From Regulator to Regulated (with Dan Gallagher)

[0:00:00 Speaker 1] from the Salem Center for Policy at the University of Texas at Austin. Welcome to an episode of Policy and Pieces. I’m your host, Scott

[0:00:08 Speaker 0] Bogus Robin Hood is, and the mission is just absolutely real. These guys, because your body and blog 10 of the founders set out to open up the financial services markets to people that had been otherwise not served at all with, you know, disregarded, underserved, overcharged and who had no interest in it.

[0:00:34 Speaker 1] That was Dan Gallagher. He’s the chief legal officer of Robin Hood, creator of an insanely popular stock trading app. We discussed the company’s mission, how it is challenging the established orthodoxy on investing and why it remains misunderstood by critics and in the media. We also discussed dance time in government. He held a senior post at the SEC during the global financial crisis and later served his Republican commissioner. He talks about his role in overseeing the investment banks, tells us where he was in oh, eight when the music stopped, provides unique perspective on the Lehman failure and dispels common narratives about Wall Street greed as the root cause of the crisis. My co host for today’s episode is McCombs business school student Robert

[0:01:15 Speaker 0] Keithley.

[0:01:20 Speaker 1] Dan, welcome to the

[0:01:21 Speaker 0] show. Thank you, Professor. It’s great to be here.

[0:01:24 Speaker 1] Uh, let’s also welcome Robert Keith. Liza McCombs, business school student. He’s my co host for today’s episode. Robert. Thank you. Scott also have to be here. Uh, and then there’s a lot about financial markets that we want you to help us unpack today, not least the rise in popularity of commission free trading through Robin Hood. But before we do, we want to explore some of your

[0:01:49 Speaker 0] previous high profile

[0:01:50 Speaker 1] roles in government and industry. Uh, you have, uh, you’re a law partner at WILMERHALE. You’re the chief legal officer of a large pharmaceutical company. Mylan. You were a senior official at the SEC during the global financial crisis. You were later Republican commissioner of the SEC during the Obama

[0:02:06 Speaker 0] administration.

[0:02:07 Speaker 1] Uh, so you’ve done a lot? You have a lot of experience. Uh, we’re hoping to learn a bit more about it. Um, And Robert, do

[0:02:15 Speaker 0] you think we should start

[0:02:17 Speaker 1] from the beginning? Um, Dan once fired you to become a lawyer. And what was your career path like, from college to your first job?

[0:02:26 Speaker 0] Well, first of all, thanks for having me here. It’s It’s a real honor to be back at UT. It’s only virtually, um, I think I think you t Scott was my last trip before the coronavirus shut down last year to come to campus and speech, you know? Look, I’m the classic case of the English Slash government Major at a liberal arts college. He didn’t know what they were going to do. And ball schools seem sort of natural. Uh uh. You know, unfortunately, uh, and I was at Georgetown undergrad in the liberal arts college and, ah, I think you know my decision to go to law school kind of came late in my college career. I wasn’t exactly sure how to how or where to go, how I would afford it. Um And so I took a year off in between college and law school, And then, uh, the debate was settled for me when the idea of going to night law school came up as I was working at a law firm, uh, sort of as a paralegal. Go for whatever you want to call it. Um, uh, you know, in in D. C. In the early nineties, if you’ll remember. And I always try to tie things to economics because of our dear friend. Uh, professor bogus here. Uh, early nineties, when I was making these decisions, were coming out of a pretty steep recession. Nothing like what we saw. Oh, AIDS. Or even later in 2000, after the dot com first, but back then, by historical norms, that was a pretty steep recession. So the idea of, you know, going and paying $100,000 plus for law school and taking on debt and everything else is a pretty serious thing. So I made the decision go to Night Law School, which I did a Catholic university in D. C. I worked at the law firm during the day and, uh, you know, really, I just enjoyed being in the law firm setting, and it felt like this was something I could do. And I was working in the real estate law group at Ballard Spahr, which is Philadelphia law firm. And that didn’t feel right. I mean, that just, you know, it was fun. I liked the people, but I just wasn’t all that intellectually interested, uh, in it. And so after my second year. Actually, actually, I think after my first year, I spent a summer at the SEC and the Summer Honors program, which used to be a really small group, kind of like a summer associate program at a law firm. And, uh, was in the enforcement division there and loved it like like just absolutely was enthralled with it. And the upside of it was that you got a interview at the end. It was the only way you could get into the SEC, uh, directly from law school. And that seemed great until they gave you your offer. And it was, I think I think it was $37,000 the year back then, which, with my rent and student loan debt, I would have had to take out loans to go work at the SEC. So I couldn’t get that.

[0:05:15 Speaker 1] Yeah, was that really competitive internship, networking interview process?

[0:05:21 Speaker 0] It actually was. It was actually, it was pretty exciting moment in my career for me because I wasn’t the best student at Georgetown. I was fine. I didn’t have the best l sets. They were fine, you know, And I Catholics certainly not the best law school. But it’s a good one. And, you know, if you stay in the D C area, it’s, you know, a pretty decent school. But I did really, really well my first year and got into the program where it was mostly me and and other kids from Ivy League schools are only about 20 or 25. It was a really nice little validation there. And, you know, it was the beginning of something special, as they would say, if it comes to the SEC, because I’d end up going back. So what I did was the summer after that. I was a summer associate at what was then called Wilmer, Cutler and Pickering, which was a I’ve been saying It’s old school in the sense of a traditional D C. Law firm. It was started in the sixties by Lloyd Cutler and John Pickering. Um Lloyd Cutler was Jimmy Carter’s general counsel and then later Clinton’s and sort of the quintessential D C law firm. Uh, they had a back then they did, and I think they still do have the top securities law practice in the country from like an SEC practice. And so I went there and spent the summer worked in the securities group and and love that and ended up getting an offer from them and staying on there as a young lawyer. And I was there for about five or six years as a young lawyer.

[0:06:53 Speaker 1] So, Dan, how did you You became a political figure. How did your your prior experience, you know, lead you to that? Did you tell us what your worldview of regulation is And how much of that came into your

[0:07:07 Speaker 0] career versus

[0:07:08 Speaker 1] was shaped or a product of your career path?

