Protecting Investors (with Barbara Roper)

[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? Uh huh. One

[0:00:12 Speaker 0] of the things I’ve learned is that

[0:00:14 Speaker 1] the real harm to investors over the years has come from things

[0:00:20 Speaker 0] that weren’t done to

[0:00:20 Speaker 1] them directly.

[0:00:22 Speaker 0] But they’re sort of the

[0:00:24 Speaker 1] the

[0:00:24 Speaker 0] collateral damage

[0:00:26 Speaker 1] of these

[0:00:26 Speaker 0] broader market

[0:00:28 Speaker 1] breaks. And

[0:00:28 Speaker 0] so, like, you know, investors who never bought

[0:00:32 Speaker 1] mortgage

[0:00:33 Speaker 0] backed security certainly didn’t

[0:00:35 Speaker 1] burn in The derivatives market

[0:00:37 Speaker 0] suffered enormous

[0:00:39 Speaker 1] financial harm because

[0:00:40 Speaker 0] our failure

[0:00:41 Speaker 1] to

[0:00:42 Speaker 0] adequately regulate

[0:00:43 Speaker 1] those segments of the market that was Barbara Roper from the Consumer Federation of America. For more than three decades, she has been a leading voice on investor protection issues in financial markets. We asked her to explain how consumer advocacy works, where her influence comes from and how she knows whether she is making a difference. We also talked about market conduct, most in need of regulatory attention and whether the new administration’s focus on social responsibility intersects with investor protection. My co host for today’s McCombs business, school student Robert Keithley Mhm Barbara. Hello, Great to have you on the show.

[0:01:26 Speaker 0] Hello, thanks for having me.

[0:01:29 Speaker 1] And I have co host Robert Keithley McCombs, business school student. Hello. Hello. Excited to be here and thank you, Barbara, for coming on as well.

[0:01:37 Speaker 0] It’s my pleasure.

[0:01:39 Speaker 1] So, Barbara, in my time at the sec, you were a household name In any discussion of a policy issue, staff would often say, What is Barbara gonna think? Your views or widely recognized? You were always part of the conversation even though you weren’t there. And today we’re hoping to, uh, figure out why and Robert is going to lead us off. Yeah. I think a quick overview of the C f A would be great. Barbara, could you explain what the Consumer Federation of America is

[0:02:09 Speaker 0] and

[0:02:10 Speaker 1] why it’s important for young investors like me?

[0:02:13 Speaker 0] Okay, So C f A is a non profit, non partisan consumer advocacy organization. It was formed in 19, 67 or eight during the early days of the consumer movement to serve when when this consumer movement consisted primarily of state and local groups and see if a was created to serve as a voice in Washington for those groups. And we worked on a wide range of issues food safety and product safety network neutrality, utility regulation, fuel economy standards, High cost credit. So across a range of issues. If you’ve got a money back on your auto insurance, that was largely because of my colleagues on our auto insurance. So so we work on a variety of issues. I guess if we’re important to investor protection, I think it’s because we were really the first of the consumer groups to add investor protection issues to our agenda. And in particular to focus on those issues from the perspective of sort of the average individuals who turned to the markets to save for retirement, to fund a college education for whatever long term savings goals. So and we continued there. There are a lot more organizations in this space today, I’m happy to say than there were when I started, but I think we still continue to be leaders in that focus on how the policies affect average sort of individual investors.

[0:03:49 Speaker 1] Barbara, you’ve been there

[0:03:50 Speaker 0] for a long

[0:03:50 Speaker 1] time. Can you tell us how long and explain why you’ve been there that long?

[0:03:55 Speaker 0] So I was hired in 1986 to edit CFS publications. I have been. I’ve worked as a newspaper reporter and a public information officer at a college. And when my husband and I had worked that moved back to Washington, D. C. For his job as a newspaper reporter. Family friend told me CF was looking for an editor for his publications, and I ended up getting the job. And my boss at The Times had gotten funding to do a study on abuses in the financial planning profession. And he said, Well, you know, you’ve been a newspaper reporter with my supervision. You can, you know, you can do this study. I have a degree in art history. I never took an economy finance class. I certainly don’t have a law degree, but you know that that sort of basic ability to do research and write was there in good support from my boss. And, you know, he said at the time, I’m going to make you a star. Yeah, sure, whatever. And I in that study, CBS Evening News, Wall Street Journal, New York Times, on the Today show, You know, I mean, it just it hit with this sort of huge impact, and I suddenly became the consumer movements investor protection person. You know, it’s not a job I would have applied for if it had been listed it when I wouldn’t have occurred to me that that was something that I would be qualified to do or even interested to do. But I guess the reason I’ve stayed with it so long is that when I do find the work worth doing and intellectually challenging, and I have a boss who over the years had a bossy since retired but who over the years really worked to let me grow in the job and provided, you know, all of the flexibility that you could ever hope for And, you know, on that first study on financial planning abuses only got ready to publish. The people who had funded the study didn’t like our findings, didn’t like our recommendations. And I’m thinking, okay, I’m brand new, right, you know. And now I’ve done this study and that, you know, we have this conflict and, you know, my boss sort of brought us both in, listen to both sides and sent back the money and published the study. So if you’re doing what I do and you have so you know, it’s like, you know that you’re going to be able to sort of always express what you really believe. Take the positions you really believe in. That’s pretty hard to walk away from.

