Thank you. And, thank you Bob for that kind introduction.
It’s an honor to speak here this evening at the Glauber lecture — named for not only a transformative leader, but a dear friend and colleague. Bob and I worked together at NASD a number of years ago. And today our paths often cross as we wrestle with the issue of convergence of U.S. and international accounting standards.
When this lectureship was first established, it was described as a forum at which to discuss topics at the “dynamic interface of business and government.” And the Kennedy School is the perfect place for that.
So many leaders and policymakers have come through this institution and I am highly confident many of tomorrow’s leaders are here in this room right now.
As you can imagine, the SEC has had a rather full plate over the past year. When President Obama asked me to be his Chairman last December, the stock market was still tumbling, Bernard Madoff was fast becoming a household name, and investors were rapidly losing their confidence in our capital markets.
I had served at the SEC years earlier, but so much had changed. And, the challenges were great.
But, I believe in the SEC. I believe in the investor protection mission. I believe in government service. I believe that the reputation of the SEC can be restored to what it once was — a premier regulatory agency within the pantheon of regulators. And, I believe American investors deserve no less.
And, so I decided to take on the job. It was a tall order. But, I figured I would just apply the many lessons I learned over my career to help guide me through this new challenge — a challenge that entailed reinvigorating the agency, refocusing the SEC on its core investor-protection mission, and rebuilding investor confidence in our markets.
So, tonight, I thought I would share with you a few of the lessons that guide my leadership of the SEC.
The first lesson is to recognize errors and missteps, and, to learn from them.
No one in this room will go through life without making a mistake or frankly, many mistakes. Some of those mistakes will be little and others will be monumental. When they occur, you have a choice. Skulk into obscurity and never rear your head again. Or figure out what was done wrong and work to ensure it doesn’t happen again.
At the SEC, we have a staff of incredibly talented men and women. And, we tackle some of the most challenging issues confronting the financial markets. But, for the past year, many people judged the SEC not based on what it did, but what it didn’t do. Namely, detect the Madoff fraud.
In September, our Inspector General issued a report that outlined many of the shortcomings that allowed this fraud to go undetected over a number of years. But, even before his report was issued, we set out to understand where we could improve. And, for the past year, we’ve been re-examining and reforming the way we operate.
Shortly after arriving at the agency, I hired a new head of our Enforcement division, and began restructuring the unit, eliminating a layer of management, putting more seasoned investigators back on the front lines, bolstering our training programs, revamping the way we handle the mounds of tips and complaints we receive and setting out to expand our considerable expertise through new hires.
And, by the time the Inspector General’s report was issued, we had already had a meaningful head start on the reforms we all agree need to be undertaken.
But rather than sticking that report in a drawer, I knew we needed to learn all we could from it. So I sent it to every one of the 3,700 employees at our agency and encouraged them to read it. And, together with that report I sent along a sampling of the victims’ letters — not just for everyone to read about the victims’ anger and disappointment, but to remind ourselves about how important it is to do what we do every day — to appreciate the very suffering that our work can prevent.
The second lesson is to not assume you know it all.
Everyone here, no doubt, entered this institution with a great deal of intelligence — and you will leave with a great deal more knowledge. But, no one can ever corner the market on knowledge. There is just too much to know and too much that is unknowable.
That is why it is important not to be fearful of reaching out to others.
In the policy making world, we are often called upon to solve problems with little time and insufficient information. At those moments, we need to make the best decisions we can.
So, that often means finding people who are more familiar with the issue than we are, who have experienced the problem first hand, or who simply have a different perspective.
The fact is that not everyone who is a critic is wrong. Not everyone who has a different view is mistaken.
At the end of the day, if you’re in charge, you need to be able to make the decision. And, you should be able to act swiftly in implementing it. But, there is nothing wrong — and everything right — in first getting a diversity of views from those around you.
In many ways, the manner in which the SEC creates rules for the industry embraces this very lesson. As a Commission, we need to get a majority of the Commissioners to agree to a certain proposal — and then the public — the industry, investors, corporations, gatekeepers - are asked to comment on what’s been proposed.
This comment period is perhaps one of the most valuable phases in our rule-making process — because it invites everyone to identify the flaws and forces us to rethink what we’ve just proposed. I do not view it as a mere formality but as a vital component in the process that makes our rules all the more better.
Likewise, in the regulatory reform arena, I believe this diversity of views is similarly important. Right now, for instance, there is much focus on the need for establishing a better way to monitor, detect and respond to systemic risk. And, one line of thought is that we need a single entity to do all of this….oversee the entire financial system, identify the risky players, pluck them out of the normal regulatory framework at a moment’s notice, and impose new requirements upon them.
