (i) protecting investors, (ii) maintaining fair, orderly, and efficient markets, and (iii) facilitating capital formation. False and misleading information not only can cost investors money ex post, but it also impedes capital formation by discouraging investment ex ante. It contributes to increased volatility in the markets and leads to the inefficient distribution of capital. Our Canons of Ethics speak to the importance of our enforcement activities by noting that "possible abuses and injustice, if left unchecked, might jeopardize the strength of our economic institutions"[2] and that "members of this Commission should vigorously enforce compliance with the law by all persons affected thereby."[3]

At the same time, I am conscious of the peculiar role of independent agencies like the Commission within our constitutional framework. The Commission is effectively engaged at all times in legislative, executive, and judicial functions. There have been times when I have voted as a quasi-legislator to approve a rulemaking, then have voted as a quasi-prosecutor to approve a legal action or settlement to enforce the rule, then have been called upon to sit as a quasi-judge to hear an oral argument on appeal from one of our administrative law judges and issue an opinion interpreting the rule. In essence, one could argue that there are times when a conversation between the right side of my brain and the left could constitute an ex parte communication!

I am therefore mindful that our enforcement powers are sweeping and must be deployed in an appropriately cabined manner. Our Canons of Ethics reflect the weight of this responsibility, by requiring Commissioners to "concern themselves only with the facts known to them and the reasonable inferences from those facts" and cautioning that a Commissioner "should never suggest, vote for, or participate in an investigation aimed at a particular individual for reasons of animus, prejudice, or vindictiveness."[4] I view this mandate to mean that we cannot allow public outcry, agency morale, politics, or jurisdictional turf battles to be reasons for pursuing, or not pursuing, an enforcement action. History will be the judge, but I have striven to uphold these canons throughout my term.

Economic Analysis in Enforcement

Former Commissioner Troy Paredes once said that, in his view, the Commission must be guided in its enforcement decisions by "the law and the facts and the proper regard for due process."[5] I agree entirely, although I would amend Commissioner Paredes's list to add one more item: economic analysis.

As this audience is no doubt aware, the Commission has not always had the best track record when it comes to economic analysis.[6] I am pleased to report that over the course of my term, I have been able to observe a great advance in the use of economics at the Commission, on both the rulemaking and the enforcement fronts. We economists are usually careful to distinguish causation from correlation…but that won't stop me from taking a little credit here! According to our Division of Economic and Risk Analysis (or "DERA"), our economists are far more commonly engaged in enforcement matters than was the case in 2013, the year in which I took office. DERA produces about twice as much written work product in enforcement matters now as it did in 2013. Our economists are testifying far more frequently and on a much broader set of issues than was previously the case. And staffing—the coin of the realm in Washington—has substantially increased from 13 DERA staff dedicated to enforcement matters in 2013 to 30 today. I hope that those who share my interest in economic approaches to law and regulation—and I know that there are many judges who do, particularly in the U.S. District Court for the District of Columbia and the U.S. Court of Appeals for the District of Columbia Circuit—will also share my pleasure in the substantial improvements our agency has made in this regard in recent years.

To give you a sense for the type of enforcement case where economic analysis can be effective, take the assessment of corporate penalties, for example. Imagine a case in which a public company commits a standard securities fraud. Perhaps the CFO has repeatedly misstated (i.e., lied about) the company's earnings through an elaborate accounting scheme. Or perhaps senior management has misappropriated (i.e., stolen) the company's assets and has failed to disclose this theft to the shareholders. As our enforcement staff has heard me say exactly 2,735 times, I always start every case at "No" and must be persuaded to reach a "Yes." I do not make it a practice to withhold my approval unreasonably, but I do believe that our enforcement powers, at a minimum, must be checked by a healthy skepticism as to whether we have met our evidentiary burden.

Assuming that I agree that the facts in a particular case are well established, that the law is clear, and that the demands of due process have been met, the question arises: What should the Commission do about the misconduct? Can the harmed investors be made whole through the payment of disgorgement amounts or use of the Commission's Fair Fund authority under the Sarbanes-Oxley Act? Are any individuals particularly to blame, and if so, should they be suspended or barred from the securities industry? Finally, should we assess a corporate penalty?

Each of these questions must be weighed judiciously. To my mind, the last question—whether to assess a corporate penalty—is especially fraught. As a financial economist, I cannot help but conceive of a corporation, at its most basic, as a collection of assets owned by a dispersed collection of shareholders. All the assets of the corporation belong to the shareholders. Consequently, every dime of every corporate penalty we assess is assessed not against some disembodied pot of gold but against the very shareholders whose rights we seek to vindicate in bringing our enforcement actions. Where our enforcement staff has historically requested our vote on a corporate penalty that, in my mind, does further damage to shareholders who have already suffered from the corporate fraud, I have typically started and ended with a "Hell No!"

