ICI and ESG (with Eric Pan)

[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, bogus.

[0:00:12 Speaker 0] You need to make sure regulation works for everybody in the marketplace and a good trade association with a diverse

[0:00:17 Speaker 1] membership

[0:00:18 Speaker 0] is actually really important to giving you that ability. And if we’re serious about giving investors the ability to

[0:00:26 Speaker 1] direct capital toward

[0:00:28 Speaker 0] Firms, companies that they believe have more consistent S three goals, then clearly we need information about this company’s and the reason why we support something like T. C. F. D. And C. As B is because we need the ability to compare companies And evaluate them against one another.

[0:00:48 Speaker 1] That’s ERic Pen, he’s the president and Ceo of the Investment Company Institute, an influential trade organization that goes by the acronym. I see. I combined its members managed $38 trillion in assets and serve more than 100 million investors. We talk with him about the current administration’s focus on E. S. G. And how the is working with regulators, both in the U. S. And abroad to create a regulatory regime that meets the needs and expectations of both the fund industry and its investors. He also gives his views and other developments and pressing issues for investment companies like proxy voting the future of money market funds who renewed push by some for city designations and how to think about the recent rise in retail investor trading and its effect on the mutual fund industry. My co host today is McCombs Business School student Nathan Graber eric, welcome to the show.

[0:01:39 Speaker 0] Glad to be here. Thank you for having me,

[0:01:42 Speaker 1] Nathan, my co host say hello,

[0:01:45 Speaker 0] thank you for having me on professor.

[0:01:48 Speaker 1] So eric we’re looking forward to hearing your views and your new role as the Ceo of the Investment company Institute. And before we ask our questions, we would like to explore your background a little bit if we may. Is that possible?

[0:02:02 Speaker 0] Sure. Let’s start

[0:02:04 Speaker 1] with how you got to where you are now. You spent a fair bit of time in government and usually when we think about places you’ve spent time at like the CFTC and the SEc, we think about it as regulating U. S. Markets, but in those roles that those institutions, you were the head of regulatory policy, international policy. Can you explain what that is, why it’s important?

[0:02:28 Speaker 0] Sure. So, so I think the first thing is both of these roles were relatively new. When I joined the sec, it happened to be after the global financial crisis of 2007 2009. So I joined at the very beginning of 2011 and I was the first head of international regulatory policy for the SEC. And then when I joined the CFTC as the director of international affairs job was very different than my predecessors. And the reason was because of the global financial crisis, you know, before the global financial crisis. Mostly international affairs for the agency’s was about having kind of non U. S. Market participants being subject to SEC and CFTC regulation. And definitely the U. S. Was sort of the preeminent financial market and everybody wanted to model their regulatory systems after the United States, the global financial crisis changed. A lot of that. First we discovered that there were huge parts of the financial market where we wanted to impose new regulation. That’s the OTC derivative space. The second was that a number of our foreign counterparts, we’re a lot more skeptical of american regulation and they were quite interested on their own to develop their own forms. And this was especially true of europe. So my role as head of international regulatory policy was really to figure out how to navigate this new world. And also more importantly, think about how SEc and CftC regulation would mesh with what was happening in europe and in Asia and other parts of the world. So, so it was an incredibly interesting experience, but it was also one that really was a product of the day and you know, we can talk about this a little later, but it’s something which I think is gonna be a permanent feature of how U. S. Regulators interact with foreign counterparts going forward. So

[0:04:30 Speaker 1] we talked to paul Andrews and I think you know him well, he was the outgoing secretary of Iosco and he gave his view of coordinating roles in international committees and listening to people like you, designees from regulators from across the world and at jurisdictions on views. And can you just tell us what it’s like to go to a committee with People representing up to 40 or 50 other jurisdictions and giving your views and answering questions and trying to share information and knowledge. What’s that like?

[0:05:00 Speaker 0] Sure, So, so I had the pleasure of representing both the SEC and the CFTC on the board of IOSCO as well as at the Financial Stability Board. And as you can imagine, it’s a bit like the United Nations in that you go into these very large rooms where you have representatives from the authorities from all of the major jurisdictions that you can imagine. Singapore, Hong kong japan, the different member states of europe, et cetera. And it really the challenge of these groups is how do you take different viewpoints and actually reach a common understanding, a consensus around how international standards should be developed? And so as the representative from the United States, you really focused mainly on three things. First, making sure that groups like IOSCO were focused on the right issues. Prioritization. 2nd is trying to build consensus and and third is how do you get all these different regulators to work together? So, so that was really the function and it was is a great experience. Did

[0:06:14 Speaker 1] you ever find yourself representing views of your agency, whether CFTc and SEc, that didn’t necessarily comport with your own views and how did you deal with that or vice versa? When somebody brought you a great argument and ask you to take it home to your institution and your institution didn’t listen? How did you deal with that?

