The Biden Memo (with Caroline Crenshaw)

[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] I don’t think the biden memo really speaks to the question of

[0:00:16 Speaker 1] disclosure versus

[0:00:17 Speaker 0] other types of regulations. I think it’s more

[0:00:20 Speaker 1] about ensuring that the

[0:00:22 Speaker 0] assessment of a rules, costs and

[0:00:24 Speaker 1] benefits, whether it’s

[0:00:26 Speaker 0] imposing a disclosure requirement or something else, includes a full consideration of its impact

[0:00:33 Speaker 1] and that includes the

[0:00:34 Speaker 0] impact on

[0:00:35 Speaker 1] the environment and people’s well being. That’s sec Commissioner Caroline Crenshaw. She’s talking about the biden memo on cost benefit analysis. On january 20th in his first day of office, President biden directed L and B. The Office of Management and Budget to make recommendations on how the regulatory review process can, among other things, promote public health, social welfare, racial justice, environmental stewardship, human dignity, equity and the interest of future generations. Until now, these issues were not explicitly required to be considered when agencies implemented new regulations for the sec. The overseer of securities markets complying with memo would until writing about issues that appear to for been absent in the economic analysis that supports their rules. Conservative groups claim the memo is licensed to justify anything undermining the intent of robust cost benefit analyses. Commissioner Crenshaw, she takes issue with this interpretation, explains her support of the biden memo principles and discusses how they related to a host of issues within the S. E. C. S. Regulatory purview. My co host, today’s McCombs business school student as she stab Commissioner Crenshaw, welcome to the program.

[0:01:48 Speaker 0] Thank you. It’s great to be here today,

[0:01:50 Speaker 1] Ashish, my co host, McCombs Business School student. Say hello hi everyone, thank you so much. Uh So Commissioner Crenshaw, we are excited to have you here today to talk about, among other things, your views on an executive memo issued by President biden on his first day of office, asking federal agencies to rethink how they do cost benefit analyses and the regulatory reviews. This is an area that I happened to focus on quite a bit during my time in government. I know that you have at least two experts on your staff that probably know the issues better than me. So we have a number of questions. So we’re looking forward to getting answers to Before we do. We were hoping to maybe learn a little bit more about you and your transition to the commissioner role. And is it possible for us to start there?

[0:02:42 Speaker 0] Sure. Of course.

[0:02:43 Speaker 1] And maybe also give you an opportunity to explain everything you’re about to say?

[0:02:48 Speaker 0] Yeah, I’ve decided I’m going to move out to the end of my first answer because it never fits anywhere well. So, uh, but I can go ahead and do it now. I will just say before we begin that the views I expressed today are my own and do not necessarily reflect the views of the staff, my fellow commissioners or of the commission. So with that out of the way, which is good to do up front, let’s go ahead and get started. Great.

[0:03:13 Speaker 1] Thanks so much. Like with other sitting commissioners, you were a former counsel to Commissioner first, I believe, with Commissioner Stein, Karen Stein, and most recently with Commissioner rob Jackson, what is a bit perhaps unusual is that typically these roles are separated, you leave the commission and then you return with your wings and you take on a commissioner role. In your case, it was different, you went straight to being or from council to commissioner. Can you tell us how that came about and what it’s like to do that transition?

[0:03:43 Speaker 0] Well, I’ll start with sure what it’s like. It’s, it’s, it’s exciting, it’s busy and it’s certainly a humbling experience so far. I will say I’ve been drinking out of the proverbial fire hose if you will. I went from being responsible for offering advice to a commissioner about a work of a couple of the divisions. Uh, you know, I thought I had a really good sense of what all the divisions did and of everything that the Commissioners were looking at to being responsible for all of it. And that’s a really big change. And I’ve, I’ve learned really the true extent of the work that comes before the commission, which I didn’t appreciate as as much as I thought I did before, but I’m not complaining. It really is a great honor and I’m thrilled to be here. And I’m, I’m really thankful for the folks that helped me get through the process and everyone I got to meet along the way through my various jobs at the commission and with commissioners died. And Commissioners Jackson, who you mentioned, and I think that’s how I ended up here today.

[0:04:40 Speaker 1] Commissioner Country. I’d like to ask a little bit about how your journey has influenced maybe, you know, your philosophy in general. Could you speak to how Insider quote unquote Insider commissioners differ in philosophies compared to, let’s say, commissioners selected from the private sector or other fields.

[0:05:03 Speaker 0] So I can’t necessarily speak to the philosophies of other commissioners. But I think one thing that my Insider status as you have phrased it, that it’s given me really a strong appreciation for the staff and that leads me to want to work with them closely and to take advantage of their deep knowledge and expertise. And I think wanted advantage I have is I know where to find that. I know where there are experts throughout the agency that might not necessarily have as much exposure to Commissioners. And so I really get the advantage of having that knowledge of who has that information and where, where I can find it, but obviously going through the appropriate channels, but knowing that it’s there in the commission and I really enjoy working with all of my colleagues every day.