This is not to suggest that I have uniformly opposed to the assessment of corporate penalties. I generally take the view, for example, that shareholders in entities directly regulated by the Commission—for example, broker-dealers—have adequate notice that they have invested in companies in which the Commission has a particularly strong enforcement interest and as to which the Commission requires the broadest possible set of remedies. More to the point of today's symposium, I also am willing to support a corporate penalty where it can be demonstrated to me that the corporation has retained an illicit corporate benefit as a result of the charged behavior. While we should strive not to harm shareholders in seeking to protect them, neither should innocent shareholders benefit from a windfall owing to a corporate fraud. For example, to the extent that our DERA staff economists can show that the defrauding corporation issued shares while the share price was unnaturally high as a result of the fraud, I have generally been willing to support assessment of a corporate penalty up to and including the amount of such corporate benefit.

Economic analysis can also help SEC investigators to identify securities law violations. Take our current "cherry-picking" initiative, for example. In 2015, Commission economists, working with enforcement investigators, began analyzing large volumes of investment advisers' trade allocation data to identify instances where an adviser is disproportionately allocating profitable trades to favored accounts. So far, the Commission has brought four actions under this initiative.[7] The most recent order, announcing settled charges just two weeks ago, highlighted the fact that our economists, using sophisticated econometric and statistical tools, were able to determine that for a two-and-a-half-year period "the probability that the disproportionate allocation of favorable trades to [the investment adviser's] personal accounts was due to chance is less than one in a trillion."[8]

Economic Analysis in Rulemaking

As judges, you will from time to time be called upon to adjudicate private securities litigation or Commission enforcement actions, and I trust that the concepts covered at this week's symposium will come in handy. Depending upon your precise role and court, you may also be called upon to review rulemakings of the Commission for compliance with the Administrative Procedure Act or the Commission's own organic statutes. The Commission and other similarly situated agencies have taken their lumps from the courts—in recent years, I have on occasion been happy to see a watchful judiciary block the Commission's overreach. This is too broad of an area to cover in a lunchtime address—and only a fool would rush in to explain to a roomful of judges how to conduct their business. I would, however, like to address in general terms my perception of the proper manner in which to consider the Commission's economic analysis in a rulemaking context.

As a general matter, within the executive branch, the Office of Information and Regulatory Affairs ("OIRA") reviews regulations in accordance with President Clinton's Executive Order No. 12866 and the Office of Management and Budget's Circular A-4. These documents, among others, outline the appropriate the use of economic analysis to inform regulatory decision-making of executive branch agencies. But the Commission and other independent agencies are not subject to OIRA review. Thus, the Commission's adoption of economic analysis has proceeded along a different path—prompted by litigation and the courts.

In 2011, the D.C. Circuit issued its ruling in the leading case of Business Roundtable v. SEC,[9] the last (and most exacting) of a trio of court decisions striking down Commission regulations due to inadequate economic analysis.

In 2012, largely in response to Business Roundtable, the predecessor office of DERA released guidance on the use of economic analysis in Commission rulemakings (the "Economic Guidance"). The Economic Guidance noted that "no statute expressly requires the Commission to conduct a formal cost-benefit analysis as part of its rulemaking activities[, but] as SEC chairmen have informed Congress since at least the early 1980s—and as rulemaking releases since that time reflect—the Commission considers potential costs and benefits as a matter of good regulatory practice whenever it adopts rules."[10]

Moreover, the Canons of Ethics arguably require economic analysis of our rulemakings. The Canons note that the rulemaking power accorded to the Commission by Congress imposes the obligation "to adopt rules necessary to effectuate the stated policies of the statute in the interest of all of the people."[11] The Canons further state that "rules should never tend to stifle or discourage legitimate business enterprises or activities, nor should they be interpreted so as unduly and unnecessarily to burden those regulated with onerous obligations."[12]

Subsequent amendments by Congress to the Securities Act of 1933, the Securities Exchange Act of 1934 (the "Exchange Act"), and the Investment Company Act of 1940 include requirements that the Commission consider competition, efficiency, and capital formation when engaged in rulemaking and consider or determine whether an action is necessary or appropriate in the public interest.[13] The Exchange Act also obligates us to consider the impact of any rule thereunder on competition and to state the reasons for the Commission's determination "that any burden on competition imposed by such rule or regulation is necessary or appropriate in furtherance of the purposes of [the Exchange Act]."[14]

Consistent with Executive Order 12866 and Circular A-4, the 2012 Economic Guidance provides that each rulemaking must include a sound economic analysis featuring the following elements:

  1. a statement of the need for the proposed action;

  2. the definition of a baseline against which to measure the likely economic consequences of the proposed regulation;

  3. the identification of alternative regulatory approaches; and

  4. an evaluation of the costs and benefits, both quantitative and qualitative, of the proposed action and the main alternatives identified by the analysis.[15]

High-quality economic analysis helps to ensure that decisions to propose and adopt rules are informed by the best available information about a rule's likely economic consequences. It also allows the Commission to compare the proposed action with reasonable alternatives, including the alternative of taking no action at all. Of course, economists are not perfect in their foresight and predictions. Whenever the Commission adopts a rule—or Congress enacts a statute—there will always be unforeseen and unintended consequences, but the imperfect state of economics as a science should not condemn us to fumble around in the dark.

