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Sept. 11, 2025 18:46-19:19 - CSPAN
32:56
SEC Commissioner Discusses Financial Regulation
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Speaker Time Text
Centering Financial Regulation 00:02:50
unidentified
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C-SPAN, Democracy Unfiltered.
U.S. Securities and Exchange Commission Commissioner Hester Pierce took part in a discussion on financial regulation.
She addressed the effectiveness of the current U.S. regulatory system and how it could benefit from innovation.
This is part of a Cato Institute conference here in Washington.
And welcome back to Right Sizing Financial Regulation.
My name is Jennifer Schulp and I'm the Director of Financial Regulation Studies at Cato Center for Monetary and Financial Alternatives.
And I'm thrilled to be here this morning with SEC Commissioner Hester Peirce.
Commissioner Peirce has served as an SEC commissioner since 2018 and prior to that she conducted research on the regulation of financial markets at the Mercatus Center at George Mason University.
I'm going to stop there and not give the rest of your background because I want to put you in the mindset today as a financial researcher in addition to being an SEC commissioner.
So we don't have too much time.
I'm going to jump right in.
We will be reserving a few minutes at the end for audience questions.
You can submit questions online via the Cato website or on social media using the hashtag CatoEcon.
And we will also be taking questions in the audience.
So get your questions ready.
But let's go ahead and jump into the conversation.
And putting on that broader financial researcher hat, I'd like to ask you the question that is on the minds of this conference, which is what really should the goals of financial regulation be?
Well, before I start, I better give him my disclaimer, which is that my views are my own views as a commissioner and not necessarily those of the SEC or my fellow commissioners.
Regulating Innovation Freedom 00:15:40
unidentified
I mean, as an SEC commissioner, I have a defined goal set by Congress, right?
So protecting investors, facilitating capital formation, and fostering fair, orderly, and efficient markets.
But I think when I think about regulation in general and financial regulation specifically, I think about wanting to preserve the maximum realm of freedom for people to engage in transactions that they want to engage in, and then really only stepping into the middle of that when there's a reason that you have for stepping in the middle of that.
Whether that's a market failure or whether, which a lot of people cite market failures when there aren't actually market failures, but if it's a market failure or if it is something else that you think you're worried about the integrity of the marketplace, right?
So there might be a reason to step in the middle of that.
And then we have a disclosure regime, which I think could be done privately, but we've chosen as a society to do that through government regulation.
And so the idea is to give people the information they need to make decisions for themselves and their families.
And so those are really the functions that I see of regulation.
It shouldn't be overriding private decision-making unless we have a really good reason for doing that.
So, say here at the Cato Institute, I spend a lot of time pointing out places where we are overriding government or we are overriding individual decision making.
How well do you think our current financial regulatory system is accomplishing the goals that you've set out?
Yeah, I mean, we have a very complicated financial regulatory system.
And I think another piece that I should say is we want to keep barriers to entry low because one of the things that's the best disciplining force on the marketplace is competition.
And so, the higher you raise the regulatory barriers, the harder it is for people to come in or for existing incumbents to try new things.
And I think that's an area where we could really do more work, which is to try to make it easier for people to come in and try new things.
And that does mean maybe taking a look at some of the accretion of regulation over time.
It becomes very easy to just add more and more regulations.
It's hard work to adopt a regulation, but it's also hard work to get rid of a regulation, and so they tend to just pile on top of each other.
And so, I think we could do a better job thinking about that.
We could also do a better job in trying to adopt more principles-based regulations, which stand the test of time better than very prescriptive regulations.
But again, that's easier said in theory than done in practice.
So, you know, I think we have a, and people say this all the time, but I do think it's true.
The capital markets in the U.S. are the envy of the world, and I think part of the reason is that we've tried to get that balance right on regulation.
You want people to be able to come into the marketplace and know that when a company is putting out financial statements, you can rely on those.
That's important, but you also want to make sure that people have the freedom to do things.
I think we've done a pretty good job at that, but when I look at the rule book and I see how big it is, it depresses me.
It's a pretty depressingly large rule book.
We talked about the individual rules here and the accretion of rules over time.
Is there anything in kind of the structure of the system or the character of the system?
And when I say character, you gave a really powerful speech last year about kind of the openness and responsiveness of the SEC to its regulated parties.
So you said sometimes they come and they just hear crickets instead of talking to the regulator and having that open dialogue.