[0:06:36 Speaker 0] Well, so I think you always have to remember you’re you’re there representing your institution, you’re not there representing yourself. So I think this is true of anybody in a diplomatic function, which is you do have to separate your personal views from your professional views. Now, with that said, you are also in a privileged position because you’re probably one of the few people from your agency who gets the same amount of information who gets the same kind of uh the broad perspective of views. And so part of my job, I felt was also a responsibility that when I went back to Washington, that I would explain to people that may be the way that they were approaching a regulatory issue was not the only way of looking at something and that that I would say for example, the representative of Germany would say X. And I would try to explain why this may be something they should take in consideration. So, in this respect, when you travel abroad, your representative of your home institution, but when you come home, you have to also be a representative of the international viewpoint. It’s got, you know, to your question, it’s sometimes it’s quite complicated, kind of remembering this in your head, that you have to kind of look at the issue from both directions. After leaving the cftc, you took up a post teaching again, which is something you did prior to joining the sec, why didn’t you do that? So, um, I did have the privilege of actually joining Columbia Law School and spending some time there, teaching and writing. And I think that was primarily the the attractiveness. First teaching is a wonderful experience because it also forces you to understand meaning. You cannot be a good teacher unless you know how to understand the issue, because you have to explain it to other people. And I still teach to this day, I continue to teach a class at Columbia, but also a chance to write. And that’s that’s something you never have the chance to do when you’re in the real world, because you’re so busy and it really is a luxury to have blocks of time where you can think deeply and you can write. And that’s something I wanted to do. But I think I would add a third reason, which is, you know, look academics and especially, you know, full time faculty at universities, You know, they play a really important role because they’re incredibly smart. They have a way of looking at problems, but I think that they also sometimes lack realism and they lack the accountability of people who serve in government functions or in the market. And I think it’s really critical that there is this exchange of viewpoints and I felt that as a former regulator, it was also a way for me to speak to the academic community and kind of provide them with the perspective that I think it’s very hard for them in fairness, it’s very hard for them to have when they are at a university environment. So that was also uh, an appeal to spending time teaching.

[0:09:42 Speaker 1] I like the third point that you raise and I’ve experienced some of that myself being here now for two years at UT and the interaction with the faculty and not just in finance, which is my discipline, but also accounting and other areas. It’s been a tremendous opportunity to have those types of exchanges. But I am wondering what did you learn from your experience and you stepped away from the government? If anything, when you have that chance to write and think about things? did you change your view on anything? Did you look at your time differently than what I thought it looked like when you were there?

[0:10:17 Speaker 0] Well, uh, that’s a really good question. I mean, you know, I think that whenever one does something like this, one has to do it with humility because, you know, expertise comes from many different places and no one has all the answers. So it, you know, I think to have the attitude of it’s a chance to learn as well as a chance to teach is really important. But I think there is 11 thing that I would say about about american universities is so I think one lesson from government is the degree to which people is policy, the degree to which the individual does matter quite a bit. You know, as regulators, we spend a lot of time expressing judgment. We have to make decisions and and how who we are as people and how we’re trained to think is really influential in that process. And one thing about american universities is we don’t teach financial regulation. You know, we teach economics, we teach law, you know, we teach regulatory issues as they come up in classes, but we don’t teach how to be a regulator. And I think this is a real emission because regulators have to do a wide variety of tasks. They have to not only interpret data and know how to ask the right questions, but they need to know how to write a rule, right? They need to know how this supervised entity, right. They need to know how to communicate with the market and, and those are skills that, in my experience, most people learn through experience as being a regulator and, and rarely learned us through their graduate program or their undergraduate programs. And and this to me has always been something that I wish law schools and business schools and public policy school spent more time on which is the art of being a regulator who

[0:12:04 Speaker 1] is best suited to teach that.

[0:12:06 Speaker 0] Well. I think it’s a really hard question because I remember when I was in the government, occasionally when I would hire new people to join my team and I would sit down have to write the job description, I realized how hard it was to write the perfect job description. You know, the SEc and the CFTC tend to hire lots of lawyers and the Fed and the U. S. Treasury Department tend to hire a lot of economists right? But we all end up doing similar things. At the end of the day, you know, the ideal candidate would be someone who had a multidisciplinary background economics law, accounting, you know, understanding of the markets, but those people are very rare and and they’re not formally trained. I do think that there are some places, for example, the London School of Economics in the U. K. Actually have pioneered some programs which I do find actually closer to what I would like to see american universities do when they do talk a lot more about what is regulation and what does it actually consist of? You recently joined? I c. I can you explain at a high level what the organization does, who it represents and the types of issues that it takes on? Sure. So, so in a nutshell, I. C. I. Is a trade association that represents the regulated fund industry. And what I mean by that our mutual funds, exchange traded funds and other investment funds, Um and our members are global in nature. They have they operate and sell these funds all over the world. Now, I see I happen to be the largest association. Are members Manage more than $38 trillion dollars in assets. And they consist of, I think a number of names of firms that people would probably be very familiar with. Vanguard, Blackrock, Fidelity and others. But what’s important part is these funds actually represent investors, shareholders, people like you and me, who may put our retirement savings into these funds. And if we look at that metric, There are about 100 million Americans who are Shareholders of these funds. So we like to think that we actually represent those shareholders right, the interests of the 100 million Americans.