[0:07:11 Speaker 0] It’s an awesome question because people see me so overtly, Uh, you know as, uh, you get attached to a party literally when you get picked to be an SEC commissioner. So I was, as you said, a Republican commissioner and a Democrat administration, uh, you know, a real believer in small government and free markets, And, um, but it wasn’t till later in life that I really kind of kept into that emotion. I mean, I was mostly concerned with, you know, getting a good job paying off debts, you know, I got married in in 2000, so starting a family all the basics and really wasn’t all that interested in the political world. And part of it was I grew up in a traditional Irish Catholic Democrat. Pennsylvania family, right? And and I think I wasn’t ever really enthralled with that. And so it kind of made me apathetic, uh, to the political world. And then when I sort of tapped into my inner libertarian, I think is when I, um you know, really, from a policy perspective. And then, um, you know, later on the commission really just got interested in the political side of things. Even though, you know, SEC commissioners, as you know, Scott shouldn’t be shouldn’t be politicians. But, you know, you do get drawn in based on your ideology.

[0:08:31 Speaker 1] So before you were a commissioner at the SEC, you would call a staffer at the SEC and you occupied a couple of senior roles and during a really interesting time of financial markets, and I put interesting in parentheses, the global

[0:08:46 Speaker 0] financial crisis,

[0:08:48 Speaker 1] can you explain your role during that period in particular? Uh, can you define when it happened?

[0:08:56 Speaker 0] The global financial crisis, at least in terms

[0:08:58 Speaker 1] of in terms of, you know, from the inside your perspective.

[0:09:02 Speaker 0] Sure, sure. So I’ll take a step back just to kind of fill in the one gap. You know, I left Wilmer after about five years because one of my clients in Philadelphia asked me to come to the general counsel. It was a brokerage firm called Fiserv Securities. And so, at an early age, I went up there, uh, in the middle of the market, timing late trading scandals of 2000 and 34 if you remember all those with Eliot Spitzer and everything else, uh, Fiserv was caught up in that, and I jumped right into the middle of the roaring SEC investigation. We got that settled the corporate parent and then sold us to Fidelity. And I ended up going back to Wilmer for a little stint. But then I heard that an SEC commissioner, Paul Atkins, was looking for a trading and markets and enforcement council, and that was really my core competency. Uh, he had another council named Hester Purse. Who’s a sitting commissioner right now at the SEC who had worked with at Wilmer Cutler. We’d we’d become friends at Wilmer Cutler. She had left to go to the sec, I reached out to her and we connected. And next thing you know, I was working for Commissioner Atkins. Um, I think you gave me the offer at the end of 05 I started very beginning of six, and so was his counsel for about a year and a half. Then I was counseled Chairman Chris Cox, uh, for a while, and then I was going to leave the agency in the summer of oh, eight, right after Bear, but before Lehman and go back to Wilmer again. You know, I had a nice little stint as counseled up on the 10th floor, as we call it, where the commission sits. And there was a division director. Scott, I know you’re familiar with Eric. Siri, who ran the division of trading and Markets, had formerly in the nineties been the chief economist of the SEC, and he was looking for a new deputy director, and I was helping him with that search. The candidate that we had identified turned out, didn’t want the job and never applied. Uh, and, uh, it was my first of a few Dick Cheney moments, as I call them, where I was helping somebody find a candidate, And then the candidate turned out to be me. Uh, so Eric asked me to come be the deputy director of trading markets, and I believe it was June, June, July of 2000 and eight.

[0:11:17 Speaker 1] Was that the first time you work for an economist as opposed to a lawyer?

[0:11:21 Speaker 0] Yeah. Yeah, for sure. Because Chris Cox is a lawyer, too. And as was Atkins, um you know, obviously at the at the brokerage firm, my CEO was an engineer by training, so that was a different experience for me, but yeah, mostly all lawyers. And, um, when I took over the the investment bank side of trading Market. So the division of trading markets at the SEC for those who don’t know covers, uh, both the markets. So you have the equity markets, options, uh, clearing houses, all covering products that are regulated by the SEC. And then it also covers brokerage firms and transfer agents, um, and things like that to market intermediaries. And back. Back in the day, they were called investment banks. She called him broker dealers now, but, you know, there was a big rivalry between investment banks and commercial banks after Gramm, Leach Bliley in 99 the SEC had jurisdiction over the investment banks, the Fed and banking regulators had jurisdiction over the commercial banks. They started to merge together, you know, after after Gramm Leach Bliley. So the SEC was sort of inserted into the world of bank regulation even though the jurisdiction was really mostly over the broker dealer entity. Um, we called them CSC s. If the SEC consolidated supervised entities, we had a whole program, uh, that we mirrored off the Fed supervisory program to oversee those investment banks. They included Goldman and Morgan Stanley and Merrill Lynch Bear Lehman. Um, and it was full of economists. Scott, As you well know, I think there was. I don’t even know if there was one lawyer in the team. It was all sort of PhD economists, quantitative experts, insanely smart people, most of whom, unfortunately, we lost after the financial crisis. Who went to go work, you know, in house on the street or for the Fed or for 0 cc. Or other agencies? Um, that was a ton of fun. I supervised that group and I took over about six weeks before Lehman and, uh, never looked back. It was quite a wild ride. And well, to answer your question, I think, um, in 2000 and seven is when I believe obviously the financial crisis really started because we we started to notice the dislocations. And we had this group which became, you know, sort of, uh, synonymous with SEC failure because of the narratives of the financial crisis. But the CSC group was actually this amazing window for the SEC into the markets that it never had before. And I remember Eric Serie coming up in 2007 when I was working for either Atkins or Cox and talking about the mortgage dislocations, um and and concerns about the mortgage markets and looking at the balance sheet of all the investment banks we oversaw and the massive amount of mortgage assets that they had. And, um, it was pretty I opening at the time. And you know, then we started to see dislocations in England that year. You know, folks always think it’s oh eight, but really started to pick up steam with Northern Rock and other failures in Europe. And then, of course, with Bear Stearns in March of, uh, of O A.