Is there anything in the structure or the character of the system that we should be focusing on in order to make it work better for the market participants?
Yeah, and I think when I look at regulation, it's important to remember just this basic principle that we as regulators work for the people.
And why is that important?
I mean, of course, we work for the people, right?
But I think when you get into a position where you have regulatory power, it's very easy to forget the fact that you work for the people.
And that doesn't mean that you say anything goes, right?
We have a set of rules.
They should be applied uniformly.
People should comply with those.
But it is important to remember that we're only working if we're working to make the system serve people better.
And that does mean that we have to have an open door to come in and hear from people.
I know that as a regulator, you often, it's often hard to learn things about what's actually going on.
And so one of the great privileges of this job is that people are willing to come and speak with me and tell me what the challenges they're facing are, what the opportunities there are, what's really going on in the markets.
And I also enjoy the fact that people on the staff are willing to talk to me.
So I get to hear from a lot of people, but it can be very easy to shut the doors to the agency and say we don't need to hear from you.
And in fact, during recent years, there was people complained to me about the reputation of the agency that they didn't feel they could come in and say, hey, here's something we're struggling with.
We're trying to comply with the rules, or we're trying to offer this new product or service, and we don't know how to do this.
Can we work with you?
And that was where people were getting crickets.
And so really opening up the doors, and I think the new chairman is sending the right signals on this front.
We want to work with you.
The staff that we have at the agency are very smart, educated people.
Part of the challenge, exciting challenge of the job is that they get to think about how to make the rules work with the scenarios that are arising.
So we really want to have those conversations.
We want people to come in.
And I think that's the piece of the character that we really need to keep preserving: this is supposed to be a joint project, right, with the people and the regulators to have the markets regulated in the way that works for this country.
And one of the things that we need to make sure that we can preserve is the ability of, say, entrepreneurs, market participants to continue to innovate and to continue to move further down the line, wherever that may be.
You mentioned the SEC's three-part mission at the beginning, say we often hear investor protection, capital formation, and fair, orderly, and efficient markets.
There have been some proposals, including a few on Capitol Hill right now, to add to that mission and to add innovation to the mission.
Is that something that is needed in order to allow the agency to support innovative changes in the marketplace?
I think it could help.
And you might think, well, why is adding one word or a phrase fostering innovation important?
But it is very natural for regulators to say no to people who come in and want to do things in new ways.
Because if you say yes and it doesn't work out, people are going to come running and saying, you regulator, why did you let this happen?
And if you say no, it's really hard for people to measure the cost of the saying no to innovation.
And one of the things that really does make life better for investors and for companies that are trying to raise capital is when people do come up with new ways to do things, new ideas, new ways to serve people.
And so an integral part of investor protection is actually fostering innovation.
But because we have tended, and again, we're not unusual, but we at the SEC I think have tended to downplay the importance of innovation.
I think sticking it in the mission would be a good reminder that yes, that is something that we should be thinking about and we should be working toward that end.
That was one of the main reasons that I wanted to come back to the SEC as a commissioner because I thought that that was something that we needed to improve at the agency is thinking about innovation.
Thinking more about innovation, I would say you've, I'm impressed, I've gotten 10 minutes in without mentioning crypto.
And this doesn't have to mention crypto, but innovation has been kind of at the core of some of the arguments as to why crypto should be given a clearer regulatory framework.
You've been very busy with that on the heading the crypto task force at the SEC.
And one of the proposals that you've made relates to regulatory sandboxes as a way to kind of foster more innovation and to deal with some of the issues that you just talked about where it's hard to measure the cost of failing to allow innovation in those processes.
So can you talk a little bit about what regulatory sandboxes are, how you envision that, and how you see it helping to create a better regulatory environment in financial services?
Yeah, and for those of you who hear sandboxing, you think this is sort of not a very attractive model because we should live in a world.
I've said I prefer beaches to sandboxes.
Sandboxes are places where children play and the adults sit on the outside watching them play and maybe directing how they play, whereas a beach is a place where people are free to do what they want.
There's a lifeguard sitting there trying to make sure that no one drowns, but really the lifeguard isn't hopping off the lifeguard stand to micromanage the building of a sandcastle.
So I have in the past really resisted the use of things like a sandbox.
My former colleague wrote a book called Permissionless Innovation, Adam Thier.
And I think there is, we really need to preserve the spirit of permissionless innovation in the United States.