[0:14:27 Speaker 1] So one question I have for you about your new role about being a ceo if I look at the academic literature that says on average, the turnover ceo is seven years. But at the ci if we look at paul schott stevens and Matthew think between the two of them, They occupied that role for I think almost 50 years, that is somewhat remarkable. So can you just tell us what it’s like to be stepping into that role after the two of them? And how does that make you think about your role in that position going forward?

[0:15:00 Speaker 0] Well now, first I should be just happy surviving seven years now, after what you just told me. Look, you’re actually right paul stevens and Matthew think my my two predecessors served as Ceo for a number of years and they were both incredibly successful leaders. Think i c i has been a successful association because both of them have been very strong presidents and they really left behind a really strong group of professionals. You know, i it’s way of things where, you know, I think that there’s the stability they brought is something that I would like to emulate. But I also think that the challenges facing the funds industry, it’s very fast paced and I think the the world that funds operated in 50 years ago, not surprisingly, it’s very different today, so, so I’m very much focused on what’s going to happen in the next five years.

[0:15:55 Speaker 1] Yeah, so we do want to ask you a lot of questions you want to transition to, a topic that I think is at the forefront of the minds of many of the students here at UT and across the campus and globe. And that csg it’s also something that has been taken up by the new administration. And we want to ask your views and thoughts particularly from your position to the I. C. I don’t know some of them you may not be able to share directly because you may be actively working on them. But we would like to get an understanding of how you think the new focus, renewed focus or the intense focus on E. S. G. Is going to affect the fund industry.

[0:16:32 Speaker 0] Sure. I think the place to start is first. What why do the fund industry even care about SG? And the simple answer there is because investors care investors are demanding funds that have an S refocus their demanding funds, taking consideration industry factors. Okay, so so the demand is there and I think the task of the fund industry is how do you respond to this demand? And when we look at this issue then they’re all these questions about, you know, how do we evaluate potential investments for their E. S. G. Qualities? How do we ensure that the type of information that we’re gathering is accurate and it’s comparable and consistent and and this has always been a challenge now with the biden administration coming in and kind of the change in government policy associated with what President biden has said about climate and sustainable finance. You know, there’s an opportunity because previously it was completely up to funds on their own to try to figure out, you know, where to get this information and even what information to collect. And there’s definitely a lot of private actors out there who have tried to kind of build a business around providing this information, the government steps in and through regulation. Maybe moving in the direction of setting certain standards requiring firms to provide certain information regulating what type of information is being provided. And this has the potential of actually making it a lot easier for the fund industry to respond to this demand. And if the funds are able to provide more products, this may also drive the demand for new products. So it’s a bit of a cycle that we have going on. So that’s the reason why this is such an important issue, you know? So whether or not you believe in climate change, the fact is that, you know, there there’s definitely a lot of market activity in the space, and if you believe in climate change, then there is clearly a case to be made that these government initiatives will encourage the direction of capital toward greener activities. Can you explain how the I. C. I helps its members generate positions to communicate to regulators, whether it be the SEC or CFTC. So I see i is a membership organization, right? So as a trade association, we have all these firms who who who join us as members. And so our task is, how do you take all these different firms who, most of the time are thinking about themselves as a competitor in the marketplace? And how do you bring them all together to say we as an industry need to come up with some common positions. So, to Scott’s earlier question about my time in IOSCO and international bodies, there’s a skill set that I developed in that consensus building process, which I find actually very useful in a trade association context and and how we build this consensus is actually through, um, we have committees of members and we use these committees as discussion for us and also places where we say, okay, if we’re all thinking alike about certain issues, can we come to agreement on certain topics? And we have a hierarchy of committees? We have a governing board and then we have various committees under the governing board that have different levels security of representation. So to give you an example back in december, I see, I actually came out with a statement saying that we called on companies. This is issuers to disclose information about climate risk in accordance with something called T, C, F. D and C. As be that decision to put out a statement started off in one of our committees. And when there’s consensus within the committee, it got elevated until eventually we had our board of governors kind of approved the statement

[0:20:39 Speaker 1] was that your DSG working committee?

[0:20:42 Speaker 0] Ah Yes, but there’s actually we have an S three task force and we have an ES three advisory group. So we actually have two es three committees but they worked together on many of these types of issues.

[0:20:56 Speaker 1] Can you also explain what your role is in communicating positions that the government may have to your members? Is there a role there too? And you’re collecting views to maybe coordinate and weigh in on issue with SEC or CFTC? Does it work the other way to?