[0:05:49 Speaker 1] So, in terms of influence or what has influenced your paradigm, your way of thinking? How much of it was inherited from working with previous commissioners, Stein and Jackson, And in particular, is there anything that you differ on with respect to advocacy or interest? So where are you the same or where you’re different? Or are you still learning that?

[0:06:10 Speaker 0] Well, I will say I agree with former commissioners Jackson and Stein, 100 of the time when they’re right. Mhm. Uh but but in all seriousness, I think they both got it right a lot of the time, however, I am serving at a different point in time on a different commission and my views, my focus is in my priorities are very much my own. For example, I’m focused on the implementation of regulation best interest. This predated commissioner signed entirely and did not go into effect until after Commissioner Jackson’s tenure had ended. So that’s something I’m really thinking about is the implementation and I also I have a military experience and I serve as a reservist and the Judge Advocate General score for the United States Army. And that has really motivated me to take a particular interest in retirement savings and other investor education and protection issues. And so that’s one area where I think that brings, informs my decision making that they didn’t necessarily have.

[0:07:14 Speaker 1] Well, let me ask you this, you said that the issues in front of you are different. I also know that Commissioner Stein and Commissioner Jackson had pet issues. I recall Commissioner Stein was very focused on structured data for example, and I know issues like dual class share structures were of particular interest to Commissioner Jackson. Do you have pet projects or pet things that as commissioner you now want to address or push forward that might be unique or different from them or others

[0:07:43 Speaker 0] may. I think all of my areas of interest are the most important is what I would say. Um, um, but no, in all seriousness, I do think one of the most important areas for me is regulation best interest and and making sure the implementation of that is effective. I do think as you know, I gave a speech recently on, on penalties and our enforcement program, that’s an area I’m really interested in looking at and thinking through and making sure that we are effectively deterring violations of the securities laws. I think I’m interested in the corporate governance side of things as well as the social side of things, in addition to the environment and climate, which has been getting a lot of recent attention. I think there are a lot of areas, there are 10 B51 plans as an area that I am particularly interested in, that. I think the commission can make some some moderate changes relatively quickly. That will have a lot of impact on the market and building investor confidence. So again, I’m really looking to build investor confidence in a variety of ways throughout the commission. Uh, and that will lead I think to investors being able to save more effectively retirement. And then this retirement savings is an area that I am particularly focused on.

[0:08:57 Speaker 1] Commissioner Crenshaw. We’d like to touch on another aspect of your resume. You just mentioned, which I found particularly unique, which was the fact that you’re a captain in the Army Reserves, specifically in the Jag Corps. First, we’d like to thank you for your service to the nation, albeit in a different capacity than your current role. But second, do you mind speaking to how that came about, how you joined it and how that’s prepared you and influenced you in a unique way?

[0:09:30 Speaker 0] Sure. I am a captain and I just found out I have to do a whole bunch more classes and work. So if I, if I want to be promoted to major. So, so that is something I’m gonna have to do as well if I want to get promoted. But I volunteered for the army reserves for a few reasons. First service the country is an important value for me. Well, I’m obviously a civil servant in my sec role as well. The army is an opportunity to play really direct role as part of the team, part of a team for our country and that really appealed to me and it’s something I really strongly believe in. It’s also proven to be an opportunity to develop leadership experience. I think a lot of the best leaders I have known in my legal career have also had military experience. And so I think that was one thing that motivated me as well and I think it turned out to be true. The military emphasizes leadership in a different way than the civilian side and I’ve learned from some really exceptional leaders and I’ve, they’ve given me exposure to different styles of leadership and that’s something I’m trying to take with me and my job as commissioner and really emulate the styles and the facets of leadership that I think have worked really well on the military side. And I think one of the important things for me is it also has given me a sense of a real world example of why it’s so important for the sec to prioritize investors, including service members and stresses for me the importance of understanding how retail investors save for retirement and the costs and the benefits of various investment products and opportunities and how investors are interacting with the markets. So it really gives me an opportunity and exposure to that in a way I might not otherwise be. So it’s something that I’m extraordinarily glad I did and want to continue doing.

[0:11:21 Speaker 1] That’s quite remarkable and we are really grateful. I had a quick follow up. There are a lot of students who listen to these podcasts as well and I was wondering whether you had any advice for them on questions about pursuing careers and in the armed services or even in the reserves and balancing that with a role in civil service or in the private sector.