[0:14:38 Speaker 1] So where do you

[0:14:39 Speaker 0] think the big,

[0:14:41 Speaker 1] um, causes of the crisis? We’re and, uh, guess who was at fault there.

[0:14:47 Speaker 0] Gosh, I don’t know if we have enough time on that, but, uh, look, there’s a common narrative, and it’s actually codified in the Dodd Frank legislation that arose out of the financial crisis that, you know, it was Wall Street greed. Uh, and regulatory failures were the sort of two primary drivers of the financial crisis. And and without a doubt, both of those things featured right that they were part of the financial crisis. I would call them either features or symptoms of the larger issue. To me, the larger issue was massively failed federal housing policy that started, uh, in earnest. You know, it started a long time ago, but in the Clinton administration, it really picked up. And it was a bipartisan issue, not a Democrat Republican thing. It was passed on from one administration to the other. This notion that, you know, we need to expand homeownership in the US And to do that, we need to pump money through Fannie Freddie. You know, the G S. E s as well as, um you know, uh, we saw the rise of private mortgage entities around the country, and it just, you know, with the implicit backing of the US government, you know, Fannie and Freddie were issuing the securities. People were assuming they would always be bailed out. Things just got completely out of whack. There wasn’t enough controller oversight of that. The banks, you know, to the Wall Street greed part of it. You know, as one, uh, Wall Street CEO said at the time, you know they’ll stop dancing when you know the music stops. Um, the music stopped pretty abruptly, right? They took part in the party. They were originating mortgages. They were buying mortgage originators. They were securitizing they, but they eat their own cooking. Uh, they had this stuff sitting on their balance sheets, right? It wasn’t just a a scam, right? They weren’t just cooking up toxic stuff and pushing it off on unsuspecting folks. They were actually caught up in this idea to that, you know, the party would never end, and so, uh, failed Federal housing policy, to me is the number one reason there are all sorts of other related you know, monetary policy issues that arose after the dot com burst 0% interest rates. You know, all sorts of related things that I think fed into the bubble. Um, but I think there’s a great, great great book for folks listening. Um, if you want a really good history of the financial crisis, the best one I’ve read and I’ve read most of them, uh, there’s a book by Bethany McLean and Joe. No, Sarah called All the Devils are here, and if you follow Bethany, she’s She writes a lot in Vanity Fair, and I mean, she’s brilliant like otherworldly, brilliant Joe. No, Sarah is an old, I think, New York Times reporter. You know, a very traditional journalist does the work and does the research, and I think in the in the most down the middle, nonpartisan way they factually put together history of the financial crisis that really it gives a lot of credence to my belief. You know, uh, does does expose the Wall Street excess. There clearly were regulatory failures. I’m not trying to say there weren’t but but again, I think they were tangential to the main issues.

[0:18:02 Speaker 1] Dan, where were you when the music stopped, What did you do? And I have a little story. That may be a myth. You can correct it if it is for everybody listening. But I was told that when the music stopped, um, you went around town and drain some cash machines because you’re worried about the global economy.

[0:18:23 Speaker 0] Is that true? Oh, gosh, that’s a great story. So I don’t know at what point people deemed the music to have stopped. I think most people say September 15th, right, when When Lehman filed. Um, I was pulled up to New York that weekend. Folks, remember, And you can see one account of this in, um too big to fail that Andrew Ross Sorkin book. I wouldn’t put a lot of credence in that book. I mean, it’s mostly told from, I think, the perspective of 22 primary leakers, that in the Treasury Department. So, uh, you know, and it was It was done quickly. He was meant to get it out before everyone else, and it’s a great read. I just you know, there’s there’s definitely some shakiness in the in the factual history, but, um, there was a meeting we called it the meeting of the seven families on Friday before the Lehman failure, where Paulson and uh, and Geithner and Bernanke and Cox were to, you know, get all the CEOs together, beat them over the head and tell them they had to bail out Lehman effectively. And it didn’t really work Friday night. There were more meetings Saturday. I got a call from Eric’s theory. That’s Saturday. Get your ass up here. Uh, you know, it’s not. It’s not really going that well. And so I had to hop on a train and go up. I brought one change of clothes with me because I thought it was just an overnight trip. Um, and it But you know, what happened next was pure chaos. I mean, we basically, um, didn’t sleep that Saturday rolled into Sunday. We were convinced, I will tell you this is there’s moral hazard is a really interesting theory, right that, you know, once you bail out somebody, there’s a presumption in the market that future bailouts are coming. And so people’s risk tolerance goes up beyond what it should, um, and in the private markets. And that certainly happened. There’s no doubt it happened after Bear Stearns. I can tell you to me that the bailout of Bear Stearns was a massive policy failure. It caused moral hazard in the markets. But what it also did is it caused regulatory moral hazard. It caused the regulators, like the SEC and others to assume All right, well, you know, if Gardner is gonna bring out his fire hose, uh, you know, and Paulson agrees with that and Bernanke agrees with it. And if they did that for little Bear Stearns, Lehman was twice or three times the size. Of course they’re going to bailout Lehman. And in the meantime, they had opened the P D. C. F the primary dealer credit facility to Lehman. They had put Fed examiners in Lehman after bear, so the notion that they wouldn’t bail out Lehman was absurd. Um, and we thought the bailout would be very similar to Bear Stearns that it would be, uh, basically, um, Barclays. With the approval of the F S. A at the time in in England buying Lehman with some type of federal support, we didn’t know what that would be. We assumed it would be like a maiden lane type structure like they did for Bear where they took these liquid assets off the balance sheet. Um, and they didn’t And, uh, they didn’t because the S a said, you know, pound sand, We’re not going to approve the sale. We don’t want your bad assets on our registrant. And once Barkley spell away, there was really no other alternative except a full Fed bailout. And that didn’t happen. So bankruptcy happened that night, like two in the morning. I think into Monday morning, the Asian markets, as you know, had already opened. So there was just chaos across the globe. Uh, CLS system. Everything else was freezing up. Um, and we were trying. It felt like you were in one of those submarines and the submarine movies when the submarines rated to go like, 300 m below. And we were about 4. 50 you know, and the rivets were popping out and water was coming in, and we were bailing and doing all that stuff. That’s what it felt like. Um, and from the sec perspective, you know, we brought our little kid toolkit into those discussions. I mean, the Fed at that point is really, uh you know the Treasury, obviously, to more limited extent. But the Fed is the one with a balance sheet, you know, that’s able to actually take real action to stave off some of the harm. And so they were the leaders of that total discussion. So I spent Saturday through Thursday morning. Uh, without I probably had about two hours sleep that whole time. Uh, at Lehman Brothers at the New York Fed. I think I was on the 30th floor of Lehman when it actually blew up or might have been sitting in the New York that I can’t remember exactly where. Um but then I had to go back to the SEC. Of all things are, this is great historical trivia for SEC nerds. Our inspector general at the time had written a report on the failure of Bear Stearns. So he he did a study of why our oversight of Bear Stearns failed and he wanted desperately to submit it to Congress before the end of the fiscal year in the fiscal year ends. Sept. 30 for the SEC and the government, um, it was September or whatever. Call it 18th, and he wanted to get it in and we couldn’t get a reprieve. We were up there like I said in our little submarines, rivets everywhere, water up to our eyeballs. And, uh, he insisted on filing this report. So I had to come back as the manager of the program and write the management response, uh, to that I g report, which was holy faulty. Um, I was just, you know, it survives no rigor, you know, by way of auditing standards of fairness, whatever you want to say. And we basically said that in our management report, if I think it should be still online, I’d be great trivia for folks to go up and find it mysteriously. When we filed it, only only page one made it up. Uh, for months on the SEC website, there was some glitch. The I g said to why the rest of our document didn’t make it up, So go figure.