[0:21:13 Speaker 0] It definitely does. Because if you put yourself in the shoes of a regulator, you care about what the industry thinks. But you know, if you want to talk to the industry, who do you call? You know, trade associations? Like I see I become natural places where if you want to put your finger on the pulse and you say, look, I’m kind of curious as to what regulated funds think about an issue. We’re a natural place because you call us and we’ll bring it up at a committee will say, you know, the SEc is interested in the following issues. And we can take we can do surveys, we can collect different opinions. And so this actually makes the trade association a really important part of the machinery because we are able to channel information to regulators, but also provide an avenue for communication from regulators.

[0:22:02 Speaker 1] So there’s often an argument that trade associations have too much or undue influence or outsized voice. But there’s another argument that is they serve as conduits to constituencies in an efficient way. You know, when somebody comes to you and asks whether or not you served an appropriate role, the I. C. I. Is good governance or bad governance, like how do you respond to that?

[0:22:30 Speaker 0] Well, so, so I would say three things. First is of course, every trade association is different from each other, so so you have to look at them separately. Second is, you know, I think this goes to the credibility of a trade association, right? You know, we live or die based upon whether or not people view us as honest brokers. So, you know, to the example that you just asked if the sec asked us reviews this idea that we would filter viewpoints, or that we would only provide them with certain views, and not everyone’s view would eventually undermine our own credibility, and then will become less useful to the regulators, and frankly, you know, they’ll listen to us less because they won’t trust what we say as much. But the third thing is, you know, about trade association, so, you know, in the case of I c I, you know, I started off by indicating, you know, $38 trillion Americans. So that’s a whole panoply of fund companies, small funds, midsize funds, some very, very large players. And the thing is, especially for our smaller members, they would probably never have the ability to provide their views effectively to the sec. They don’t have large Washington offices and they don’t have the time or the money to spend a lot of time calling the sec or hiring outside counsel to do so. So, so the trade association, I see, I actually becomes really important to them to to make sure that their views are considered as well. And I think this is really important to regulators because you don’t want to only regulate those who have the biggest names or are the largest players. You need to make sure regulation works for everybody in the marketplace. And a good trade association with a diverse membership is actually really important to giving you that ability.

[0:24:23 Speaker 1] Let’s go back to your point, you made earlier about that issue or disclosure follow PSAs be required formats. Is that is this is E S D, a harder task for the issuer’s than it is for the fund is a fund. Our funds wanting issuers disclose more information. I’m going to use the new administration’s push for it to get what they want or how would you frame that?

[0:24:45 Speaker 0] So, no, I would not frame it as it’s a way of trying to shift responsibility or two to get certain people who do more than others. You know, I think any type of disclosure framework, it’s a bit like a chess game has got multiple pieces. And the reason why we focus on corporate disclosure is first at the end of the day, investments are about those who the capital is going to go to. And if we are serious about giving investors the ability to direct capital toward firms, companies that they believe have more consistent SD goals, then clearly we need information about this company’s and the reason why we support something like T C, F D and C as B is because we need the ability to compare companies And evaluate them against one another. You know, Delta Airlines may be different than United Airlines. And and if Delta United are disclosing different types of information, it’s going to be really hard to tell the difference between the two. Now, everything else kind of relies on that initial step, which is getting more information from the companies. So even if we look later on at things like, well, what about information about what the funds are doing? Well, you can’t evaluate what funds are doing unless you can evaluate where funds are putting the money. So again, we’re coming back to the need for corporate disclosure. So that’s why that is the current focus and and from the statements of acting chair Allison lee, you know, we’re very much in agreement with that approach and that let’s focus on corporate disclosure, make sure we get that right. And then other parts of a sustainable finance framework will fall in place. Will mandatory disclosures by issuers help funds? So how? So I think the question of mandatory disclosure, Well, let me answer in two ways vs disclosure by companies as I said, will help funds whether or not it’s mandatory or not it starts becoming a legal question because often when people talk about mandatory disclosure, they’re talking about an sec rule that says under punishment of liability. You know, you must provide certain information. And and here I think it’s a much more complicated issue because if our goal is to ensure meaningful disclosure of information, meaningful in the sense of their disclosing information that’s actually useful to investors, then we have to be very careful about whether or not we also want to use the stick of law to kind of force this, you know, and I think this goes to my comment about the art of regulation because part of regulating is understanding what are the incentives you’re creating. So if I write a rule that says to a market participant, you must disclose, and if you don’t precisely disclosed, in accordance with the rule, I’m going to find you or I’m going to punish you in some way, then you may be creating a liability environment where companies then try to be very conservative or try to use a lot of boilerplate language because you’re trying to stay safe. And if that happens then you’re undermining your ultimate goal, which is to have meaningful disclosure. I think in the case of E S. G, where even though there’s a lot of interest in the area, we are still early days and I think a lot of companies are struggling to determine what type of information they need to show. You know, certain firms have been doing this now for a couple of years, but other firms, especially we talk about small and mid sized enterprises, you know, this this is relatively new for them. I would rather give them the opportunity to feel like that they can disclose more information about themselves before we start making them worry about whether or not this is going to result in some type of fine or liability because that that can quickly chill the type of disclosure they’re going to provide.