[0:06:35 Speaker 1] So the key takeaway is that you’ve had a long career with a C F A. Because you’ve been controversial.

[0:06:41 Speaker 0] Yeah, I mean, I don’t know. I would say I have had a long career at CF because when there’s no one else, there was no one else doing what I do. It’s easy to be the completing consumer advocate on your issues when you’re the only consumer advocate on your issues, which I was for probably 10, 15 years before the community started to grow more. I can’t understate the importance of having a boss who just won back to, you know, has your back. And two is always looking to help you grow and have new opportunities. Not to mention that he wants called me up and said, I’ve been looking at the salary schedule at C F A. And you’re grossly under compensated and gave me a 40% raise. You know, it’s just it’s a pretty good environment in which to work

[0:07:35 Speaker 1] How did you learn about all the finance and economic things? Like he said, he didn’t have much knowledge. Was he a good advocate for that? Or did you learn inside the C f A or

[0:07:45 Speaker 0] so? Yeah. I mean, I’m definitely I am learned on the job, self taught. So on that first step going back to that first study. By the time I finished that study, I knew enough to start a study on financial planning, right. You know, I mean, it has at times I’ve had to learn new topics over the years. I guess the way I approach it is I sort of treat when I start on a new issue. I treated like writing a thesis. You know, I do. I want to know everything, right? You know, for example, we recently did a comment about 18 months ago. Now, maybe on a concept released from the SEC on private offering exemptions went back. I read the 33 act in the 34 act and the conference report from Congress when they adopted the 33 act and a law review article by the guy who drafted it on what they were trying to achieve. And every as you see rulemaking going back to the eighties on, you know what the thought process was behind all of these steps that were taken over the years to open? Uh huh. You know, new exemptions in the law and legal cases, the decisions in court cases that, you know, that decided those factors because I want to, like, I want to know all of the background before I then decide, Like, what is what should our policy be? You know, we’re very research focused in the way we approach is used as CFO. And so I’ve over the years sort of acquired that knowledge just learning on the job and, you know, just digging in and doing the research.

[0:09:26 Speaker 1] We shift a little bit. Maybe have you hope, explain to us how advocacy works, like, what do you do? And how does it affect the world?

[0:09:36 Speaker 0] Yeah. So So advocacy, you know, in the simplest terms is, you know, the effort to influence policy generally in Congress or at a regulatory agency, in my case, either the Securities and Exchange Commission or, on occasion, the Department of Labor. And anytime you’re working on an issue, there’s usually someone on the other side, like if we’re trying to advance a policy, there’s usually someone on the other side that’s trying to prevent it from being adopted. You know, if we’re trying to stop something, there’s someone else’s pushing it. So it’s, you know, it’s a question of Can you persuade members of Congress? Can you persuade the staff and commissioners of the SEC that your view is correct? And so, as I said, for me, that starts with research and sort of the process is sort of What’s the problem we’re trying to solve? What’s the evidence that it results in harm? In other words, why should we focus on this as opposed to something else? Is there an opportunity to address it? So in an ideal world, you know there’s legislation or rulemaking that gives you a chance to sort of advance your goals. But if not, can we create that opportunity? Can we do the research and analysis that leads members of Congress or leads commissioners at the SEC to conclude that this is an area where they need to act, and then if there are other organizations that are working on the issue, do We have something unique to offer in terms of our perspective, and then it’s just, you know, reaching out, reaching out to people directly to have conversations we do. A lot of our work is done through the press. You know that it’s our ability to affect how issues are presented in the press that gives us influence because we don’t have money to make campaign contributions, you know, and we don’t you know, we don’t have a big, powerful body behind us. We have to persuade through our ideas and our arguments. And so it’s just and we don’t usually win. I mean, clear. It’s like it’s, you know, or or if we do sort of win. It’s so like partial and incremental. So I don’t want to overstate how effective that technique is.

[0:12:07 Speaker 1] Barbara, can you explain? You said something that I thought was interesting, and you said We don’t usually win. Can you tell us what a win is? How do you know if you’ve won?

[0:12:16 Speaker 0] So I mean in the classic sense the win is if Congress or the SEC adopts the policies that we think are needed to, you know, protect investors or promote the integrity of the markets in a form that we think is likely to be effective and so that that just frankly, doesn’t happen very much

[0:12:40 Speaker 1] if you keep a proposal from being more extreme than it would otherwise have been absent. Your participation is that also a win.