[0:24:39 Speaker 1] So while Lehman was failing, you had to suspend your response to explain why Bear had failed.

[0:24:47 Speaker 0] So I took a train down Thursday morning. I think went right to the SEC. Worked until I think two in the morning at the SEC. I still remember it like it was yesterday because it was about it was really hot. It was like 85 degrees and humid in D. C. And Scott. You might remember the air conditioning goes off at seven. And so I was sitting in a temporary office. I still didn’t have a permanent office as a deputy director. So this little temporary office revising and writing this management response, Eric Siri came into my office, and, uh, he’s one of the more brilliant guys that you’ll ever meet. He was literally, literally a rocket scientist, PhD economist, Harvard Business School professor. Now he’s at Babson, and he’s just one of those guys that, you know, nothing really gets to him. He’s sort of unflappable, and he walks into my office. I think it was like nine o’clock at night and, um and he said, Oh, man, that was crazy And I said What? He said. I just got back from Capitol Hill. I was there with Paulson and Chris and Bernanke and and, you know, we’re begging for TARP money, this bailout money. We’re begging for $800 billion or something. And and he said it was just wild because Bernanke said this is the worst thing since the Great Depression and could be even worse. And I remember I literally no joke, hadn’t had sleep in in days and days and and looked at Eric and I was sweaty and just tired, and I just said Bernanke said that He said He said, Yeah, he said, Was he on TV? Like, Is this like the markets are gonna freeze like there’s going to be rioting in the streets tomorrow? If he said this on TV and he said, No, no, no, I don’t I don’t think there was a camera. And so we hop online and immediately see Nancy Pelosi at a at a podium, repeating that Bernanke just said, This is the worst thing since the Great Depression. And you’re like I said, Eric, this is This is like end of day stuff like the markets might not open and, you know, and he was like, Yeah, I think it’ll be okay. And then typical Eric Fashion said, You know, the money markets are gonna freeze. That’ll take like a you know, a week, and we can’t income that, you know the equity market should be fine. He just walked through why he wasn’t so worried. He’s like, But I did call Jennifer. His wife’s name is Jennifer and told her to take out as much cash as she could from the A t. M. S because because the money markets will freeze. And if we need cash for something and and I got to tell you that just like so hit me. I didn’t tell the story until 10 years after the financial crisis because but now we can laugh about it, Uh, in a way, um, but I thought it was a little too scary for people to hear how scared we were. Uh, and I still remember my wife went to Harvard Law School. She was at her Harvard Law School reunion, and I called her and she was at a bar and it was super loud. And I said, uh, go outside, please. She went outside. I said we had to separate not bank accounts that you know, not not in different names. We both had joint control, but she had a bank card for one of them, and I had Bankcard Fielder said, Go take as much cash as we’re allowed to take out. I don’t even know what that limit is. But go go take out And she goes, Oh, my God, Why? And I said, Steph, just go take out the cash, please. I can’t I can’t tell you. And the funniest thing she still remembers that she was with her, uh, law school roommate Colette. And she said, Can I tell Colette? And I said no. And then I hung up the phone, which we have a much more cordial and loving relationship than that. I think she knew that it was under a crazy stress. So she did. And and then on my way home, I think I took like, a two a two a m train home that night or whatever that last Amtrak train was. And, uh, I stopped and took out as much money as I could to. And the funny part was between the two of us, we had, like, $2000. I thought, like a limit. The A T M was about $200. It’s it’s way more than that these days. And so we had, like, two grand in cash, sitting in a safe in our basement that we would use for babysitters for for, like, the next year or two, all inspired by Eric Siri. And it was only because Eric series the coolest cat I’ve ever met. And if if he went and took out cash, then goddamn it, uh, you know, something was really going to happen. So

[0:29:06 Speaker 1] good thing he didn’t go on TV,

[0:29:08 Speaker 0] right? Exactly. So the rumors were true.