[0:28:54 Speaker 1] Let’s go back to what meaningful disclosure entails. I’m going to ask a question that we asked Commissioner Crenshaw in a recent podcast and that is what’s more important to report something like risk disclosure, like what is asked managers to report what the risk of their activities is, or is it more important to disclose those elements or factors that would allow anybody to assess the risk? For example, perhaps your carbon footprint or your governance structure is more important for managers to explain it or to just give the information.

[0:29:34 Speaker 0] So I think ideally you would want them to do both, meaning because it’s really hard to boil down climate risk to a single number or single set of numbers. Any type of disclosure of that nature needs to be accompanied by explanation a narrative. Now, here I hesitate a bit because you know, part of this is maybe just, we don’t have experience yet. You know, I have I personally have not spent a lot of time reviewing corporate disclosure on climate risk. So um you know I want to be careful that I don’t want to be portrayed as having kind of judged the adequacy of that. But my gut tells me that given that when we think about climate impacts, carbon footprint is definitely something that would seem to be a type of information you want to provide. But I also wonder if the type of company matters. You know, uh it’s obviously going to be different for a software company to talk about the carbon footprint than for an oil company. And it just strikes me that you would want to give both types of companies the opportunity to also explain what that carbon footprint means to their business based on your conversations. Does the fund industry believe E. S. G. Investing has the potential to outperform conventional investing strategies? You know, it’s not something that that we think about in that respect. I think we start off with the fact that, you know, there’s investor demand for climate funds and and and kind of other sng type of funds. There’s obviously been been going back to academic work, there’s been academic studies that have suggested that there’s uh, there’s a connection between financial performance and E. S. G. I. I think that we also do believe that a lot of this information is material and material in the context of a reasonable investor would want to know this type of information. But to to kind of talk about will they always perform better than other types of funds? I don’t have an opinion on that. What do you

[0:31:44 Speaker 1] think about the criticism that a lot of funds are engaged in green Washington creating products that are labeled E. S. G. Or environmentally friendly? But they really aren’t. I mean is that is that an issue in the industry? Is it an issue of practice or an issue of bad data? How should we think about that issue?

[0:32:04 Speaker 0] So I think the issue of greenwashing is we have to really look at real cases because you know, people refer to greenwashing and there’s kind of this assumption of, well maybe there’s someone out there who is falsely indicating that they are doing certain things and they’re really not. I think the reality is you know, there are lots of funds out there that actually are trying to pursue certain DsG friendly objectives, But we don’t have we don’t have a standard way for how they can show that they’re doing so. So for example, um ICI in order to assist in this area, last June of 2020 came up with the terminology document, and the point of the terminology document was so that funds would describe themselves in similar ways, and depending on the terms that they used, it would provide investors some degree of certainty that they knew what was the strategy of the fund and what would the fund was trying to do? So, again, uh you know, a fund that is investing in a number of, like, fossil fuel companies? Is that greenwashing? Because they invested in fossil fuel companies? I think that’s that’s uh we can’t look at that. We have to ask ourselves, well, maybe they’re investing in certain fossil fuel companies, because they see it as a way of transitioning from dirtier fossil fuel companies. Right? And so the objective is to be greener, just that they’re not green compared to if they invested in a solar company, have they green washed? I don’t think it’s fair to say that they green washed and we need to have a conversation about that. Where is europe compared to the US on E. S. G. Issues on fun disclosure? So europe is very far ahead of the United States on climate issues. The european union has been thinking about this for a number of years. They have a green deal and they’ve actually gone taken the step of proposing european regulation to embed certain sustainable finance rules into their system. So in that respect, europe is ahead of the United States. You know, I think that gap will close with the biden administration given the statements of their intention by the S. E. C. But also other U. S. Regulators to try to encourage sustainable finance. In fact the financial stability oversight council is meeting right now in which they will be talking about climate finance. But I think, you know, we also have to be aware that europe sometimes follows a different approach than the United States europe very much favors approaches where we would call it top down, which is, you know, the the EU policymakers tend to kind of through very prescriptive requirements, try to tell market participants how to act. So. The EU taxonomy, for example, is a way for the EU policy community to tell market participants you shall treat certain activities as green and certain activities as brown. That is a an approach that I think the US historically has never done. The US tends to favor more market oriented approaches. So rather than having the U. S. Government kind of say this is a good or bad activity but to give market participants the right incentives to to make those decisions for them. And I mentioned this because we of course operate in a global economy these days and, you know, our members operate in europe and the United States. A lot of our issuers are companies of course, you know, have european operations and the degree to which EU regulation and U. S. Regulation conflict creates real problems. Uh It makes it very difficult for international firms, whether you’re on the investor side or the issuer side to do business in both jurisdictions. So there has to be people successors. My successors at the sec, for example, as well as other U. S. Agencies need to be thinking very hard right now how to mitigate those differences because if they don’t then we actually may end up disrupting the international financial system.