I do not believe any one entity can fulfill that role. Perhaps we need one entity to have the authority and ability to act swiftly. But, I believe that entity should not alone be the one to craft the rules by which any risky player must abide.
That is why I support coupling that single systemic risk regulator with a council of regulators — and a diverse one at that.
Rather than allowing one super-regulator to maintain all the control, the council would ensure that there is more than one voice and more than one perspective in monitoring systemic risk.
Different peoples’ perspectives, knowledge and experience can help. I guess what I’m trying to say is that as a Harvard graduate you shouldn’t feel reluctant to accept the advice of someone from Yale.
Which brings me to my next lesson — the right people make all the difference.
This is particularly true at an agency like the SEC — where our “product” is the policy we make or the cases we bring. And they are both 100% the result of the intellectual capability of our people.
If you’re going to reach out to those around you to make the best decision you can, then you must ensure that those around you have what it takes. Do they have the skill sets and experience that are needed, the dedication to do the job, and an understanding of the mission?
And, in government, as importantly — do you have enough folks to tackle the challenges you face?
At the SEC, one of the things I’ve been trying to do is bring on board more people with non-traditional skill sets and backgrounds. We have many attorneys. We have many accountants. And, they are absolutely needed for us to succeed.
But we also need more people at the cutting edge of finance. We need people who are deeply familiar with derivatives, hedge funds, trading and risk.
That’s in part because there are so many new financial products and strategies being developed and we must keep pace. So we need to have people capable of connecting the dots of multiple risks and regulatory concerns and devising appropriate responses.
This September, to address this issue, I created a new Division of Risk, Strategy, and Financial Innovation to serve as a knowledge-based center of expertise within the agency. Importantly, it’s a division that will also help link existing know-how from one part of the agency to the needs of another.
And slowly but surely we are staffing it up. Just today we announced three more hires with modern capital markets expertise. One is a well-known financial expert and noted author. One is an expert in the legal issues surrounding derivatives and structured products. And the third is an expert in hedge funds and their investors.
But to make this all work, we have to have the resources to hire the people we need. And, that’s been a challenge in itself.
Investors expect that the agency looking out for them can perform the task we are charged with performing. But, in fact, we are an agency of only 3,700 people — charged with overseeing more than 30,000 entities — with policy responsibilities ranging from market structure to accounting standards to corporate disclosure to small business capital formation. We’re an agency whose staff size and investments in new technology are less than where they were in 2005.
What’s more, we’re an agency that is subject to the annual appropriations process. So, over the past ten years, we have seen large ups and downs in our budget, making it difficult to do long term planning or develop adequate technology. In my view, it is truly critical that, if the SEC is to become the kind of regulatory agency that the American people have a right to expect, we have sufficient, stable long term funding.
That is why I think it is important that Congress address the issue of self-funding, allowing the SEC to retain the regulatory fees it collects. In fact, the amount of fees we collect is far more than the amount we currently are given to operate.
Virtually, every other financial regulator is self-funded, which gives them the flexibility to respond to market events through increased staffing and technology developments. Like them, the SEC should be self-funded.
But, if we cannot get what we need, or if something doesn’t quite go the way we expect….my next lesson is to take the long view. Perseverance pays off.
There may be many ups and downs in any given job. But, the mission is bigger than the events of any one day. The end zone is not the next media cycle.
If you’re constantly worried over what someone will say about you tomorrow, you probably aren’t doing the right thing today.
At the SEC, we are under a very intense spotlight. And, we recognize that. We get criticized for bringing cases. We get criticized for not bringing cases. When we settle a case, people ask why not for more? When we bring a case, people ask why not sooner?
Sometimes, we lose a case. Sometimes we don’t get the legislation that we hope for.
But, I think we need to just keep doing the job that we are tasked to do — realizing that in the long run, if we do not waiver in our commitment to protecting investors, we will get it mostly right.
Indeed, I am confident that in a few years, we will be able to look back at an agency that helped to restore investor confidence, that restructured key divisions, that changed a formerly insular culture, that passed rules giving shareholders a better chance to vote for the directors of the companies they own, that enhanced the amount of information contained in proxies, that shed light on the dark spots within our markets, and that closed loopholes that contributed to the financial crisis.
But knowing your goal is also crucial — because you can have all the perseverance in world — and all the determination and drive, but if you don’t know where you’re headed, it will be difficult to get there.