[0:29:11 Speaker 1] Um, what were your

[0:29:13 Speaker 0] bake? What? Your big takeaway from that whole experience and what you learn from it. Uh, you know, so many things. I think one thing you learned as a capital markets regulator at the SEC is you know, in a time like that, unless you have a balance sheet, you’re really a bit player. I mean, there’s only so much you can do. The SCC’s job, which I think is the right one, is to ensure that you’re not taking undue risks as a market participant, where their brokerage firm and investment advisor mutual fund that you’re disclosing things properly. And then if you take excessive risk and you blow up, we make sure that we can wind you down and and I think that’s from a free market perspective, the way things should be And that’s the toolkit we brought to a party where, you know, on the Fed side that’s not what they do right. They ensure safety and soundness, and they ensure that the institution can carry on. And that’s why they get pulled into all of these activities around keeping the entity going and we come at it. Let’s just wind them down and make sure investors don’t get harmed. Um, so that conflict of regulatory views came into sharp contrast because the Fed had to balance sheet. You know, I think they’re viewed as the victor in so many ways. They took their lumps, you know, giving bonuses to a I G executives and things like that. They certainly took some lumps. I don’t mean to say they had an easy path, but you know, the way Dodd Frank was written, the way these books are written about the financial crisis, the SEC is certainly painted as a major loser. The Fed and Treasury a winner. You know, I think that again kind of goes to your own ideology. You know, if you’re a really free market person, you would say no. The whole country lost here because now we’ve instituted bailouts. Um, and, uh, you know, that was on display, obviously, Last march again, you know, with with covid totally different circumstances. And and maybe from a principal philosophical perspective, doesn’t present the same moral hazard. But still, all those same tools were unleashed in into the markets. And so the ensures that the Fed will be entrenched for years in our markets.

[0:31:30 Speaker 1] So then you had a wonderful government career, and then you left. You returned to the private sector some years ago, and you have started this

[0:31:39 Speaker 0] pattern. You

[0:31:40 Speaker 1] get elected to a corporate board, and then you become the company’s chief legal officer

[0:31:44 Speaker 0] first with myelin.

[0:31:46 Speaker 1] And now with Robin Hood. Is that backwards? Can you explain how this

[0:31:50 Speaker 0] happened backwards? You’re the first one that noticed the pattern. I didn’t even really think about it until I saw you had that question. Um, yes, I met the myelin folks when I was a commissioner. They were very interested in corporate governance issues and pretty passionate about it. And outspoken, Which is, as you know, Scott, pretty rare for a public company to be outspoken in a in a singular way, on governance issues. So really admired them. Um loved the CEO, the chairman who was the former CEO, and And when I laughed, um, they asked me to join the board and I went through a process of, you know, getting ready to join that board. They hadn’t voted on me yet. And after the election, uh, in 16, I was at a place in 2016 called Potomac Global Partners is Paul Atkins. My old boss and another former commissioner started at, um, and we had done the financial services transition work for the trump campaign. So when Trump actually won and shocked everybody, there was a lot of speculation about me about Paul, about others in our shop going back into government. I knew I wasn’t. I had to go make some money. I got two kids in private school and SEC commissioners I made. I made two thirds as much as an SEC commissioner, as I made as deputy director of trading markets. So that will tell you something. Um, and, uh uh, and so we didn’t know which way the shop was gonna go. And at the same time, my old law firm came back and asked me to rejoined to be part of the management and succession plan and the securities group at Wilmer. So I agreed to do that. And then the Wilmer folks called me after saying I could join the mile on board. They didn’t realize they had a conflict and I couldn’t join it. So I called the chairman. He was wonderful about it. Very disappointed. It was a few weeks before the vote, but then I got a call from their board meeting and they had a succession planning meeting of their non gav committee. And, uh, they decided they wanted me to come as their chief legal officer instead of there, uh, board member. And you know, I told them I know nothing about pharma, and I am not moving to Pittsburgh because they’re based outside of Pittsburgh. And their response was we know pharma, we need you for other things. And, um, you can work at a D. C. So the rest is history. I agreed to do it for a few years. They had had the EpiPen incident in 2016. You know, that required sort of rethinking of their D. C. Focus A lot of litigation and regulatory. Um uh, you know enforcement after that that we dealt with and governance issues, you know, corporate governance and things like that. And so it was a great, great ride. I learned a lot, you know, to be a chief legal officer of an S and P 500 company and, uh, love the team there. But, you know, my real desire was to get back to financial services.

[0:34:43 Speaker 1] So you you went back to Wilmer for 1/4 time and that somehow lead you back, lead you to Robin Hood explained that,

[0:34:51 Speaker 0] Yeah. So another former SEC commissioner, Joe Grundfest, uh, had been a friend. He’s out at Stanford Law School. For those who don’t know, he’s sort of the dean of the Fintech Bar in Silicon Valley, I would say. And if not the technology bar, more generally, Uh, he had met the founders of Robin Hood early on, and it’s sort of been, uh, if not more a spiritual advisor to them. And, um as they started to really feel the pressure of Washington, he was telling them, you need to meet this guy Dan Gallagher. He’s got a broker dealer, you know, investment bank background. Um, and I finally at the end of my mile Instant was introduced to the founders of Robin Hood and immediately just loved both of them. Found them to be very different than I. They had been portrayed in some ways, and at least in Washington circles, you know, and just brilliant and really nice people, family people, uh, really disrupting, I think the brokerage industry in a very positive way for investors. Um, And it got me very excited talking to them, and those conversations continued. Um, and I left Milan. I was set to return, and bi, deputy chair of the Wilmer Securities Group. I actually should have taken over as chairman last week. That was the arrangement. Um, and Robin had asked me to join the board, you know, right before I came back to Wilmer and Wilmer allowed me to do that. So I became a board member back in October of 19. And then in the spring, my predecessor decided to leave, uh, and Hoagie, who’s a wonderful person. She had some things going on personally, and she she needed to leave. And so this was my second Dick Cheney moment where I spent a lot of time with the founders trying to find a replacement. And then they asked me to come do this job.

[0:36:45 Speaker 1] So as you allude to before you were a guest lecture in my policy class in the fall. And I remember when I announced the class that you were coming, um, I could have been inviting Bob Dylan or Elon Musk. The reaction to class that somebody from Robin Hood, the general counsel or chief legal officer, was going to talk to them. So you had I mean, you were a rock star, and I was really astounded because at the time, my knowledge of Robin, who is mostly to the press, which doesn’t necessarily have the same view. Um, as many, um, Robin Hood customers. And so that was that was pretty remarkable. That was my first introduction to a different view of the company. Um, and so, uh, there’s a lot that we want to unpack here right now and let me turn to Robert and say, By the way, he’s a huge fan. I think you can tell us differently of Robin Hood. And where do you think we should take questions? Yeah, I definitely am. Um I think we should start with the name. So why Robin Hood?