[0:36:43 Speaker 1] Yeah, you took my next question right away from me, which is how to funds comply in both regimes and what is the harmonization path? And I think the answer you just gave is that’s up to the U. S. Regulators to figure out how to merge with european regulators. But there’s also examples of where they don’t do that mifid two global data protection and then you just have to live with two separate regimes. Is that an outcome that you think could be likely here?

[0:37:14 Speaker 0] So that’s definitely a possibility. I think that the approach that the US regular should take is actually to try to take it away from the US EU dynamic and move to international standards and to agree on a baseline, a baseline that does not prevent europe from doing what it wants to do, but also serves as a basis as an alternative for the rest of the world to provide adequate disclosure, adequate information that hopefully will also allow them to continue to operate in europe in accordance with international standards. And I think here the work of the fRS Foundation and in trying to bring together the main private initiatives at providing corporate disclosure that includes the work of such as B but also the work of the World Economic Forum and and to bring them together into a international body which has a regulatory governance system, is a very promising approach. And hopefully if in those places, european regulators and U. S. Regulators and asian regulators can get together come to agreement, then that may actually end up allowing us to avoid some of the conflict that I worry about.

[0:38:32 Speaker 1] What you’re saying is having standards bodies create a common language that even if the rules are different, at least everybody speaking the same

[0:38:40 Speaker 0] language. Yes.

[0:38:42 Speaker 1] Well that’s that’s interesting. And let us we had a number of things we want to get to and ask you and we haven’t gotten through half of r E S. G. Questions, but there are other things we want to talk about and ask you about two and so I’m hoping we can get some non E. S. G. Topics and questions. And and our first one is something that’s come up recently in a acting chair, lee speech at an I. C. I event, she brought up some concerns about fund voting. She said one form MPX which describes how funds, both their shares, its outdated and unwieldy according to her leads to opaqueness in the process. And a decade ago, the sec zone I a C investors advisory committee recommended that that forum should become machine readable. Does she have a point? Is that something the I see, I see I should be looking at and waiting on.

[0:39:35 Speaker 0] So. So this is because of her recent remarks which she actually gave at our mutual fund conference, We are actively discussing this now internally. So you, you know Nathan before I was asking the question of also how do you come up with your position? So this is an example of the topic that our committees are now considering. So I don’t have anything to report today, but we’re actively kind of thinking about charlie’s comments. Well, what about

[0:40:03 Speaker 1] the other thing that she mentioned on that current disclosures don’t make clear how many shares funds land out and as a result doesn’t vote. I mean this has been a long running issue, share lending and who’s voting the shares. Is there a solution to that? Is that something that I see is also thinking about

[0:40:23 Speaker 0] it is something we’re thinking about it, I think, Look, I mean, I think we we obviously are going to be responsive to anything that the sec is considering, so knowing that I think this is an issue that the current leadership of the sec wants to talk about it. Something that, you know, I think we’ll be prepared to talk about with them

[0:40:42 Speaker 1] acknowledging the issue.

[0:40:45 Speaker 0] Yes, definitely acknowledging the issue. I I and I don’t mean to be coy other than, you know, I think that this is an example of where there’s a diversity of views and as you’ve indicated, there’s been past practice, and, you know, to the extent that the sec wants to really kind of drill into this, this is the perfect example of where trade association, like I c I can can really add value. Have a question about money market funds. At the 2021 mutual funds and investment management conference, you discussed money market funds and the parallels drawn between the financial crisis and recent COVID issues. What do I see? I members want the sec to do in this area. So, money market funds, It’s a complicated area. I think. I think the simple answer to your question is I see members support money market fund regulatory reform to the extent that it allows money market funds to continue to carry out the kind of the service, the function that that money market funds carry out today, meaning that you preserve the essential characteristics of money market funds. And I think this is a really important kind of point to make, because The the a lot of discussion focuses on what happened a year ago in March 2020. And the reason it happened, it’s focused on that is because it’s viewed as a real life stress test of the financial system, the first real major test since the last global financial crisis. And I think some people are very quick to say, well, look, there was a liquidity crisis which is different than what happened in 2007, but they’re saying, Okay, there’s a liquidity crisis, so therefore something must have gone wrong. We’re very supportive of looking at what went wrong and we think that there are signs that there were problems in the fixed income market that probably can be fixed. But in the zeal to try to say, let’s try to change things around to prevent what happened a year ago, we just want to make sure that these reforms are measured and do not inadvertently destroy money market funds as a product, because we don’t see money market funds as being the trigger for the liquidity crisis. Nor do we see it as the only part of the financial system that was affected by the liquidity crisis. So, so singling out money market funds just from the get go strikes us as being premature and and really kind of not considering other other pieces that that are really relevant to the story.

[0:43:25 Speaker 1] This may not be a fair question, but I’m gonna ask it anyway. Do you think that Covid really was a stress and active stress of the reform? The measures that the Fed took were very swift, very quick. And did funds actually have time to use all the measures that the reform contemplated before the quote unquote bailout happened?