[0:11:44 Speaker 0] So it can be done. It’s not easy. I will tell you that. I don’t think any of the service members, the soldiers in my unit, have it easy. Everyone’s balancing civilian jobs, family and their work in the reserves, which everybody takes seriously and everybody really wants to do well. Fellow service members from my unit are returning from deployment regularly, returning from mobilizations. But I think it really is something that you really believe in. It’s something that you learn a lot from. It’s something that gives you exposure to a variety of different areas, Whether it’s law, whether it’s technology, whether it’s infantry side of things, it really, you can do so many different avenues and get so many different exposures to concepts, ideas, various, even just places in the world geography. And so it’s something if folks are interested in, I encourage them to do it is there are certain of the services you cannot go directly into the reserve decided. So that’s something to keep in mind. You might have to serve active time and then go into the reserves. But you can on in some capacities go directly into the reserves. So again, if it’s something you’re interested in, I do encourage everybody to move forward and if they have any questions they can contact me. Yeah,

[0:13:00 Speaker 1] Well, thank you. Let’s talk about the January 20 memo issued by President Biden. It was directed at federal agencies to modernize their regulatory review in the context of cost benefit analyses to promote, among other things, social welfare, racial justice, environmental stewardship, human dignity, equity, and the interest of future generations, a lot of things. Well, the SEc is an independent agency. It’s traditionally committed to the regulatory precepts of executive orders in this area. How do you think the sec will and should respond to this memorandum?

[0:13:38 Speaker 0] So, we’ll start with an initial matter that the biden memo is a directive to O. M. B. To make recommendations about how to use regulatory review to promote the objectives that you just listed. And we haven’t seen those recommendations yet. So right now, I don’t think we know exactly what the approach is going to be. And of course, as you said, because the SEC is an independent agency, the memo is not binding on us the same way that it is for the executive agencies. That being said, our approach is always informed by relevant memoranda and executive orders. So this memo is certainly something I think we are aware of and we plan to pay close attention to. And I think as you know very well, we currently perform a cost benefit analysis in accordance with a memo that that’s on our website and which we refer to internally as the guidance. So it may be that one way we respond to the memo is to make some updates to the guidance. We now also have about 10 years of experience with the guidance. So even putting the biden memo aside, I do think it makes sense to consider updates That reflects some of the more recent jurisprudence in the area, as well as what we’ve learned in the past 10 years about the economic analysis?

[0:15:02 Speaker 1] How well do you think the sec has followed the existing guidance, as you said as a 10 years old? Has it done a good job of that?

[0:15:12 Speaker 0] You know, I think there’s areas where we’ve done a very good job and I think there’s areas that we can look to improve it. You know, I think as part of our analysis and as part of our statutorily required analysis, we need to be thinking about competition. And I think we need to consider whether our rules encourage competition in markets that are dominated by a handful of large entities like credit rating agencies and stock exchanges. And I would also like to ensure that our economic analyses consider investor protection benefits. That can be difficult to quantify, like the increased investor confidence that can result from a perception of market fairness or transparency. And I also think it’s important that we should be analyzing the impact of our rules on underserved groups such as minority and women owned businesses, uh and minority investors. And I think again, we have a talented team in our division of economic risk and analysis, but I think these are areas that I would really like to see us beginning to think through.

[0:16:14 Speaker 1] There’s been a discussion around measuring these some of these factors. There are some who suggest that anything can be justified if standards are subjective enough, that they can’t be measured or quantified. So is that a applicable or relevant concern here?

[0:16:35 Speaker 0] So, to start with the sec in its economic and risk analysis is always considering the importance of benefits and costs that are difficult or even impossible to quantify. I think some of the examples of those are, we discussed the benefit of a rule in terms of promoting capital formation. That is something that’s typically difficult to quantify. If you look at those discussions in the Economic analysis section of our rules, I think we almost never quantified the benefit, but we still account for it in the analysis of the rule and I certainly don’t hear much criticism of our approach there. So to the extent that people are critical of accounting for a positive impact that is subjective or hard to quantify. I think they aren’t critical of the way we discuss capital formation, so it’s possibly how they have to, how they feel about the subject matter as opposed to about the quantification specifically

[0:17:45 Speaker 1] and specific to disclosure what are appropriate ways in which the sec could or should require firms to disclose these difficult to quantify factors.

[0:17:58 Speaker 0] So I think the sec has again long required disclosure of information that’s difficult to quantify the management discussion, analysis, disclosures that the SEc requires I think are one prominent example and we’ve never been required to regulate only what we can quantify, what can be quantified. So, you know, I think there are examples throughout our disclosures of areas. Again like the M. D. N. A discussion that would be informative in this area moving forward.

[0:18:31 Speaker 1] Do you think the memo depending how he comes out and the recommendations from O and B? Do you think it will affect the matters that will be undertaken at the SEc or just the manner in which they are evaluated?

[0:18:44 Speaker 0] The economic analysis is something that really should happen at all stages of our rule making process, including identifying new projects and I certainly support involving our economists and getting their input as early in the process is absolutely possible. And informing the policy and our guidance says we should be doing that as well. So I don’t think you can really separate the evaluation of the rule from the decision to initiate the rulemaking at the cost and benefits of a particular approach should be considered at all stages. In my view,

[0:19:19 Speaker 1] can you think of any actions in recent memory that might have been done differently or it could have been done differently if the new standard have been applied?