[0:12:50 Speaker 0] So it’s, you know, it’s progress, right? Like it’s it’s a positive. It’s just And I hear this a lot, right? You know what? Answer? Questioning my life choices, you know, is like How effective are we really people? Oh, it would have been much worse if you hadn’t been doing what you’re doing. You know, like, yeah, that doesn’t feel very satisfying. I mean, I know it’s important, right? But it doesn’t. It doesn’t. It doesn’t feel like a win. And that is, in fact, that’s more common. Oh, this is a little bit stronger than it would have been if we hadn’t weighed in. This isn’t quite as bad as it would have been if we hadn’t weighed in. You know, there are areas that you could point to where we were very involved in the lobbying on the Dodd Frank act, for example, on the Sarbanes Oxley Act for example, and we were very, very intimately involved in the Department of Labor’s fiduciary rule and that, you know that Gol rule was, you know, in the classic sense a win, right, because they did the rulemaking in a form that we thought was likely to be effective. And, of course, it got overturned when the Trump administration stopped defending it in court after the fifth Circuit decision. So and if you look at the Dodd Frank act, that’s a win, right? Except it depended for its effectiveness on regulators doing well the things that they had done poorly in the lead up to the crisis. And I would argue that they have not done well in implementing the law, the things that they needed to do well for it to be as effective as it should be more in some areas than others and the same with Sarbanes Oxley. We’ve seen the reforms that were adopted in that 20 years ago to clean up the audits of public companies have just been decimated in terms of the quality of auditor oversight in terms of the independence of the Auditor Oversight Board in terms of auditor independence and auditing standards, you know, you really see that they’ve been decimated. And so So you pick up and you start to fight again. You know, we’ll try to build it back. Maybe better.

[0:15:06 Speaker 1] Do you think you’re more effective during a Republican or Democratic administration?

[0:15:11 Speaker 0] So clearly and so CIA is non partisan and we work with whoever you know is with us on the issues. But clearly, our agenda aligns better in a Democratic administration that in a Republican. But you know, I can point to several Democratic SEC chair who weren’t at all sympathetic to our positions. You know, there’s not as much. It’s not like once there’s a Democratic office, everything’s good to go, you know, it’s it’s challenging, and I’ve had Republican chairs who have been much more accessible. Harvey Pitt called me like the day he took office at the SEC or shortly thereafter is not that we ended up having a huge over left and our policy agenda or Chris Cox. One of President Bush’s SEC chairs, tons of access. So we talk to and work with whichever party is in charge. This has been an extraordinarily difficult for you, Do

[0:16:21 Speaker 1] you think? Do you think the amount of access is positively correlated with your influence.

[0:16:29 Speaker 0] I mean, I think you have to have access to have influence, but I think we often get access instead of influence. You know, I’ll always take your meeting. I’ll never do what you tell me to do, you know, is is, uh, and an unfortunate reality.

[0:16:47 Speaker 1] So you said you were a bit more effective during a Democratic administration. Are you excited about Gary Gensler coming? The new chairman?

[0:16:55 Speaker 0] So I am very excited about that appointment. I’ve actually known Gary for, like, 20 years. First time we worked together was on the Sarbanes Oxley Act when he was advising Senator Paul Sarbanes on the drafting of that legislation. And I’ve gotten to know him considerably better that during the Dodd Frank, you know, fight and his, you know, his chairmanship at CFTC. And and since then he has the Wall Street insiders knowledge of the markets, right? He was the youngest person named as a partner at Goldman Sachs, and he marries that with a real commitment to investor protection and being a seasoned regulator who actually knows how to use the regulatory process effectively. He knows how to write rules that withstand legal challenge. He, you know, obviously prefers to work on a bipartisan level when that’s available and most of what he did at CFTC he did with at least one Republican voting in support. But he’s not afraid of taking a partisan vote when he needs to. And you know he has. I don’t think he’ll go to the SEC to be a placeholder. I think he’ll want to have a big impact. And I think there are big issues for him to address. And then beyond that, I know he has the respect and trust of the two other Democratic commissioners. Commissioner Alice Inherently Commissioner Caroline Crillon Shop. So I think for the first time in a long time, we have the prospect of having three Democratic commissioners who work as a team. You know, where there’s no drama, and that is an exciting prospect because it unfortunately, hasn’t been the norm.

[0:18:45 Speaker 1] So, Barbara, there’s a lot of talk about a new sense of social responsibility with the incoming administration, and there’s a keen interest among the younger generation environmental, social and governance CSG issues. Is there an intersection with that possible agenda item and investor protection.