I work in a very regulated industry, and that means that in reality, a lot of innovation does have to get permission before it can move forward.
And so the idea with a sandbox is that you have the ability for people to come in and say, hey, here's what we're trying to do.
We want to build something that's a commercially viable experiment because if it works, we want to keep going.
And so you need to have on the outs, you know, and the incoming, you need to have pretty big flexibility to design the experiment the way you want.
And then there needs to be a way out so that you can get into a long-term regulated world.
And you don't have to stop your experiment when the sandbox period is over.
So I think design of sandboxes really matters.
And that's something that I've been thinking a bit about.
The chairman of the SEC has been talking about an innovation exemption.
And that's something that we're thinking about.
So we have tools that Congress has given us.
We can give people exemptions from rules.
Sometimes we condition those on certain things.
So if we want to make sure, of course, that there's going to be investor protection that we're seeing if problems are developing as this product or service is being offered.
And so there are ways to condition these experiments.
And then you can also just give someone a no action letter, which is typically from the staff at the SEC.
And it's saying if you do things the way you laid out in your letter, which again, it's conditioned on things, we will not recommend an enforcement action.
And that's a way to let people try something different.
I think one important piece, too, of sandboxing is you can do things iteratively.
So someone can try one thing and then someone else can come in and say, yeah, I know they tried it with these 10 conditions.
We think it would work with these nine conditions instead.
And so it allows you to see how things work and it gives you a little bit of comfort that you're building on precedent.
So that's some of how I'm thinking about sandboxing.
I'm going to shift gears a little bit and talk, say a little bit about regulatory design, but in the practical context.
We often hear about kind of the regulatory competition between the SEC and the CFTC.
And that if we were designing a system today, this division probably wouldn't exist as a first choice option.
But what we have now is a system where we have securities regulation at the SEC and derivatives and futures regulation at the CFTC.
The lines have blurred a lot over time as to what those products look like.
And I think there's been a marked change over the course of the past nine months about the level of coordination and joint activity between the SEC and the CFTC.
I would say particularly in the crypto context, but I don't think not just in the crypto context as we're looking forward.
Can you talk a little bit about the thinking there and about how you see the need for coordination between these agencies and how that looks going forward?
As an initial matter, I don't think that a little regulatory competition is a bad thing.
It can be a good way for us to see if we're not doing things maybe as effectively as another regulator.
What are they doing that we're not that we could maybe look to and model ourselves on?
But I do think that the American people, again, expect us as regulators to work together.
We're all serving the American people, and so we shouldn't be in a game of, let me see if I can grab your jurisdiction and when I turn around, you steal my jurisdiction.
That shouldn't be how it works.
And so coordination is important.
We are now really committed to doing that.
And I think it's good to have crypto pushing us toward that because Congress clearly thinks that both of us have a role to play based on the drafts that we've seen of legislation so far.
Both of us have a role to play and so we need to work together.
The CFTC has had futures products on crypto for a long time now and so that has been instructive and helpful for us and we need to work with them around those kinds of issues.
I will say though that we have had periods, I mean we've had a long time to work out our relationship and there have been times where we've had a pretty good relationship.
There are other times when it's not been so good.
But in my memory, when I came to the SEC as a commissioner, we were still trying to finish our security-based swap rulemaking, which is a mandate that came out of Dodd-Frank.
The CFTC had largely finished their swap rulemaking at the time.
The products are very closely linked, and so you want to have consistency in regulation.
A lot of the same players are involved in those markets.
Cross-Border Coordination Efforts 00:07:20
unidentified
And so we worked closely with the CFTC and with Brian Quintens, who's the nominee to be chairman of the CFTC.
He was then a commissioner.
He and I worked closely together to try to have harmony.
It's not to say that regime is perfect.
It still needs work on both the security-based swap side and the swap side.
But we were able to work together productively.
We even had a joint meeting between the two agencies.
And so I think that going forward, what I'm hoping is that we work closely together, especially as the market structure regulation for crypto, legislation for crypto gets finished, we'll need to really work hand in glove to make sure that the rulemaking gets put in place in a way that makes sense.
Is this type of regulatory coordination a model that other financial regulatory agencies should be following?
In the first panel, we talked a little bit about the myriad of banking regulators, the state-federal problem that, if you're in the financial services industry, you might have upwards of 160 regulators that you're trying to placate at any time.
Should coordination be...
I'm not sure I like the term placate, but yes, I see your point.