[0:37:47 Speaker 0] Well, you know, obviously I I joined about nine months ago, coming up on 10 months ago, so I wasn’t there at the time. But it’s directly tied, uh, name Robin Hood to the mission of the company. The mission is to democratize finance for all. And I gotta tell you guys like you’ll, especially as business students or, you know, law student, whoever is listening, you know, you’ll you’ll encounter companies, private public companies. At some stage in your career, you will work for them to work with them. Almost everyone has a mission. And you know, one thing you should challenge is whether the missions for real or not, because there’s just a lot of catching slogans for companies who really are just all about squeezing that last penny, you know, out of their business model. And they put a catchy slogan up to make, you know, make it sound like it’s more than that. Robin Hood is, and the mission is just absolutely real. Um, these guys, because you bought and blog 10 of the founders set out to open up the financial services markets to people that have been otherwise not served at all. Disregarded, underserved, overcharged, um, and who had no interest in it, Presented with a means to entry into the financial markets. That was clunky. You know, that was not intuitive. And they just said, You know what? We think we can tap into something new here. We can open up and democratize these markets, and they have. So So the Robin Hood name is really synonymous with that mission.

[0:39:25 Speaker 1] No. Did you Did you have to read your Children? Robin Hood Growing up the fairy

[0:39:30 Speaker 0] tale? I don’t think I did.

[0:39:32 Speaker 1] It’s banned in my household because I tell my kids it’s not okay to rob from the rich, even if it’s to give to the poor. But that’s not the intent of the Robinson name.

[0:39:40 Speaker 0] Here it is. Not at all the intent of the name. Uh, it’s It’s to grow the pie. Bigger for everybody.

[0:39:46 Speaker 1] Yeah. Robert. Well, is that what you meant when you said you met the founders? Could

[0:39:51 Speaker 0] you see like that?

[0:39:52 Speaker 1] Their mission was real.

[0:39:54 Speaker 0] Yeah. I mean, like, I had really limited bandwidth to take on any additional roles, you know, including a new board role But, you know, and I think Scott probably encountered this, uh, his time at the SEC also. I mean, I was out there all the time, and it was not a partisan issue. Democrat commissioners were out there a lot bemoaning the lack of retail participation in the U. S. Equity markets in particular. And what we saw was a pretty rapid decline from the late seventies. Um, you know where I don’t I don’t know the exact numbers, and Scott will test me on this, but let’s just say it was 75% retail participation, right? So 75% of us citizens were somehow involved in the U. S capital markets in the late seventies. It dwindled down to, uh, you know, the 50% mark or so. And for a lot of reasons, folks just weren’t investing. Um uh, the rise of passive investments, you know, where you just by your S and P 500 funds, set it and forget it. That sort of thing, uh, really has caused folks to not directly invest in the companies that are held by those passive funds not to really make that directional investment decision not to be involved in the life of that company not to vote your proxy, things like that. Um, and I just viewed that as a hallmark of the U. S. Capital markets. And what set? It’s what sets us apart from so many other wholesale markets where everything’s inter mediated for retail, where there’s just really not, uh, retail interest. Uh, and I think, look, having retail interest in companies and therefore the, uh you know, uh, the economy is a really good thing for citizens, right? It’s a good thing for financial literacy. It’s a good thing for engagement, understanding of how the economy works. So

[0:41:43 Speaker 1] So why is Robin Hood so popular? What? What what about the business model is making it successful? What incumbents miss, and how will this model

[0:41:51 Speaker 0] endure? It’s pretty easy. I mean, what they not Not easy. I don’t want to take away from what? What about you and blood and the original team did. But I mean, the the idea is simple, right? They were the first brokerage firm to start on an app, right? It’s app and mobile. First, it wasn’t some website, you know, clunky website that they came up with and then translated into a clunky app, which is pretty much everyone else. It was at first it was commission free, uh, meaningful e. It was no account minimums. We don’t talk about that as much because, you know, account minimums come and go, and they vary amongst firms, but they’re a real barrier to entry for small investors. Right? If you have a $500 account minimum, much less 5000, which you might find it some other brokerage firms you’re not going to enter, right? And so you take no account minimums, no commissions for trading, which which Robin Hood really pioneered. Uh, you make this thing and you put it on an app. You’re tapping into a world that otherwise isn’t that interested, You know, it doesn’t, you know, doesn’t feel sold by the notion of participating in the brokerage community. And so

[0:43:07 Speaker 1] it’s just taken

[0:43:07 Speaker 0] off like wildfire. They built something that our customers want to use that they like to use. That’s intuitive. That works in a way that they’re They’re used to write that that other apps that they use also work. And so it’s tapped into this whole new demographic. Uh, you know, Obviously, a lot of our customers might have otherwise been going to other brokerage firms, but I think we firmly believe we’ve. We’ve opened the markets to a huge number of our customers that otherwise wouldn’t be in these markets.

[0:43:40 Speaker 1] I’m not smart enough to actually invest markets. I don’t own any stocks except through broad based indices.

[0:43:46 Speaker 0] But

[0:43:47 Speaker 1] my co guest here does. Robert is a Robin Hood user. And can I ask you, Robert, what do you think makes Robin Hood so appealing as Dan Reid? Is there anything else? I mean, I think what he said is exactly why I joined. Um, I was my cousins were using it. My friends were then once it. One day I was looking at my cousin’s phone and he had the Robin Hood app, Um, like the and said open. I asked what that was, and he explained to me, and he showed me his portfolio and it just picked that off for me. And, you know, also with the account minimums, I had a small amount of money to invest, so I pretty much was forced into Robin Hood for that one reason alone. But then, on top of that also no commissions and being an app, I could just download. The APP. Takes two seconds. It’s on my phone. Um, so that was really good for me. Yeah. And now you’re a business student at University of Texas. And one day you’re going to have a high paying job and you’re going to be a Robin Hood customer. And Dan is going to say, That’s why we did it.