[0:19:29 Speaker 0] Well, as I said, I don’t think there’s anything in our current rulemaking approach that forbids the consideration of indirect or unquantifiable costs or benefits. However, I do think that there are recent rules where a different approach uh might have resulted in greater benefits along the lines of the factors that are laid out in the memo, for example, the recent amendments the commission made to regulation Sk did not address climate at all, nor did they require meaningful disclosures on human capital management. So I think disclosures on these items are relevant and material to investors, but they can also play a role in advancing. I think some of the objectives mentioned in the biden memo by allowing investors to direct their capital to companies with more sustainable or equitable or inclusive approaches. I think similarly, in 2020, the sec moved to limit the ability of investors to advance proxy proposals in what’s known as the 14 a eight rule. And they did this by increasing the steak that an investor must have in the company in order to advance a proposal for that company to here. And they also eliminated the ability for shareholders join together to advance proposals. And I think there is a resolution now to reverse this change under the Congressional Review Act. But if they went into effect these changes, I think would limit the ability of shareholders who want the companies they own to adopt either more sustainable or inclusive or equitable policies. And to suggest that to management and I do think that that perhaps works against the factors that the memo we’re talking about suggests are important.

[0:21:16 Speaker 1] So, I guess in many ways when we put together economic analyses and I was still there. In fact, working with one of your councils on this, we always had a lot of deliberation over affected parties. And it seemed to be somewhat of a subjective thing to think well who is affected by a particular rule. And I recall distinctly that when the jobs Act came out, we didn’t actually talk about jobs because that was under the purview of purity is regulation. And it was kind of odd that in all of our releases that we did, we never talked about the impact of the rules on jobs, even though it came from the jobs act. And I guess my question is is this now just give greater license to talk about overall impact of regulation in in terms of who might be affecting the different ways it will be effective.

[0:22:03 Speaker 0] I think our existing guidance on economic analysis and rulemaking does contemplate the discussion of indirect benefits and costs. Um as I’ve already said, you may not have specifically talked about jobs, but I do think that we have had the authority to discuss indirect costs and benefits uh in qualitative terms. So I think that is something that our economists are practiced at doing. We need to write well informed rules. But I think will be hard pressed to find an economic analysis existing where every potential cost and every benefit of the rule is assigned a dollar amount. And I think that makes sense. You know, if you only account for what can be quantified the analysis is unlikely to account for key impacts of the rule and I think it would be deficient. Some things lend themselves to quantification easily, but if we only focus on those easily measured costs, we do perhaps miss the bigger impact impact rule is likely to have. So I think this is something we’ve had the authority to do now maybe um as you say, not specifically talk about the jobs, but I do think it’s something we have had the authority to do that are economists are good at and I continue to looking forward to working with them moving forward.

[0:23:17 Speaker 1] Okay, so I have another question and it it echoes a lot of the conservative views or concerns about the memo and that this might push the SEc more towards Merritt regulation and away from transparency regulations. So up until today, most of the measures have been about making investors aware of risks, not keeping them from taking those risks. Is there anywhere where that breaks down or the concerns overblown? Given the biden memo or what are your general thoughts on merit versus transparency regulation?

[0:23:51 Speaker 0] So, I’ll take a little bit of issue with the premise of that question. As I imagine you probably thought I would give in your introduction. I think ensuring adequate disclosure and transparency is certainly a very important and key aspect of the S. E. C. S remit. But our our authority does extend well beyond that. And I think chairs of all political persuasions have taken actions that, you know, that could be considered a merit based again, regulation. Best interest is one that comes to mind for me now, that rule, which Chairman Clayton promulgated, didn’t just say that broker dealers need to disclose their conflicts. Instead, it put an affirmative requirement on them to act in their customers best interest. Uh, That said, I don’t think the biden memo really speaks to the question of disclosure versus other types of regulation. I think it’s more about ensuring that the assessment of a rules costs and benefits, whether it’s imposing a disclosure requirement or something else, includes a full consideration of its impact, and that includes the impact on the environment and people’s well being.

[0:25:06 Speaker 1] So you we were going to ask you about regulation best interest, but you brought it up twice now, and it is an interesting topic. So let me just ask you the top line question that is, isn’t working as intended or does anything need to be changed about either the rule itself or in the enforcement of it?

[0:25:23 Speaker 0] So right now we’re gathering information all about how firms are implementing regulation, best interest. We at the sec are doing that. Finra is doing that, the States are doing that and I really look forward to working with Finra and the States as well as our staff, as to see how firms are carrying out their best interest obligation when they’re making recommendations and see how they are mitigating various conflicts of interest. I think staff highlighted in a round table a few months ago that they have identified some areas of concern. One of those areas, for example, is an instance in which are instances in which broker dealers are disclosing conflicts when they really should be mitigating them. In other words, reducing the conflict of interest. So it does not inappropriately influence the recommendations that they’re making. I think the staff also highlighted that it’s not always clear how firms are considering costs or reasonably available alternatives when making recommendations. So I’m looking at these areas, I’m looking across the board really to see how it’s being implemented, whether it’s being implemented effectively so that investors are getting high quality advice is the rule is build getting in other words, the advice of the recommendation that really is the best match for the investor.