[0:19:07 Speaker 0] There absolutely is so a lot of what sort of it operates on a couple of different levels. It’s not going to be easy or probably even not really possible for this administration to accomplish a lot on those issues legislatively, given how tight the divide is, you know 50 50 Senate, the adamant political opposition from some. But the SEC has authority under its existing rule making authority to do a lot in the area of disclosure. The disclosures that public companies make about things like, What’s your climate change risk plan? How are you managing your climate change risk? That’s an issue. It’s not just it’s not just a value right. That’s a material financial issue is how are you going to How are you going to deal with the changing environment? And and then also, what’s your impact? You know, to what extent are you contributing to this problem? That’s something investors reasonably want to know. Same around issues of diversity, an inclusion and what steps you you are taking to promote those social values. And I think what you’re seeing is the disclosure rules that the SEC are supposed to be driven by what reasonable investors view as material, what information do they want? You know, in order to make investment decisions clearly, for many investors issues around environmental issues, particularly climate change, but more broadly and racial diversity and how you treat your workers and are important. And they’re important not just to individual investors, but they’re important to asset managers. And they’re important both because they consider them financially material and because they consider them sort of socially important. And so I think the SEC has the potential. And will I I feel, you know, like I don’t bet, and I would be willing to make a sizable wager that this will be a major focus of the S E. C s agenda in the coming years. The other piece of that is that if you’re going to go in that direction and say we’re gonna do this like socially responsible investing or this is an E s g fund, then there has to be some real credibility behind that. You have to be concerned about things like greenwashing, where I heard a new term lately woke washing. You know, you have to make sure that their substance So there has to be real transparency and accountability around that. And I would say that, you know, a lot of that is focused on what we can do in the public markets. But if we continue to have the majority of capital raised in private markets, those policies are going to have a limited impact. So part of what you need to do if you care about these issues is also addressed this issue that we’ve endlessly expanded the ability of companies to raise unlimited amounts of money in the private markets with no disclosures and no accountability. So I think it it is both an issue in itself, and it ties into other important investor protection issues.

[0:22:42 Speaker 1] So we definitely want to circle back to private markets before we do. I’m hoping to get your thoughts on a recent op ed by Arthur, 11, former chairman of the SEC on the NASDAQ proposal on board diversity. Do you want to? Do you have any thoughts you want to share?

[0:23:00 Speaker 0] Yeah, I mean, I’ve again. I’ve known Arthur Levitt for many years, and he’s done many things that I admire. I thought this op ed was unfortunate. You know, the NASDAQ proposal is very moderate, you know, either add this sort of minimal level of diversity to your board or explain why, and that just shouldn’t be a big reach for coming. And I still got an all white, all male board in this day and age. We ought to be looking at why that’s still the case, and we ought to be willing to use, you know, these kind of prods to get people to at least examine their process. And I think in fact, he’s swimming against the tide here. I think the I think we will see things pushed beyond what’s in the NASDAQ requirement in the coming.

[0:24:01 Speaker 1] Do you think that’s going to be a priority for the new SEC and Ginzler administration?

[0:24:07 Speaker 0] I do, Um it’s a big issue for Alison Heron Lee, who is already a commissioner at the SEC. And she’s already been sort of focused on what the SEC can do under its authority. And I think, as I said earlier, given the limits that the Biden administration is going to face in pushing this agenda legislatively, I think they will be looking to agencies like the SEC and other financial regulatory agencies to use the authority they have to advance that agenda. It’s just consistent with their whole focus on promoting racial inclusion, ending the racial wealth gap, addressing climate change and other environmental threats. You know, promoting fair labor practices across a variety of issues that they’ve ended. Identified as priorities. The SEC has a role to play. And while the SEC is an independent agency so they don’t have that the administration doesn’t exert the same kind of direct control over their agenda that they can at a Cabinet level agency. The nun I would be shocked if the SEC didn’t pick up that up as part of its agenda. I don’t I mean, I think there’s zero chance that the SEC won’t pick it up as a priority

[0:25:38 Speaker 1] in terms of other priorities. Historically, Democrats have been very fond of the fiduciary duty. Um, and there was a big regulation recently passed under a Republican administration called Regulation Best Interest. In last summer, investment advisors and financial professionals began complying with the new standard of investor care. Can you tell us what that is? Is an important