Should coordination be something that should be a higher priority across the financial regulatory system?
I think it should.
I think one of the frustrations that I encounter with people in the marketplace and even investors is they just don't know who to go to.
It's really even hard to know that.
And I think if we did a better job coordinating, that could be helpful.
The reality is that it's a very complicated landscape.
You've got, as you said, the state and federal, but you also have international, and it can be very overwhelming.
And that's one of the things that makes me sad because I think a lot of people just say, I'm not going to do anything in the financial regulatory space at all because I can't even figure out who to go talk to.
And so I do think that we ought to do a better job coordinating.
I'm going to put in a plug.
We're having a roundtable coming up, SEC CFTC roundtable, to discuss some of the issues that we have to work through.
And that will be, I think, September 29th is the date, but you can find it on the SEC website, and that's something that will be open to the public.
Say something to definitely tune into.
You mentioned international regulators in that kind of mix of regulators that have to be considered when engaging in financial services.
We're going to have a panel later today that's going to talk about federalism and financial regulation.
But in many ways, kind of this international regulatory question raises a lot of the same issues that we think about when we're thinking about federalism and competing regulatory regimes that might impact the provision of financial services.
You've been speaking a lot about international regulatory considerations lately, talking about cross-border regulatory sandboxes.
The chairman has been speaking a lot about international regulatory issues as well, cross-border tax force on financial fraud, his speech yesterday in front of the OECD, financial regulators.
How should we be thinking about the design of financial regulatory systems in the international context?
Is it competing regulatory regimes?
Is the U.S. out there trying to win it all?
How should we place ourselves in this conversation?
Yeah, the international discussion is always interesting because we are sovereign, so we shouldn't have international regulators or bodies of international regulators telling us what rules to write.
I think that is problematic, and that's something that I've pushed back against.
But at the same time, our markets, the markets that I regulate, are very international, and so we do need to work with our fellow regulators.
We have these bodies that do bring us together to do that.
We also have a lot of bilateral connections.
And I think that's good and important.
And, as you said, I've suggested having some sort of cross-border sandbox so that someone who wants to offer a product or service in two countries could work with both regulators at the same time to try to figure out, assuming there are only two regulators, there might be more, but so that you could launch in both countries at the same time.
I think there's some value there.
But again, I also think that there are areas where we're really very different than our European colleagues, for example.
So the U.S. is very heavily reliant on the capital markets for funding things, and I think that's beautiful because it means that you're not so reliant on banks.
Banks tend to, I would say, they're not as open to people who are coming.
Say you have a great idea and you want to fund that great idea.
You can go to the capital markets.
You don't have to have rich family and friends.
You don't have to know the banker down the street to get that funding.
Other countries are much more reliant on bank funding.
And so it changes the dynamic of the place.
And then another thing that's changed, I think, the dynamic across the jurisdictions is in Europe, there's a lot of focus now, and not only Europe, it's Asia as well, but there's a lot of focus on sustainability, on ESG type issues.
And so, okay, I mean, that's fine.
People can invest whatever way they want.
But the problem is that they're trying to bake requirements around sustainability into the financial regulations.
It's as a way of driving capital toward the uses that regulators have decided in their wisdom are going to save us from climate change or save us from whatever other ENS type issues they've identified.
And my pushback on that is always we have real problems in the world, and the Europeans have identified some of those problems.
But the way to solve them is not to stick a bunch of financial regulators in a room and say, where can we direct the capital to go?
It's to let the markets identify the problems and figure out organically how to solve those problems.
And so the best thing that you can do as a financial regulator is actually not try to control where capital goes, but try to make sure that your regulations are written in a way that it will go to its highest and best use.
Now that means sometimes those uses will be in the U.S. and I want the U.S. to be a place where people want to come and build things.
Regulatory Capture and Insights 00:07:44
unidentified
I want it to be a place it always has been where people from all over the world are coming to study and learn and build things together because this should be the freest place to do those kinds of things.
But we can't let regulators in other jurisdictions that want to write rules that will direct capital toward favored purposes.
We can't let them be the ones to write our financial regulations.
And I mean the truth is that when you start putting financial regulators in the driver's seat for where capital flows, it ends up just being driven by who has the ear of the financial regulators, right?
So it ends up being exactly the kind of system that is totally not consistent with the American way of doing things, which is that people get rewarded by merit, not by who they know.
Commissioner Purce has graciously agreed to take a few questions today.