[0:26:53 Speaker 1] So let’s talk about form CRS for a moment. Barbara roper was a guest of our show a little while back and and she thought it was an unmitigated disaster. And there’s I think Michael Zweig, the Wall Street Journal wrote a piece showing that I think upwards of 20 or more percent of all former crs is actually didn’t disclose a violation when they had one. They couldn’t even report accurately on it. So there are some voices out there that think it’s a problem. Do you share those concerns? Jury’s still out on Form CRS Any thoughts on what might you be changed? If anything?

[0:27:29 Speaker 0] So let me start by saying that the idea behind form CRS is a good one. Investors should be provided with useful disclosure about the relationship before they engage with a financial professional to help them make informed decisions about who to work with and what services to choose. Now, of course, in adopting CRS, the commission provided firms with pretty significant flexibility and how to design them and flexibility can be a double edged sword, right? It can be used to innovate in really helpful ways, for example, displaying information in ways that investors can and want to digest, but it can also be used in ways that perhaps are not as helpful. The forms might be less comparable if you’re trying to actually compare to broker dealers, one with another. If they have a lot of discretion, it might be harder to compare. They might use terms of art for that specific financial firm. Uh, and of course the discretion can be abused. So I’m certainly interested in seeing whether we can do investor testing to try to answer the question of whether it’s helpful and if not what we can do differently. But ultimately, I think investors are going to tell us. And so I look forward to hearing from them and look forward to seeing what changes, if any need to be made and how we can most effectively make it a useful document.

[0:28:55 Speaker 1] So you’ve already learned the art of elegant dodge and not giving an answer while also being informative. At the same time,

[0:29:02 Speaker 0] I’ll take that as a compliment.

[0:29:06 Speaker 1] Yeah. So let’s let’s turn back to the memo. But in the context of climate tSG this is something that I’ve learned being a professor now back at UT is something that the students care passionately about. I’m gonna let a she should ask the question because he is the passionate party here. But is she sure? What do you what do you have to say or ask on? E. S. G. Yeah, absolutely. We we wanted to ask about SG disclosure in particular as you’re aware of the S. E. C. S. Investor Advisor advisory Committee last May recommended that the commission began in earnest an effort to update the reporting requirements of issuers to include material decision useful E. S. Chief actors and Acting Commissioner Allison lee recently pushed out a request for comment in the context of what should be done with the respect to climate. So, in your opinion, where do you think the SCC should go from here?

[0:30:12 Speaker 0] So I think the agency exists in part to facilitate material disclosure to investors. And I think at this point there is no dispute that there are many investors who consider E. S. G. Related issues material to financial performance. When we look at physical impact of climate change and its disruptive impact on existing supply chain infrastructure, it’s easy to see why the market is interested in knowing how companies manage that risk. Similarly, studies have shown that companies that adopt strong executive compensation clawback policies to get not just to the part, but to get to the G part, really experience significant improvements in financial reporting quality and have decreased likelihood of Ceo turnover. So in terms of what the sec should do, I think we need to listen to investors about what disclosures will be most useful to them. As charlie suggested in her request for public comment. And I’m really looking forward to seeing the responses to the requests for comment and working with staff on how to facilitate high quality, comparable disclosures that investors are looking for.

[0:31:25 Speaker 1] So you you alluded to something. That is also a question that we had and and that is the separation of the E. The S and the G. We we tend and the, you know, the royal, we tend to talk about DsG as one thing and you C E S. G ratings. Is that the right way to think about it? Should we have E. S. G. Ratings or or should they be separating the components thought about differently.

[0:31:51 Speaker 0] So I’m not sure it makes sense to have one metric for E sng together. But what I will say is that it’s important to have objective metrics that are consistently applied within industries and across industries as applicable. I think we need to focus on identifying benchmarks for E. S. G. Disclosures first. I think IOSCO standards setting board initiative is a positive step. I’m certainly interested in seeing what public comments we get on the standard that should be used on a related note. I understand that some credit rating agencies are starting to take E. S. G. Metrix into consideration when rating issuers, which to me underscores both the value of this information to investors but also the importance of ensuring that we have a disclosure regime that yields consistent and again comparable SD related disclosures.

[0:32:49 Speaker 1] Commissioner Crenshaw, do you believe there is credence to the idea that the U. S. Would be setting a international model for other foreign regulatory agencies when it comes to E. S. G. Obviously we know that, yes, it is not just a domestic phenomenon but an international one. So do you put a weight into the idea that the sec, through standard disclosure could serve as a model for other regulatory agencies on the S. G.

[0:33:20 Speaker 0] So I think historically the FCC has made certain disclosure requirements that perhaps other regulators have followed in this case. I think there are other regulators out there that have been focusing on this specifically, perhaps prioritizing it a little bit more than the agency has in the past few years. So I think it’s really key to work together. And I think if we work together again we can work with IOSCO, we can work with all of the international standard setting boards to come up with perhaps a floor. Um, and then obviously each country is different. Each country has their own requirements, their own standards and go with really a building blocks approach. So I think it would be critical to to work on a floor. And then each country can build on that as they seem appropriate, as works with their regime and their securities laws and their regulatory requirements.