[0:26:03 Speaker 0] So I just like to make 11 correction as someone who’s been harping on this issue. First, a couple of decades, historically, there has been a Republican and Democratic indifference issue, and it is only reason. I mean, like I used to. The first letter I wrote to SEC every SEC chair, starting with Arthur Levitt, was a letter urging them to take this issue up and to no avail. This is an issue where we have, you know, we talked earlier about how do you respond to an existing opportunity, or do you try to create the opportunity? I’ve been trying to create this opportunity for a couple of decades for for the SEC two. Raise the standard of conduct that applies when brokers and advisors are giving advice and recommendations to retail customers to match the reasonable expectations of those customers. So if you call yourself a financial advisor and you promote, this is a relationship of trust and you encourage the customer to rely on your recommendations. You ought to have a fiduciary duty to do what’s best for them and to set your own financial interests aside and what we’ve. What the SEC has done over the years is let the broker dealer industry transform itself in terms of its marketing and how how it describes its services and, to a certain extent, how it provides those services into something that’s more advice driven without changing the standard of conduct. So regulation best interest was adopted. To try to address that issue, you know, finally, is to do rulemaking to to raise the standard of conduct for broker dealers when they give recommendations to retail investors, mom and pop investors. The problem is that they took the best interest terminology, and they didn’t define it. They simply sort of adopted a standard that uses the term you meet your best interest obligation under Rigby I by making recommendations in the best interests of the customer.

[0:28:14 Speaker 1] Circular logic,

[0:28:15 Speaker 0] circular logic, plus a few disclosures, plus mitigation of conflicts. And then again, you know there’s this obligation to mitigate conflicts of interest, and your policies and procedures have to be reasonably designed to mitigate conflicts of interest. But there’s no guidance from the SEC on what that means. And so, like you read language from firms now that says we mitigate our conflicts through a combination of training, supervision and disclosure. In other words, we’re not doing anything to reduce the conflict. So I think the standard is problematic, but for a variety of reasons, when it doesn’t do anything to eliminate the confusion, the difficulty investors have distinguishing brokers who are regulated as salespeople from investment advisors who are regulated as advisers. And it’s not a high enough standard as interpreted by the SEC to rein in abusive conduct. And you’ve got one customer who could have one account this an advisory account subject to one standard one account. That’s a broker dealer standard subject to another. And so we think this is an area that will need to be a priority to be fixed in the new administration.

[0:29:32 Speaker 1] There is something called form CRS, part of the new regulation. What is it? Who is it for and does it work?

[0:29:40 Speaker 0] So the idea was that you could create this brief pre engagement disclosure document that both brokers and advisors would have to provide to prospective clients that would help them make an informed choice about who they want to rely on, and we support having a brief, plain English disclosure document. But all of the evidence, you know, including research that the SEC itself conducted, has shown that If the disclosure doesn’t solve this confusion, even well designed disclosure doesn’t actually lead to inform decisions. But for investors between brokers and advisors, and these are not well designed disclosures these disclosures actually in several ways to do more to obscure the differences between brokers and advisors than they do to clarify them. And had the SEC tested them, as we repeatedly urged them to do, they would have discovered that the disclosures were that investors weren’t able to use them to make an informed choice. And I think they refused to test them precisely because they knew if they tested them that they would discover that they didn’t work. And their entire regulatory approach depends on them working. If you’re going to maintain different standards for brokers and advisors, investors need to be able to make an informed choice between them, and the disclosures don’t enable them to make an informed choice.

[0:31:00 Speaker 1] So let’s talk about their effectiveness. Jason Zweig and Andrea Floor or The Wall Street Journal, recently wrote an article financial firms failed to own up to advisers past misdeeds. They found that 20% of the roughly 6000 brokerages and advisers they

[0:31:16 Speaker 0] analyzed incorrectly

[0:31:17 Speaker 1] reported that they had no past blemishes. Does that surprise you?

[0:31:22 Speaker 0] You know, I have to admit it did. And I’m pretty cynical at this point, right? You know, I didn’t expect the disclosures to be good, but But to just not even comply with the law, that actually did shock me. There’s nothing ambiguous about the requirement to include your disciplinary record and these disclosures. And so for a firm not to do that like, what does that say about their compliance department? That either they didn’t know that this was required or they didn’t care. So yeah, I actually found that quite shocking, even as I expected the disclosures to be ineffective. Like I said, I did expect them to sort of follow the basic requirements of the law.

[0:32:18 Speaker 1] So, Barbara, you want to ask you about market crises and disruptions and thinking about change more broadly, that might be needed in the new administration? Is there anything left left over from the Dodd Frank Act that remains unaddressed or needs to be addressed?