[0:44:47 Speaker 0] Yeah, you know. So, first of all, great to hear I’m glad you you sound like a happy customer, and that’s terrific. That’s what we want. And you know. But we get it to Robert like, you know, having a customer like you write who until recently was new to the industry, comes for us with a lot of responsibility. Right? We we need to make sure that your treated fairly that there’s proper disclosures made to you about things you know, the the way we receive revenue. The way, uh, you know, material things about the companies you’re investing in, right, that you have access to those disclosure documents and and like educational materials which you know for us is just hugely important. You know that we have a really vibrant source of educational materials for our customers and not just like you guys have seen them, right? Go into a more traditional firm, go on their website, go to the education library or whatever, and they’re going to link you to attend Q on Edgar Wright, and you’re supposed to go read 300 pages, and that’s not good enough for us. We know that our customers don’t want to learn that way. We know that it’s really hard for anyone to learn that way because it’s just so much language. So many words and required mandated SEC disclosures. And that’s the whole separate discussion. Um, so we’re trying to educate folks in the way that, you know, is is most efficient for them. And so, uh, we have we have a learned page, which is basically our education page, you know, in the app. And, you know, up on the website. Um, I think you know, there was some crazy statistic. We had 3.2 million people read our learned articles in 2020 which was a 260% increase from last year. So the activity on our educational pages was huge. in 2020. We have the Robin Hood snacks. Robert. I don’t know if you listen to the snacks podcast or see the newsletter. Yeah,

[0:46:53 Speaker 1] I do The newsletter. I read the newsletter almost every day, but not the podcast,

[0:46:57 Speaker 0] which is It’s just pretty cool, right? And it’s just talking about current events. But it’s really educating folks as to how the markets work. And we have, I think, two million monthly active podcast listeners and then 20 million subscribers to the to the newsletter. And then we, you know, we give you free access to all of the financial, uh, you know, news Network, CNBC barons, all that, um, and we’re And you know what, though we’re not, either. We’re certainly not happy with where we are. We’re going to keep pushing. Investing on on education will never be done. It’s just an evergreen obligation that we have to our customers to get better at it, to provide new resources and tools. And and to me, that’s the challenge, because we want Robert to stay with us. We want to be with him. It’s got to your point. As he he goes, he gets married as a job his kids or he doesn’t. You know, he all of a sudden he needs a 5 29 plan instead of just a regular brokerage account like we want to be able to be in a position to provide the products of the education that our customers need as they as they mature. So, uh, and then, you know, obviously continue to drive new growth by younger, uh, you know, getting younger and newer investors onto the platform.

[0:48:08 Speaker 1] So there’s a There’s a fair number of critics out there. I mean, everything he just said, uh, sounds great, um, one of one of the critics. Or I think he’s a critic, or at least according to how he’s written, somebody we know in common. Jason Zweig recently wrote an article about when the stock market is too much fun and there’s discussion of gay muffin investing. Can you tell us about these criticisms or the critics, right. Are they wrong? What is your

[0:48:35 Speaker 0] response to that? You know, I think where this sort of inflection point Scott, where sort of the old world is meeting the new Um, and Jason’s a brilliant guy. We obviously I sat next to him you know, on your panel at U T. And I respect him tremendously. And I think, you know, I think his it wasn’t all criticism. I think there was some appreciation expressed by him for Robin Hood. I know you know, he’s very keen on having retail participation in the markets, and so, uh, but we pay attention to these things, obviously. And, you know, if someone like him is raising issues, we take it seriously. But the Gamification idea to me again, is this inflection point of There’s the old guard right that’s in an entrenched old guard that likes things the way they are and the way they were, and they love these barriers to entry. And they like the old rule book. And they like, you know, their relationships with policymakers, and they don’t want a lot to change. And when something like Robin Hood comes along and present such a radical change from the norm, right where it’s easy and intuitive to invest right where it’s right at your fingertips, where it’s at first, that’s a challenge to the established orthodoxy and that, you know, disturbs some people. Is it Gamification is It’s not. It’s just simply that we’ve created a platform that people like to use and they find easy to use, they find intuitive. And I think in some ways it’s a lack of understanding by the old guard of what this new generation of investors really wants. And so let’s just call it Gamification and and make it sound sinister. I just as you can tell, don’t subscribe to that. Um, I think that I think that the markets have evolved. I think that, um, you know, I think the rest of the industry and I think policymakers need to evolve with it.

[0:50:30 Speaker 1] Robert, do you think that the old guard has got it wrong? Do they understand your level of sophistication? The unique collection? Yeah. I don’t think you know, I wouldn’t be able to trade higher level things like options. You know, on Robin Hood, I would definitely need clearance to do that. But I think for the things that I’m doing, um, you know, I do have I’m sophisticated enough to do that. So So Dan, let’s move to, uh, another topic of criticism, or at least a civil settlement that Robin had recently engaged with the SEC for $65 million. Uh, penalty paid. What? Can you explain that? What happened? Are you guilty of something?