[0:34:15 Speaker 1] So speaking of the floor, would that be a good way of describing disclosing characteristics of E. S. G. Versus interpretation? And in particular, there’s a lot of discussion about disclosing climate risks, which is requiring for issuers to interpret the information and disclose if we think the impact of that will be, which is much different than just, for example, saying, here’s my carbon footprint, here’s how much water I’m using, here’s what my board looks like.

[0:34:46 Speaker 0] So I think it’s all instant ideas. I really I really want to see again what the request for comment comes back with before I get too far. I obviously sort of have thoughts on on how to approach it and but I do want to see sort of what the request for comment returns and what information we get back on really how best to approach it.

[0:35:09 Speaker 1] You recently gave a speech on enforcement for all great title by the way, it got a lot of press and a lot of attention and you brought up some aspects of enforcement about tougher penalties for wrongdoers. I think the headline commentary really focused on your belief that too much emphasis has been placed on whether shareholders benefited from misconduct or will they be harmed by the penalty? That seems to be kind of a well worn argument that is like a pendulum swinging back and forth between administrations. But what I thought was more interesting in your speech was talking about penalties being based on how hard it is for the sec to find the conduct and tied to the amount of sec resources exerted. And that led me to wonder from your seat. How well do you think the sec staff are using analytical resources, novel of methods and original approaches to find fraud and misconduct versus you know, the boots on the ground examinations and inspections or collecting referrals and whistleblower T. C. R. S from the industry.

[0:36:24 Speaker 0] But I want to start by saying, the enforcement division really does a fantastic job. Their work really is goes above and beyond. And our staff has significant expertise in using data analytics to make sense of anomalous market activity and to attribute misconduct to individuals or to entities. Agency staff of course rely on information we received through exams or through the T. C. R. And the whistleblower referrals to identify misconduct and the latter are crucial sources of information. But staff must also use the analytical tools and their expertise to determine whether there have been securities laws violations and if so, who should be held accountable? So I sort of I think I answered your question, but I I think it’s got to be a combined approach where we’re using again the boots on the ground inspections and T. C. R. S. And whistleblower referrals, but really continuing to use the analytical resources to the degree possible. And you used

[0:37:30 Speaker 1] to work in the, what used to be called the Office of compliance inspections and examinations. And now division examinations, do you think there’s enough connection between examinations, program and policy does? More emphasis needs to be placed there.

[0:37:46 Speaker 0] I think that they policy and the lessons learned from the exams does make it to the policy divisions and to the commission. Can we always improve on that? Of course. And I really think that we do, we take their analysis and their findings into account when we’re looking at rule makings. We, you know, as we’re making decisions. So I really think they play an important role, but like all things in a fairly large bureaucracy, there’s always room for improvement. Why

[0:38:18 Speaker 1] was the division renamed or why was the office renamed division? Is there any significance to that?

[0:38:24 Speaker 0] Well, so as someone who did get her start in Oc or what is now exams, that’s obviously an issue that’s close to my heart. And I think the name change isn’t about changing is not about changing what they do. And despite my strong support for the name change, I probably will continue to refer to them as OC, but they have played as we just talked about an incredibly important role in the commission in the last 25 years there, instrumental in terms of promoting strong compliance and, and culture at firms. And they also important and informing policy. They also are the second largest group at the SEC. Only enforcement is bigger. So I think the changes of just about better reflecting OSI’s contributions and its overall role, the commission more than it, is anything else

[0:39:10 Speaker 1] like to turn to a topic that has been discussed for a long time, that of private offerings. You’re on record, dissenting from the expansion of access to private offerings by retail investors. This is an issue that’s passionate. Too many young people. Do you mind explaining why in your thoughts on this?

[0:39:31 Speaker 0] Yes, I mentioned to hear more about that. That for me, one of the questions that I have is really, is this about access to private offerings for retail investors? Or instead is it about private offerings getting access to investors? It sounds like you have a lot of colleagues or and classmates who are passionate about this, but I will say I certainly haven’t had investors banging on my door to get this access. But as you know, uh, private offerings really lack the traditional investor protections that attached to registration, most importantly, transparency, accountability and liquidity. So the main way that the sec works to protect investors in private markets is to try to ensure that those offering unregistered securities can only sell to investors who can both assess and bear the heightened risk in the private markets. And those are what we call the accredited investors. And when the SEC changed the definition of accredited investor, it missed an opportunity. In my mind, we should have updated the income and net worth thresholds for those who qualify as an accredited investor. We haven’t changed those thresholds, but they have effectively Been loosened by inflation over the past 30 years. So I certainly would support revisiting this issue. And I think regardless of what you think about access to the private markets, the boundary between public and private markets should not be changed by just simply mirror in action.

[0:41:12 Speaker 1] So, you know, changing the threshold. It’s interesting because I think for as long as I was at the commission, there was always a discussion about what the threshold should be and what is an accredited investor and it seems like it’s a definition that never really has a good landing place wealth obviously is an indicator possibly correlated with ability to invest, but not necessarily a good one. Is it the best 1? Or are there other ways to think about being in a credit investor that’s not necessarily tied to wealth?