[0:32:40 Speaker 0] There are, I mean, I think there are a handful of rules that the handful is probably an exaggeration there. A couple of rules that the SEC has never finished, I think executive compensation being one. But I guess the question here is not so much have they sort of finished doing. The regulations that needed to be written were mandated by that act is what they are. The rules they adopted adequate to address those problems, let alone the problems we haven’t thought about yet. That will emerge right? And I would say in a couple of important areas they they aren’t so I’m not going to pretend to be able to judge the derivatives regulations. I learned just about enough about derivatives to be dangerous during the fight over done. Frank and I do not claim to have, you know, an expert under understanding of how effective those regulations are, and that’s important because it was the derivatives market that spread the risk throughout the financial system. So making sure those are those were done correctly is pretty significantly important. But in a couple of areas, I think it’s clear that the regulations that were adopted or the legislation itself were not adequate, and one has to do with the lack of transparency around asset backed securities and in the sort of private debt markets more generally. So one of the lessons of the financial crisis should have been that even the most financially sophisticated investors don’t actually make really good investment decisions if they don’t have any information to base them on, you know. So if you have, if you’re investing in asset backed securities and you’re not getting any disclosures about those securities, and you know you’re relying instead on a rating from a credit rating agency that, by the way, is paid by the person who’s structuring the accent backed securities, that’s maybe not going to and very well. We still have a huge amount of debt sold in opaque private offerings in this country. And I think that is an issue that needs to be addressed before it blows up on us again in some unexpected way. And then the other one, the credit rating agencies, you know, that was in fact, a major. There’s a whole section of Dodd Frank devoted to regulating credit rating agencies, and I think it’s been extraordinarily ineffective in part because so there was a debate at the time between those who thought what you needed to do was change the business model. But as long as credit rating agencies were paid by the issuers of the debt they were raiding, they were going to be biased and approaching that. And then there was another faction that said, The solution is just to eliminate our reliance on credit ratings. You know, write them out of our regulatory system and it’s the eliminate reliance crowd that one. The problem is that nobody actually had anything to offer as a substitute for credit ratings, like if you write them out of the laws. But you still have to consider whether something is credit worthy. What do you have to use instead? And so everybody is still relying on credit ratings? So it was sort of an empty gesture. And then there’s all of these things. You know there’s inspections and disclosures and whatnot, but the inspections reports, if you read them, they find the same violations year after year. They don’t name names about the about the firms that are guilty of those violations. So they’re sort of no real accountability and and we’ve We’ve been looking at this for decades, right? You know that the credit rating agencies worked great right up until some there’s some destructive disruption in the market, and then they don’t work. And so we’ve given them this sort of gatekeeper role in our markets, and we just haven’t found a way to make them perform that function effectively. And I think that’s a continuing risk and, you know, and that’s an area one of the things that God Frank said that we thought was the best chance of being effective in the credit rating agency space was something called Universal Rate. So if you’re going to give a triple A rating, you have to. It has to have sort of similar default characteristics across asset classes. So the same force a municipal debt, corporate debt as structured products. And if you can’t do that, if you can’t write, you know, a ratings methodology that does that because the asset classes are just too different, then you have to use a different rating system for, say, structured products, and it can’t just be Triple A S P right, you know, and the reason that’s important is because those ratings, even though they’re sort of out of the regulations they’re still very much in, like when pension funds or money market funds or someone else making decisions about what they can invest in the ratings still play a part. So if you you really want to get ratings for those structured products that reflect the risks and those ratings, you’ve got to do something along those lines that forces ratings agencies to adjust their ratings when they’re shown not to be well correlated with the actual default risk. We always sort of looked back to see where the risks lie, and then the next thing is often something very different that we didn’t anticipate. So I think you can’t just say Are we at Did we do a good enough job in addressing the last crisis? Because, let’s face it, in this past year when we went through that extraordinarily volatility in the market, right at the lockdown of the economy around covid, the markets actually withstood that shock remarkably well. And even where you saw some disruptions, like in bond DTs, they weren’t cataclysmic, right? You weren’t seeing systemic risks, so there’s obviously some things that we’ve done that have made the markets more resilient that have help to ensure that they function in those times of stress and that’s you know, that’s great. That’s really important. We need to be thinking about where the next source of risk and disruption might come from, that we haven’t adequately sort of factored into the way that we regulate the markets.

[0:39:38 Speaker 1] Speaking of the markets being resilient, the market went up a lot this year with the pandemic looming in the background. Um, does that worry you when it comes to investor protection?

[0:39:49 Speaker 0] I mean, we know that you know the market isn’t the real economy, and as someone who has lived through the sort of dot com bubble and bust of the night late 19 nineties, you have to be thinking about whether or hit a similar period now. But I don’t know that that’s the case. If the market is sort of forward looking, you know, is it an expression of optimism about like, I don’t know, If I could make those kind of assessments, I’d be richer than I am, right. But it does. Yes, it does concern me that there’s that there seems to be such a fundamental disconnect between the market and the real economy and that, you know, that’s usually usually that that that gap narrows in a way that’s extraordinarily painful for investors. And I would say I think about myself as someone who works on issues that impact real investors. You know, how do you keep them from being taken advantage of for bad brokers are being sold bad products or whatnot. And one of the things I’ve learned is that the real harm to investors over the years has come from things that weren’t done to them directly. But they’re sort of the the collateral damage of these broader market breaks. And so, like, you know, investors who never bought mortgage backed security certainly didn’t burn in The derivatives market suffered enormous financial harm because our failure to, you know, adequately regulate those segments of the market. And the same investors who didn’t own a share of Enron stock lost a lot of money in their four oh one K plans or whatever because of the extreme, you know, drop in market values that came from that are, you know, around the bust, you know in the post dot com the dot com bust. So I have to be focused, not just on the sort of issues that that one might traditionally think of as retail issues are mutual fund disclosures clear or broker subject to an appropriate standard, but more generally, our our markets regulated in a way that, you know, makes them transparent and promotes the efficient allocation of capital and makes them resilient and promotes market integrity, subject not to manipulation. And those are, you know, those are Those are tougher issues to grapple with the tougher issues to influence. If you’re a consumer advocate,