[0:43:51 Speaker 0] So, so I think that I would agree with you that the swiftness of the Fed to act kind of cut short, you know, what was going to happen? Like, I think we can debate the counterfactual for a long time that if the Fed had not stepped in when it did, what would have happened. So to that extent, I agree with you right. It was sort of a it was a stress test, was ended, was ended early because of Fed action. I also agree with you that, you know, was it truly a real stress test? Because, as I said before, what happened in March 2020, I would not characterize as a financial crisis, a financial crisis kind of happened because of a pandemic because of a health care crisis. But this is an example of where there was some type of change in financial assets or some type of failure in the financial system that caused a cascading effect. So in that respect, it’s also not quite a real stress test of the post global financial crisis reforms with that said, you know, one of the things that regulators and market participants had debated for many years in the mid 2000 tens was would some of the reforms of the global financial crisis create a liquidity problem, meaning, you know, we require more capital, require more margin, choir the types of collateral to be held in safer instruments, all things that made a lot of sense, but you know, would that actually create a liquidity problem when push came to shove And in this respect, I think March 2020 is a very useful case study because it shows that there was a dash for cash when there’s an event, an external event where everybody is running to get high quality collateral and and money in general money to pay payroll. If you’re a company, right? If I think we go back, if you remember the stories, people were pulling on their credit lines to the max, I think a lot of individuals not knowing what their personal situation was going to be. You know, was looking to liquidate assets. You know, and and and all of that happening at the same time, foreign central banks, we’re trying to sell us treasury bills, invest amounts all at once. I think it’s useful to look at that and say, okay, so how could the financial system react to this? And here, let me just make my last point, which is, You know, central banks do have a lender of last resort function. And and I do think that what happened in March 2020, I think the Fed made the right choice because I think they saw that there was a liquidity crunch. They saw they had the power to stop it. And what’s interesting is it was the mere announcement of Fed action even before the actually, the Fed doing something. The mere announcement created a very positive impact on the financial system. People stopped racing to get their money because they no longer feared that the money wouldn’t be there for them to get when they needed it.

[0:46:54 Speaker 1] Yeah, that’s a very good point. All of this is going to be discussed at the first f sake meeting of the new administration. And that makes me think of maybe a long forgotten issue that may come up is Sifi Sifi designation, you know, in 2016, leading to the last administration that was abandoned by the F sock in favor of an activities based approach. But just recently, Senator Warren asked Treasury Secretary Janet Yellen about whether large institutional investors, for example, like Black Rock, whether they’re systemically important and should they do anything about it. Do you think the is going to have any views on this?

[0:47:39 Speaker 0] The I. C. I will have views on this and but the views are not going to be new. You know, I think with with all respect to Senator Warren when she was asking questions recently to Secretary Yellen, Uh something that stood out was the fact that a firm like Blackrock, I think she said it’s $11 trillion dollars in size. Now whenever I hear an asset manager referred to its size and the size seems to be the reason why people are saying they should be designated as financially significant or systemically significant. You know, we have to understand that an asset manager is not like saying a bank has $11 trillion. And the very basic differences that $11 trillion dollars which the asset manager manages is not the asset managers money that $11 trillion is the money of the investors. That’s my 41 K. Plan or that might be your I. R. A. And it’s managed by Blackrock and Blackrock can’t take that money and buy a boat with it or go off and acquire companies. And so the size figure becomes, I think I think that this is why talking about size as a function of systemic importance is not true in the case of asset management and the whole point of focusing on activities is to say, okay so size is not the right metric. Let’s look at the types of activities that the asset manager is doing in his position has always been that that that’s a completely reasonable approach and we support socks looking at activities. But we we have a kind of a very negative reaction to anybody who points to size as being the right way of determining whether or not affirm is systemically important.

[0:49:31 Speaker 1] So, I wasn’t surprised by that response, and we’ll see what happens with the new administration going forward on this topic. But I do want to switch to a question about something that I know, you know well, on the topic of legal entity identifiers, also known as the I believe it is something that you worked on one year in government and it seems to be forgotten. It’s a part of the Dodd frank reform that was central to solving the next financial crisis, but we haven’t heard a lot about it. Is that because the issues are solved, they’re all done with is their work to be done there. What is your take?

[0:50:05 Speaker 0] So, I think one reason you don’t hear very much about the early is because it’s been successful. So, for example, when the L. A. I was set up, it was a rather novel idea. This idea of an identifier for every legal entity and the fact is, today, people get lies, and in some jurisdictions, in europe, especially, you know, regulators actually require Elliot I. Um, and in my old regulator at the United States, the CFTC is the main regulator that mandates people to get Ellie eyes and you’re able to get an L. E. I. And it works. But but I think another part of your question is, well then, if the FBI works, then, how come it hasn’t changed the world? Because that was sort of its promise? And the fact is, the L. A. I was always going to be one piece of a set of common data standards. Remember the hope and dream post global financial crisis is we would have the ability regulators would have the ability to look at the global financial system and be able to get a snapshot picture of the, you know, financial transactions at any particular point in time. Or they’ll be able to identify like what is the risk exposure of different entities. And the L E I, which is merely identified for the entity was meant to be accompanied by other identifiers, a product identifier, a transaction identifier and other identifiers. And that work hasn’t been finished yet. That work is still ongoing. So I think that the promise of the L E I let’s not blame it on the L I I I think the guy is a success story. The L E I has made it possible for other identifiers. But those other identifiers have just not progressed as quickly. But I definitely hope that in the future that with the other identifiers that we will come closer to that kind of objective that we had a number of years ago to be able to give regulators this global picture of what’s happening in the financial system.