[0:41:44 Speaker 0] So I’m certainly open to thinking about all the ways that we should be thinking about in credit investor, the wealth piece goes to the ability to bear the risk, but not necessarily the ability to assess which is sort of what I hear you saying. So are there other ways? And I think that’s one of the things that that rule was designed to get out of? There are other ways we can get to who can really assess the risk effectively and and take it on. So I certainly think, you know, more than happy to think about ways we can do that. But again, I think sort of just changing this boundary just because we didn’t do anything is is one of the reasons that I was not supportive of that rule.

[0:42:26 Speaker 1] And you mentioned changing the threshold, it implies that we know who is going to be impacted by that change. And just a general question, if not a specific one on a credit investors, Do you think the sec has good data or does that data ever reach you on how investors fair When they participate in private offerings? Whether it be 506 offering one that’s generally solicited or regulation a offering or crowdfunding? Do you have information that makes its way to you that allows you to make an assessment of whether or not the outcomes are reasonable.

[0:43:03 Speaker 0] So generally, no. And that was another reason that I felt we shouldn’t necessarily move forward changing the definition until we have the exact data you’re discussing. I think going back to the earlier point, we were talking about the information that we have, the data, the economics should govern throughout the process, our rule making and we do not have good data on how investors fair when they participate in these offerings. To the extent some of the entities make exempt offerings are public companies. We can see how those entities do post offering because they have certain filing obligations. But really that’s not the case for private companies. And those really are a majority of exempt offering. So I think we missed a really good opportunity in some of the rules we issued last fall to start collecting this data. And I think it should be an important priority going forward.

[0:43:52 Speaker 1] And what what would be the method of collecting the data? Would it be through like a form D offering through the current exemptions? Like Reggae? Is it updating those disclosures or how do you get private offering information through the existing authorities?

[0:44:08 Speaker 0] Well, one of the one you mentioned, we had a proposal, I think it was from 2010 to update Form D uh I think that would be certainly something we should consider moving forward on on how we can update Form D to get at some of the really important information that we at this point don’t necessarily have good data on.

[0:44:27 Speaker 1] Well as an academic researcher of course, we’d love to see more data in that area. It’s often a chicken and the egg problem where approving getting additional data is premised on arguments that aren’t supported by the data because we don’t have it. So I hope you move forward on that that one in particular shifting gears a little bit. We had a guest recently, Bill Gurley. He’s a venture capitalists in Silicon Valley who has taken a lot of companies public and he’s been very vocal on the traditional I. P. O. Process. And he uh is a big advocate of something called a direct listing, which I’m sure, you know, well he has a big complaint about firm under pricing and that is investment bank setting the price. That ends up not being the accurate price. And we now have 40 years of data that says it’s 20% underpriced is the typical IPO that’s a lot of money left on the table. And so he and others have pushed for direct listings. And most recently, the NYC at a rule approved that would allow primary issuances. So raising capital as part of a direct listing which would forego the typical underwriting process. I think you have some views here. Would you like to share them?

[0:45:37 Speaker 0] Well, sure. I’ll start um, you know, on on bill girlies comments, I’m certainly very interested in anything that makes it less costly for companies to go public. But an important part of that is just it cannot be at the expense of investor protection. So I wanted the direct listing the question have to be careful not to prejudge anything here because Dad Zac has filed with the sec. But speaking generally, I’m certainly not opposed to the idea. I think direct listings that include a primary offering have the potential to encourage companies to go public, and I would like to see more capital raising activity take place on the public markets rather than the private ones. However, as I said in my statement on the proposal, I do want to make sure that we aren’t compromising investor protection in this move away from the traditional underwriting process. Specifically, I want to be comfortable that someone in the offering process is incentivized to do careful due diligence on the company in the absence of this traditional underwriter. And I also want to try to ensure that the investors are not losing certain legal remedies they have if there are false and misleading statements made as part of the offering process. So those are just considerations I have. But you know, I certainly again, I am interested in anything that makes it less costly for companies to go public.

[0:47:02 Speaker 1] We have a few more questions to ask you and one that’s come up quite a bit is a Gamestop and payment for order flow. And this is something that again, the students here at U. T. Have been following closely and are very interested in. So I’m gonna turn this one to the Sheesh and uh, let him go at it. Yeah, this is definitely was a hot topic on campus. Just like to get your opinion on, let’s start with payment for order flow. Do you think in general this issue gets the attention it deserves? There have been a lot of opinions in the popular press, uh, from Capitol Hill on this. Do you think that it’s well understood by the stakeholders and what should be done if anything?