[0:42:33 Speaker 1] let’s, uh, let’s talk about collateral damage amongst retail investors, particularly with the rise in the stock markets. A lot of online day trading. Uh, we had a recent guest who you know well, former SEC commissioner Dan Gallagher. He’s now the chief legal officer of Robin Hood, and that is a

[0:42:51 Speaker 0] stock. He’s

[0:42:53 Speaker 1] busy, Uh, and what Robinson has done is it’s made an expanded access to capital markets to a new generation of investors, particularly young investors. In your opinion, what do you think of that development?

[0:43:06 Speaker 0] So I’m Look, I’m positive about using technology to increase access to the markets for small investors to young investors, as long as you know what you’re giving them access to is something that’s actually beneficial for them. And because Robin Hood makes its money by encouraging people to trade a lot, they make their money on payment for order flow. They want people to trade a lot. That’s often the worst strategy for people. So I guess I contrast it with something like when some of the robo advisors where they’re using technology and they’re giving access to small accounts with very low minimums and whatnot that the messages you know, we’re going to put you in the super low cost E. T. F s in a well diversified portfolio and, you know, promote, buy and hold investing in world. Periodically rebalance your portfolio. You know it’s boring, right? You know, it’s just like stodgy, old fashioned investing. But it’s also if you’re investing and not gambling, it’s also a much It’s a much more appropriate approach for the vast majority of investors. So that’s what I worry about is not. I mean, there’s nothing wrong with trying to use technology and being innovative in the way that you use it to bring in a new generation of investors. And it’s just what are you? Are you going to exploit their lack of experience and lack of sophistication to build your bottom line. Are you going to build a product that really is designed to promote their best interests? So let

[0:44:51 Speaker 1] me bring Robert in here as a guest for a second instead of a co host. Because I know he is a Robin Hood user, just like many other students here at UT. Uh, can you just offer whether you feel like you’re exploited or how you feel about the Gamification aspect of a trading app like Robin Hood? Do you have a view? Yeah, well, I actually fall into the boring investor, which, what Barbara’s talking about, I do not actively trade. I just have a couple of E t s I’m invested in and some stocks. And as you know, e t f could really perform really well when the market crashed. They did a lot better than other things. Um, so I’m kind of boring. I’m not. Then they’re actively trading, and I haven’t really tried to, um, see if I could do options or something more sophisticated. Um, but I was wondering Barbara, like, what’s your viewpoint on that? Do you think there is, um, enough regulations on young investors doing more sophisticated investments.

[0:45:48 Speaker 0] So, um, so one of the complaints against Robin Hood is that they weren’t following their own standards for approving investors for options trading, and, you know, and those standards were pretty minimal. Um, and they weren’t following those. But the way we regulate our markets is less about what people can and can’t do, and more about making sure that they make. They have the information they need to make good decisions. And I’ve become pretty skeptical over the years. That disclosure alone actually is effective in helping people make good decisions. Obviously worked for you. Kudos worked for my son. I’m sure the fact that he has me breathing down his neck has nothing to do with that. But I don’t want to pretend that I know what the answer is on that issue. I do think it’s an issue that needs a little more five. So when I started working on these issues back in 1986 the percentage I mean it, the markets were still really a rich man’s playground, right? The percentage of the population that invested was something like I’m thinking 10% that was in the market I mean, it was tidy, and that was when a lot of this sort of approach to regulation, you know, sort of took shape. And now you have around 50% and it’s the primary way we fund retirement, which was not the case back then. And I just think it calls for us to rethink some of these these issues in light of the modern reality.

[0:47:31 Speaker 1] Barbara, we’ve covered a lot of ground. I want to circle back to something that you alluded to earlier, and that’s access to private markets. And this has been something that’s been talked about a lot over the past few years is that a lot of gains and investment opportunities are retail. Investors are shut out from the last administration, took some steps to make access to private markets more accessible. And, you know, can you offer your views on that aspect of those developments?