And I'm going to start with an online question and then we'll go to the room if there's any here.
We have an online question that says, you mentioned market failure.
There is also regulatory failure.
From inside the agency, what factors and forces best promote regulatory accountability?
Well, I think that is certainly true.
There is regulatory failure.
And I'm glad that the questioner raised it because often what I hear is, well, Hester, there's a market failure, so you as a regulator need to come in.
And my response is, well, you're assuming that we can design an effective regulatory solution, which we may not be able to do.
And so you do have to take account of regulatory failure as a possibility.
So one guard against regulatory failure is the notice and comment rulemaking process, where you are trying to get people to weigh in on the proposal that you have, and then you can reshape it in response to those comments.
But obviously, people on the inside and on the outside can't see the future.
So you also want to have a mechanism for testing whether your regulation is working as intended.
I think there are ways to do that.
I think you should tell people up front what you're trying to achieve with the regulation, and then you can go back three or five years later and say, hey, is it working as intended?
Maybe it's having great positive unintended consequences, or maybe it's having terrible unintended consequences.
And then you can adjust the rule for that.
But I think it is really important to remember that, yes, there are market failures, but there are also regulatory failures.
And that is why we can't just assume that we shouldn't rush to regulatory solutions, assuming that they're cost-free.
Absolutely.
Any questions in the room?
Let's go right over here.
Thank you for the chat.
It was pretty insightful.
I do want to ask that you mentioned the failures or your criticism of European models of baking international issues with that of their financial system.
And I wanted to ask if, in your opinion, you have gained any influential or important insights from other financial institutions that the United States could potentially adopt.
Yeah, so I think we can always learn from what other people are doing.
And I think that that's something that I'm always paying attention to.
You know, on crypto, as an example, foreign regulators were more out front, especially Europe.
They came up with a regulatory framework for crypto pretty quickly.
And I was impressed that they were able to do that because they have a complicated system there for making law.
So then watching how that's being rolled out and what the challenges are that are arising from that, what the successes are, I think that has been helpful.
And so I'm always thinking about ways we can learn from others.
We talk a lot about financial stability with regulators from across the world, and there can be really helpful insights, what's going on in your country, how has this worked in your country.
Sometimes it turns out that something that has been done somewhere else, it's a real cautionary tale for us not to do it, but in other instances it might be something that we can change something here based on.
And we've got time for one more question.
Say kind of in the middle here.
Of course, pick the hardest place to get a mic to.
Omar Akin from Ministry of Trade of Turkey and also I'm doing JD at GW Law School.
I would like to, you know, thank you first for these insights.
And second thing I would like to ask is normally in financial industries, industry is faster than regulatory institutions because they have to be competitive, they have to be innovative and problem solver.
And they are quicker than the regulatory institutions.
And rulemaking itself is a slow process.
Therefore, you need their insights.
You need how to address these new problems coming.
And then when you do that, actually, you are exposed to regulatory capture.
So they may, you know, influence you to not regulate properly.
How you can address this issue.
Thank you.
It's a good question, and it's important to think about those issues about regulatory capture.
I think the rulemaking process is slow for a reason.
I mean, it's slow for practical reasons, but there's also a good reason to be slow because you want to have predictability in the market so that people can build a business and know what the rules are and know that if the rules change, they'll have notice for those changes, they'll be able to weigh in.
And so, I think that deliberative process is really helpful.
With respect to regulatory capture, it is something that I worry about, and you worry especially about less about regulating too little because of regulatory capture, but about putting in a regulatory framework that works really nicely for the large incumbent who's able to come in and talk to you all the time and is terrible for everyone else.
And so, it erects a nice little fence around the industry and keeps everyone else out.
And so, one way to combat that is to have as principles-based rules as you can to say, here is the objective that we're trying to achieve.
You go figure out how to achieve it.
One firm might achieve it one way, and another another way, and that makes it harder for any one firm to keep all its rivals out.
But it is an important issue that we have to think about.
Well, thank you very much, Commissioner Peirce, for taking the time to talk with us today.
Great to be here.
Thank you all.
Cryptocurrency and Financial Protection 00:00:20
unidentified
We will be back in 15 minutes at 11:45 for a panel talking about the Federal Reserve.
House Financial Services Committee Chair French Hill also sat down with the Cato Institute to discuss the state of financial regulations.
Cryptocurrency was a big topic in this portion, along with the work of the Consumer Financial Protection Bureau.
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