I have seen considerable improvements to rulemakings over the course of my term thanks to the insights contributed by my fellow economists. But I'm not the only one. In 2016, Jerry Ellig, an economist at the Mercatus Center at George Mason, assessed the quality of the Commission's economic analysis across the four elements I recited above, and concluded that "SEC economic analysis improved substantially following the 2012 guidance." [16] The improvement was noted in all four areas: statement of need, definition of baseline, identification of alternatives, and evaluation of costs and benefits. While the study makes clear that there is room for improvement, this result is encouraging and a solid foundation for improved future Commission rulemaking.[17]

Experimental Economics: Pilot Programs and Investor Testing

One provision of the Dodd-Frank Act that I strongly supported is Section 912.[18] Specifically, Section 912 granted the Commission greater freedom to gather information, communicate with investors, engage in temporary investor testing programs, and consult with outside experts without triggering the burdensome requirements of the Paperwork Reduction Act.

To focus for a moment on a type of rulemaking where investor testing could be of particular value, I expect that the staff will consider, in rulemakings with a disclosure component, whether it is appropriate to engage in investor testing of the proposed disclosure. It is a far better approach, when considering disclosure proposals, to have empirical data, rather than rely exclusively upon the beliefs and opinions expressed in public comment letters. Consumer products and services companies routinely engage in testing to see how their output is perceived. The Commission should be no different. We must determine whether our rules that require the delivery of important investor information in fact advance the stated goals. I hope that the Commission commits itself to a robust investor testing program that examines the efficacy of not only proposed rules, but our existing rules as well.


In summation, I would like to see the Commission's increased commitment to incorporating high-quality economic analysis in our enforcement and regulatory activities continue well beyond my tenure. Where can we go from here? I have a few ideas.

To maintain our momentum, it is important that our attorneys in the rule-writing divisions and the economists in DERA work even more hand in glove—there is room for improvement in this area. Economists should be involved not merely in litigation-proofing our rulemakings; they should be integrated into the policymaking process from start to finish. I would also be eager to see economists with an enforcement focus added to each of our 11 regional offices. Finally, I believe that the Commission should adopt formal guidance on the use of economic analysis in Commission enforcement actions, as we have already done for rulemakings.[19]

Individually, each of these incremental steps represent marginal improvements to existing practices. Collectively, they would bring further insights from the law and economics movement into, and therefore improve regulation and enforcement of, the securities laws.

Thank you very much for your kind attention. I would be happy to accept a few questions.

[1] The views I express today are my own and do not necessarily reflect those of the Commission or my fellow Commissioners.

[2] 17 CFR § 200.53.

[3] 17 CFR § 200.55

[4] 17 CFR § 200.66.

[5] Knowledge at Wharton, Former SEC Commissioner Troy Paredes: Sometimes People Just Make Mistakes (Mar. 10, 2014),

[6] See, e.g., Business Roundtable v. SEC, 647 F.3d 1144 (2011).

[7]See SEC, SEC Announces Cherry-Picking Charges Against Investment Manager (Jun. 29, 2015),; SEC, SEC: Investment Advisers Cheated Their Clients By Cherry-Picking Trades (Sept. 12, 2017),; SEC, SEC Charges Orange County Investment Adviser and Senior Officers in Fraudulent ‘Cherry-Picking' Scheme (Feb. 20, 2018),; SEC, Investment Adviser Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme (Mar. 8, 2018),

[8] SEC, Investment Adviser Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme (Mar. 8, 2018),

[9] 647 F.3d. 1144 (D.C. Cir. 2011).

[10] SEC Division of Risk, Strategy, and Financial Innovation & Office of the General Counsel, Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012),

[11] 17 CFR § 200.67.

[12] Id.

[13] See, e.g.,15 U.S.C. § 77b(b); 15 U.S.C. § 78c(f); 15 U.S.C. § 80a-3(c)(1)(B).

[14] 15 U.S.C. § 78w(a)(2).

[15] DERA Guidance, supra n. 11, at 4.

[16] Jerry Ellig, Improvements in SEC Economic Analysis since Business Roundtable, Mercatus Center (December 2016) at 6,

[17] See id. at 7.

[18] 15 U.S.C. § 77s(e).

[19] See, e.g., J.W. Verret, Economic Analysis in Securities Enforcement: The Next Frontier at the SEC, 82 Cinncinati L. Rev. 491 (2013).