[0:48:01 Speaker 0] Let’s be clear about what we’ve done. What we’ve done is made it easier for issuers to market their securities to investors without providing the essential information necessary to value those securities without ensuring that everybody has access to the same information without ensuring that everybody gets the same price. I mean, so it’s It’s popular to present this in sort of, you know, as a oh, we’re shutting investors out of this This market, what we’re trying to do is preserve the basic principle of transparency that was adopted in the wake of the stock market crash of 1929 and was fundamental to our market success there. It is the reason our markets were the entity of the world and we have been gradually dismantling those requirements so that now I think it 70% of the capital raised in 2019 was raised in private markets, you know, and again that means because Red D is the primary method through which that capital is raised, they don’t have to provide any disclosures, and they can really use unlimited amounts of capital. And so we are, in essence, re creating the conditions for a major part of the market that existed before the 33 act was adopted. I think that is a cataclysmic Lee dangerous approach to be taking, and I think instead of looking to further expand retail access to investments that aren’t appropriate for any but a tiny portion of the population we should be looking to restore an appropriate balance so that we restore the primacy of our public markets and the health of our public markets.

[0:49:49 Speaker 1] Yeah, I think I think packs definitely fit into that trend of increase accessibility to traditionally private investments. What’s your viewpoint on special purpose acquisition companies and how they’re currently regulated,

[0:50:02 Speaker 0] Right. So, um, they look a lot like the blank check blind pool, penny stock offerings I worked on back in the eighties. So everything old is new again. So let me start by saying the one positive thing about Sfax, which is that at the end of the process, you have a public company so that you now have the transparency of the regular reporting and then insight into that company. So it is, you know, I guess a marginal benefit that you’re bringing companies out of the private markets and into the public markets. Beyond that, I think the biggest problem is that the incentives, you know, they’re great for the promoters, right? You know, they’ve been very profitable for the promoters. They have not been nearly so profitable for investors, you know, The Wall Street Journal reported using some Renaissance capital data that the average returns for stacks since 2015 was negative, 1.49 And you know, the stats facts have underperformed both the broader market and the traditional I P. O s. I think in 2020 because of a couple of very successful facts, they actually did better than I P. O s in that one year. But as a general rule, so they have not. While individual examples have done well for investors, they have not, as a category, performed well for retail investors because the incentives don’t align. You know, the there are structured in a way that doesn’t actually create an incentive for the promoters to make sure that they do the best possible deal to make sure that when they purchase a company that is well valued, they have to get a purchase done in a certain amount of time. They’re going to profit, whether it’s a good dealer, a bad deal, and then they also they’re alleviated from the rules on a traditional IPO that keep you from hyping your future performance. So they have a They don’t face the same liability when they make questionable claims about their future prospects. I think that’s problematic. So I think I I saw in an interview that Gary Gensler mentioned stacks as an area that he would be interested in looking at if he’s confirmed his chair. And I think, you know, I think that’s inevitable. But I and I think there’s some obvious places that you can sort of sort of try to tackle the issues. But, you know, I I don’t know the extent of what the SEC can do under its existing authority without new legislation from Congress.

[0:52:49 Speaker 1] Barbara, As we wind down our time with you, I want to defer to youth and give Robert the last question. Thank you, Barbara. What is your advice for students interested in financial markets?

[0:53:04 Speaker 0] I guess my my sort of general advice is, you know, you find the thing you do for free and then find a way to make money. And I think you know, there there are, you know, there are areas in the financial services fields where I think people were attracted by the money more than by the nature of the work. Often, what you find is that they then develop a passion for some aspect of the work and then, you know, like I hear over and over and over again for people who sort of started out in a traditional broker dealer, relationships selling products and ended up as advisers really committed to working for teachers, you know, to help, you know, whatever. So I think it’s in any job. Find the thing that you do for free and do it for money. My sister says I found a way to argue for a living, which she seems to think. It’s a perfect embodiment of that and then beyond the sort of career aspect of it, you know, for a sort of how you manage your own finances. Piece of it. Like I said, I just think don’t be tempted by the bells and whistles. You know, most good financial practices are really boring, and you know, if you can if you have money you can play with that’s fine, you know. But if if your financial decisions are critical to your ability to afford a secure retirement or pay off your student loans or buy a house or whatever,

[0:54:39 Speaker 1] you heard it here. Barbara tells students to be boring.

[0:54:43 Speaker 0] That’s right, save your creativity for other aspects of your life. But if you have that market changing innovation, I mean, that’s the beauty of our markets is actually the extent to which, from their very earliest days, they have continually evolved and innovative and offered new choices. It is the brilliance of our system. So go do that and do it for good, not for evil.

[0:55:16 Speaker 1] Great. Well, Barbara, we thank you so much for your time here. Today was wonderful. We hope you enjoy this episode, and if so, please rate it so that others can find it. The production is brought to you by the Salem Center for Policy Housing McCombs School of Business at the University of Texas at Austin. If you’d like to learn more about the center, visit Salem center dot org. Our student executive producers from the Moody’s College of Communication are happy. Sawyer and Zoete are my co host. Robert Keithley assisted with the background