[0:52:08 Speaker 1] You alluded to some unfinished business and that’s a U. P. I. Universal product identifier. Is that pointed at a particular product? Is there an asset class or product that is most in need of a U. P.

[0:52:21 Speaker 0] So, so here there is a jurisdictional difference because in the United States, U. P. I has primarily been thought of in the context of derivative products, whereas in other jurisdictions, again, europe being probably the most important one, they see the U. P. I as being quite useful for all different parts of the financial system beyond otc derivatives. But even if we were to limit our focus only on to drift as markets, the U. P. I still hasn’t really had a chance to succeed yet. I think it’s it’s still just ramping up. So so my I take call this my consensus building approach. I take the view of, let’s make sure it works for derivatives and then if it works for derivatives, we can expand it to other areas.

[0:53:08 Speaker 1] So this is the is it just naturally takes a long time. There’s no, there’s nothing blocking it or somebody trying to keep it from happening. But it’s just a matter. It needs to work through the system. It’s a complicated problem. Or is there a government or regulatory issue that needs to be solved?

[0:53:25 Speaker 0] So, I’m not familiar with the current status of the U. P. I. But when I was last involved in it, there were a number of complicated legal, as well as economic issues that had to be addressed. You know, part of it is if we’re going to have everyone used this identifier, it shouldn’t be expensive to use. And if there’s going to be an entity to gather this information, we need to make sure that’s an entity that’s not going to use it to to to basically create a monopoly and get monopoly rents. And if we’re going to have a framework where everybody in the world is going to have to rely on a producer of the U. P. I. Someone has like a, you know, kind of a global yellow pages where everybody will, we can identify who’s doing what, then we need to make sure it’s protected and robust, you know, and have the right security protocols. So there were a number of kind of issues that had to be figured out that took quite a bit of time. And and in that respect, you P. I and U. T. I proved to be a little bit more complicated in elia because Ellie I at the end of the day was you know it’s it’s a random set of digits regarding an entity. When you talk about uniform transaction identifiers, think about how many different transactions you can have right? It was you basically multiplying the problem by a hundredfold if not more. And so as those problems came more complex. There’s just more issues that had to be figured out. So the last 30 years have seen a constant rise and managed money namely the amount of money in index funds. Do you think that the rise in day trading and recent

[0:55:03 Speaker 1] market volatility

[0:55:04 Speaker 0] will affect this trend? So I think there’s a reason why people invest in funds most when I talk about 100 million americans invested in our members funds. Let’s think about why they’re doing it right. They’re saving for retirement, they’re saving to send their kids to college, uh, they’re saving it to buy a house, right? So they got long term investing needs. And to me that that use case still would tell people you should be using regulated funds. You know, you should be having a diversified portfolio. And obviously passive investing is very attractive because it’s low cost for people. So when I read about things like, you know, the day traders and what happened with Gamestop, you know, I think the concern I have is are people using money that they would normally be saving for the long term and putting it into the stocks. And are they doing it because they think this will get them to their financial goals faster. If that’s the case, then I, you know, my, my message to them would be, uh, that that’s not a wise thing to do. You should be looking to regulated funds. But I recognize that there are some people who, who they want to speculate in the markets and are willing to take the risk of of losing quite a bit of money. And that obviously is not for me to to to say whether or not that’s good or bad. I’m just, I’m very comfortable and just saying that regulated funds investing in regulated funds is still the smart way to go if you’re looking for long term growth.

[0:56:45 Speaker 1] Well, eric, you’ve been with us for a while, You’ve answered a lot of our questions and we really appreciate your time with us.

[0:56:52 Speaker 0] Well, I’m very glad to be able to be here and thank you for having me.

[0:56:56 Speaker 1] We hope you enjoyed our discussion with ERic. We recorded it as the first f sock meeting of the new administration was taking place. That’s the financial stability oversight council and in it the secretary Treasury Janet Yellen referred to climate risk as a financial stability risk. That’s a pretty bold claim and it’s something that will revisit an upcoming episode with Blackrock co founder Barbara Novick. She too will discuss along with other topics how Black Rock thinks about DSG issues. And another news not captured by this episode is a confirmation of Gary Gensler is the new sec chair. So all of our speculation and open questions and previous episodes on what to expect with the new sec, that will all start to get resolved. The student executive producers of today’s show, our Zoe Tar and Abby Sawyer from the moody School of Communication