That’s why another lesson I have learned is to have a vision about where you want to take your organization and stick to your principles in getting there.
Principles are not ideologies. They are different. Maybe it’s a question of degree. Maybe to some it’s semantics. But as I see it, unlike ideologies, principles don’t seem to demand a particular answer to every problem that emerges.
We’ve seen how strict adherence to ideology played out over the last decade in the financial arena. “Free market ideology” together with rapidly changing technology, globalization and many other accidental causes led too many of us to forget hard-learned lessons from past crises and abandon basic common sense.
Principles, on the other hand, help frame a question, an issue or a problem. Having a principle might highlight tensions and tradeoffs of particular choices, but rarely do they force you to choose between a good solution and a worldview.
For me at the SEC, my main principle is putting investors first. And, I try to stay focused on that every day. And the goal is to build an SEC that is deeply expert, nimble, and aggressive — that gives investors confidence.
In fact, as Bob Glauber can attest, I have a sign posted on my door that says “How does it help investors?” It’s a simple question, but it guides all that I do at the SEC. And, all those who enter my office understand that is the prism through which we will consider all issues.
It doesn’t necessarily dictate the outcome of every issue that lands on my desk — because there are many solutions to any problem that could aid investors. But, the principle helps to shape our thinking and steers us in the right path.
At the SEC over the past nine months:
This principle has steered us to propose new rules that would improve corporate governance and enhance the type of information disclosed to investors.
It has steered us to propose new rules that would make money market funds more resilient.
It has steered us to propose new rules that would shed light in the dark corners and level the playing field for all investors in the market.
And it has steered us to propose new rules to eliminate the corrupting influence of political contributions in the management of public pension funds.
Indeed, I like to believe that one of our successes has been to refocus the SEC on this principle — which is also a basic mission of the SEC.
Another important lesson — that certainly applies in the governmental arena is to know how to communicate.
Given our system of separation of powers and checks and balances; any sustained, meaningful change requires buy-in from others. It’s hard to get buy-in without being able to explain your position clearly and concisely. If an idea can’t be described, it has a very hard time being adopted.
Think about your favorite professor. He or she is likely the one who captured your imagination, clearly laid out the lecture, and knew how to speak directly to you.
It probably wasn’t the one who spoke in lofty phrases and in an overly pedantic manner that you could barely follow and hardly grasp. And, in the real world the same is true.
I could have the brightest minds in the agency and some of the best ideas to offer, but if I cannot explain those ideas to lawmakers, investors or taxpayers, it will only be an idea — never a policy.
So, know what you want to say and say it clearly.
Which brings me to my next point — beware of the unintended consequence of genius.
There are many people out there who are sheer geniuses. They have a wonderful ability to stretch people’s thinking — shake up an organization — and shape new and better ideas. That being said — because ideas matter — geniuses are just a part of the equation.
The unintended consequence of genius develops not from the genius, directly — but from others who can sometimes stop questioning and just start trusting.
It’s rational to say: “heck, he’s a genius, he knows what he’s talking about so I don’t want to look foolish by asking a silly question.” This is bad. It’s bad for the team that now loses other perspectives and inputs; it’s bad for the genius — who stops questioning himself; and it’s really bad for policy.
Part of me thinks this is how plain-vanilla mortgages turned into mortgage-backed-securities that turned into collateralized debt obligations that turned into CDOs-squared.
This happened with a whole host of financial products and activities that people didn’t fully understand, but bought or transacted anyway. Think about it. The financial system was brought down to its knees by products; activities and actions that only a genius could love. Of course, it may just be that they never really were geniuses.
I’m not saying you should not be one. I hope you all are. But, don’t let others around you cower in your presence because you sound so smart about a topic. In the end, you may be wrong.
Finally, and perhaps most important — attitudes matter.
There are many different paths to success in policy: there’s luck; hard work; pure talent; good judgment and experience. And like you, most have some mixture of these.
But the one secret weapon in this field is decency and humanity. I really mean this. I know this is a cynical time, but I’ve seen a lot of talented people left behind because of attitude. Not all, but a lot.
I’ve also seen a lot of a good honest people who got a seat at the small table, taking full advantage of that opportunity and having a huge impact.
These are just some of the lessons that guide me. Some of the lessons that I have latched on to in my life.
But, like you, I will continue learn new ones as time goes by.
That’s because we don’t stop learning important lessons when we graduate from an institution of higher education. We always continue to learn.
At the SEC, we also will continue to learn. To continue to do what we are tasked to do. To continue to protect investors. And, to continue to work to restore investor confidence.
Thank you.