[0:47:46 Speaker 0] Well, it’s certainly getting attention now. I’m not sure it was before, but it’s certainly getting attention now. And I do think that that’s a good thing to me. The biggest question in this payment for order flow issue that you raise is how these order routing practices align with the brokers, best execution obligations. And I would really like to see us study the impact of order routing practices on execution quality. Uh, and to the extent we don’t have the data we need from existing rules. I think we need to update those rules and make sure that the sec and the public can really understand the impact of order routing practices on investor income. Sorry, outcomes rather. So I think that’s something I would certainly like to see us do. And I think that answers your question of, you know, we need to look at it and we need to make sure that we have the data. We need to really ensure that everyone understands the impact of these practices

[0:48:49 Speaker 1] order routing in general. Right now, the focus is on retail, but there was also a transaction fee pilot that was struck down the courts and I believe, and I’m probably not gonna get it right. So I’m not an attorney, but the sec overstep its authority and collecting data without a clear purpose for doing it. And my question is we’re focused on retail investors today, but is the bigger issue that go all way back to Michael Lewis’s Flash Boys and the impact on by side and liquidy not being there. That they think is there because it disappears before they get there. Is there, you know, where is the real harmer issue and payment for order flow?

[0:49:29 Speaker 0] So I think there’s a lot of questions about payment for order flow, some of which you touched on and some about the transaction fee pilots. Well, you know, I think there’s, there’s questions about sort of what, what are the concerns about best execution? And to me, just as a little background, we require brokers to seek the most favorable terms when they’re executing customer orders. This is across all venues. And so I think one of the things you know, that we need to be thinking about is can you reconcile, uh, that obligation with an agreement to route a customer order flow in return for payment? So that’s one question that I have. There is also just a question about price improvement more generally, and broker dealers who have payment for order flow arrangements often say this is a win win because it creates price improvement for the customer. But I think we do need to look carefully at that claim. The statistics on when we get price improvement are based on the national that’s bid and offer and they exclude lots. They don’t necessarily account for better prices that might be available. And I think there’s also a question about who benefits from the price improvement is a broker dealer passing that on to their customers. So there’s a lot of questions here and you raise the transaction fee pilot. And I really think it’s all related to the question of how order routing incentives, impact execution quality. I think the transaction fee pilot would have given the sec some valuable information that would we could be using right now to answer that question. But these are all things that I’m certainly interested in. I think we should be looking at.

[0:51:09 Speaker 1] Well you’ve given us a lot of your time and I don’t wanna take any more of it, but I do want to give is she is the last opportunity to ask you a question. This was a really great discussion. Again, we really appreciate it. I wanted to end on a more general note of career advice for young listeners. Obviously in today’s economy, young college grads are being recruited quite heavily by technology companies, by finance, by banks and other companies in the financial sector, consulting firms. And so an organization, as you know, is only as good as its people. So what does the sec need to do to update its pitch to young young people who want to come join? And do you have any general advice for young listeners on what a career at the sec would look like?

[0:51:59 Speaker 0] Uh what what do we need to do? I think one thing, at least when I was in school, I didn’t even necessarily know the sec had intern opportunities, summer intern opportunities opportunities throughout the year or an honors program which we have had at times and you know, I hope we will consider again. So I think one of the things we need to do is is be actively out there on campus is letting those students know that opportunities exist and you don’t necessarily have to be in D. C. We’ve got regional offices as well. And I think we get to deal with some of the extremely interesting issues that are become certainly in the past few months more mainstream, you know, like Gamestop and payment for order flow. Probably prior to that we would have been discussing payment for order flow on this. So I think we really get a glimpse of the really interesting issues that we deal with every day. I don’t think we’ll be able to make a commercial like army does. I saw recently an army commercial that was really quite cool about all the various opportunities It made me want to join all over again. I’m not, I’m not sure the sec has the budget for that, but we really do. We really do have exciting opportunities to learn about these challenges and to think through the policy implications of how are securities laws have worked in the past, how, how they move forward, whether they need modernization. And I think advice, I think the second part was advice on at the SEc Just be open to opportunities, be open to any division. Be open to all various aspects. You know, it’s not necessarily you don’t have to have a always an upward trajectory. Can think about taking steps back or white lateral. And if that helps you learn more, just always be willing to learn. Uh, and I think that can really help you both at the SEc and in general and just be passionate about what you’re doing. And the folks at the SEc are passionate about what they’re doing. And that’s one of the things I love most about this agency.

[0:53:58 Speaker 1] Commissioner Crenshaw, thank you for being with us.

[0:54:01 Speaker 0] Thank you very much for having me.

[0:54:09 Speaker 1] We hope you enjoyed today’s discussion. It’s on topic that I spent many years working on when I was still at the SEC. During my time there, I supervised dozens and dozens of economic analyses. I also helped develop and implement the 2012 guidance that Commissioner Crenshaw referred to. That’s a memo from the General Counsel and the Division of Economic and Risk analysis to the rule, writing divisions of those practices the SEC needs to follow when writing and justifying new rules. It was written in response to a string of court decisions that struck down SEc rules because of poorly executed analyses. It’s not a binding document. The sec doesn’t need to follow it, but past chairman of testified to Congress that they would we will see what Gary Gensler does if he’s confirmed and to what extent he will adopt the recommendations from O and B, the student executive producers of today’s show, or Zoe Tar and Abby Sawyer from the moody School of Communication