[0:51:11 Speaker 0] Uh, well, as you well know, as a sec alone, we neither admit nor deny anything in that sec order. Um, and so, you know, one thing I can tell you is that you know, the facts associated with that order relate to old historical issues that at Robin Hood that are, you know, well behind us, in my view. So, um, you know, it’s always hard when you have a, uh, a settlement with one of your, you know, your prime regulator like that. And when they find issues, and so we’re happy that it’s resolved. We take it incredibly seriously and don’t want obviously, ever anything like that to recur the Robin Hood of today. Scott is so different than the Robin Hood during the time frame represented by that order. I mean, you know, starting. I think with me coming on board, we’ve we’ve just massively restructured and rebuilt, and we supplied the legal department. You know, I’ve brought in a number of of really seasoned people, both on the regulatory side as well as the industry side. So the whole of the legal department. Senior management is brand new. We’ve grown inside. We’ve we’ve added, Like I said, new skill sets illegal. I mean the existing lawyers that Robin Hood work brilliant and did some amazing things over the years to get Robin Hood where it is. And this is just a recognition that we’re you know, we’re big, we’re on the radar screen and we’re building that out on the compliance side. We’ve done the same exact thing we brought to senior senior industry vets in to be the ccs of each of our brokerage firms. So we have an introducing firm where you have the client relationship and then clearing firm that handles and settles the trades and the assets. So, um, we’ve added across the board. It’s so incredible what we’ve already done since I’ve been here to improve our control environment. That again, it’s it’s like, uh, that that SEC settlement does not reflect who we are today

[0:53:14 Speaker 1] is this. Is this just a case of a fintech disruptor changing the way things are done and then as they grow up and fits into the legal environment, the pre existing structure? It’s just a a meeting of the middle and bringing somebody like you in helps shape the corners to make sure that the compliance the company grows into standard compliance.

[0:53:35 Speaker 0] You know, I got to tell you that this is again one of the reasons I really just became, you know, enthralled with the founders laden Basu. When they asked me to come to my job, they had. It wasn’t just Let’s plug beyond Gallagher and hope things go away. It was part of a large division for legal compliance and the other control functions in the company where they just wanted to really enhance everything as part of a holistic review of things in 2020. And, uh, that’s what really sold me. It wasn’t just, Hey, let’s let’s bring down and hope things go away and they are fully bought in to having the best talent around the highest standards for compliance. We’ve been working like crazy, you know, to get Robin Hood there. There’s always more work to do, and we take it really seriously, you know, our responsibility to be compliant, but also our responsibility to customers. So, um, it’s I gotta tell you, Punished job I’ve ever had I love it. It’s all part of the founder’s vision. Um, and so it’s It’s just a recognition of where Robin Hood stands right now to your first comments, like you didn’t know about Robin Hood. And next thing you know, you find out that we have 13 million plus accounts, and, you know, we really were on the, you know, unfortunately, in the press, Uh, all the time. You know, a lot of times were good, um, reasons. And so, you know, it’s just, uh I think it was a great move by them.

[0:55:05 Speaker 1] So we’re running out of time with you. We really appreciate you being here, and we probably didn’t cover nearly as much as we wanted to, But I do wanna talk about covid for just a second before we leave. It is something that’s affecting all our lives. And I just want to know personally, professionally and for Robin Hood. How has that affected, uh, your environment and your worldview?

[0:55:26 Speaker 0] You know, it’s been an amazing experimentally. I joined Robin Hood remotely. Uh, I had the luxury, obviously, of knowing the team from my board, uh, spot, you know, and I’ve had a couple meetings with them personally in that context. So I got to know the C suite pretty well in that regard. But, you know, I joined remotely. I wondered how it was going to work. I didn’t know most of the folks in legal. I’ve hired a whole bunch of people who have now joined remotely. It’s working, you know, We’re still fully remote, you know, And I will see how long that’s gonna last, you know, through this year. Um, but, you know, I think lawyers luckily are able to pull off their jobs remotely, probably easier than some other professions. And, you know, but I think the engineers were getting it done and in all of the various aspects of our organization are really pulling together. And I mean, the company has just grown by leaps and bounds even since I started. So, you know, I think we’re the majority of Robin Hood right now. Probably started since covid and doesn’t know life in an office. And it’s still working really well, which is great.

[0:56:35 Speaker 1] It has covid accelerate the business model, hindered it, unaffected it.

[0:56:39 Speaker 0] You know, there’s there’s discussion about whether you know, folks sitting at home, you know open accounts because of it. There has to be some of that, Scott, I don’t I don’t know how you quantify exactly what that is. Um, but, uh, you know, what we’re finding, though, is that the majority of our customers are buy and hold investors. Right? So this notion of people just sitting around day trading, I think is misplaced based on what we’re seeing is, you know, folks are getting in and buying their instead of buying an expensive pair of shoes, they’re buying a fractional slice of apple, you know, And, um, that’s awesome. Just like that to me, you know, from my old policy, See, just feels so good.

[0:57:19 Speaker 1] I’m kind of one of those. Just buy and hold investors. I’ve had Andy for, like, this whole year, and it’s growing exponentially, and I haven’t done much trading. And I agree with you. I think people think that a lot of young retail investors are going on Robin Hood and day trading and inexperienced day trading. But I think people are just playing their money in Robin Hood and as almost saves and savings account, but also something that is investing in something that can track. So

[0:57:44 Speaker 0] which is just awesome, right? Because now you’re You have a relationship with that company, right? You’ll you’ll be able to vote your shares this spring through your proxy and you’ll be tracking it and you’ll be looking at larger market developments because you have that ownership, you know. And if you hadn’t, maybe you wouldn’t be looking every day checking in on stuff. I think it really is having an impact on our customers and their awareness of financial issues generally.

[0:58:13 Speaker 1] Well, Dan, we really thank you for being on the episode today. It’s been wonderful talking to you. Hopefully, we’ll get you back at some point in the future. But thank you for being here.

[0:58:20 Speaker 0] Absolutely. My pleasure. Thank you. Thanks for having me.

[0:58:26 Speaker 1] We hope that you enjoyed our first episode. If you did, then stay tuned for more. We have a great lineup of future guests. Each will help us explore the inner workings of financial markets and regulation. Our aim is to make the issues both interesting and understandable. The production is brought to you by the Salem Center for Policy, housed in the McCombs School of Business at the University of Texas at Austin. Our student executive producers from the Moody School of Communication are happy. Sawyer and Zoete are. My co host for this episode is Robert Keithley, who also assisted me with the background research. You will be introduced to more students as the season moves on. Finally, I’d like to dedicate this first episode to a former colleague of mine. When I left government to help start a policy center here at UT, she planted the seed of hosting a podcast. As a talented security markets attorney, she lamented that it was often hard to find easy to understand explanations of financial markets. She suggested that I do something about that. Well, Claire O. Sullivan. Thanks for the idea, and I hope you become

[0:59:26 Speaker 0] a listener