Podcast: SEC Commissioner Hester Peirce on regulatory demands, CCO input

The conversation covered issues including the flood of new regulation emanating from the SEC, stresses on compliance at smaller firms, chief compliance officer liability, and more.

Listen to the conversation in the podcast below. Compliance Week has also produced an edited transcript of the discussion that has been condensed for reading convenience.

Aaron Nicodemus: Commissioner Peirce, welcome to the Compliance Week podcast.

Hester Peirce: Aaron, it’s great to be here. I really appreciate the opportunity. I want to start out by telling you that my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners.

AN: Thank you. Let me start with this, which isn’t a question but more like a comment. I really enjoy reading your speeches and comments because they’re peppered with pop culture references and puns. As a regular reader, I appreciate them. “Green Regs and Spam” was my favorite.

HP: Thank you, I appreciate that. I have fun with those.

AN: My first question touches on the recently approved SEC disclosure rules on climate and cybersecurity. You said in a recent speech the SEC has moved from a principles-based approach on disclosures, one that is grounded in materiality, to a prescriptive approach. With this new approach, you said the SEC “steps into the shoes of the corporate board, nudges corporate decision-making, and distorts corporate supply chains.” What are the implications for public companies of an SEC that is using disclosure regimes to influence corporate behavior?

HP: The concern that I have is that it really changes the way public companies operate and makes them creatures of regulation instead of creatures of the market. Why that matters is because the market ultimately reflects the views of consumers, employees, and other communities in which those companies operate. The market collects all that information. And so, if a company is responding to the market, it’s responding to signals that all those folks are sending. And of course investors, the shareholders that own the company.

If instead you have a company that’s looking primarily to, ‘Well, what is my regulator doing? Do I need to be thinking about what risks and opportunities my regulator thinks I should care about it?’ it really distorts their decision-making. I think, ultimately, we’ll all be worse off for that because companies will be more responsive to Washington than they will be to Main Street. That’s a real problem.

AN: There’s been a slew of new regulations coming from the SEC. I have actually benefited from this because I get to write lots of stories about them. But I’m sure that not everyone views it the same way. You’ve expressed concern about the lack of public input into these new rules. What’s lost when the public cannot adequately consider and comment on new commission rules before they’re enacted?

HP: Well Aaron, I’m certainly happy that there’s someone out there who likes the slew of rules coming out.

I think focusing on whether or not the public can fully comment is really important. The reason that our rules have worked over the years is because they’re really the product of deliberation. Not to say that all the rules in the past have been perfect, right? There have been problems. You always have unintended consequences, but you’re likely to minimize the risk in magnitude of unintended consequences if you draw comment from as many people as possible. It kind of goes back to what we talked about before in the last question.

One of the motivating themes for me, as I think about regulation, is really the dispersion of knowledge across society and dispersion of decision-making across society. I think what you need to do is to draw from people who are actually day-to-day making decisions and from people who have that day-to-day knowledge. You need to draw that knowledge in as you’re making rules. The way that we do that is through notice-and-comment rulemaking.

It can be very tempting to try to shortcut that process so that we can move more rules through faster, but then we lose the value of getting the perspective of people on the ground who have to implement these rules or who will be protected by these rules. That’s what I really worry about.

If we start treating it as a burden rather than a privilege to get the input of the public, then our rules just won’t be as good, and they won’t stand the test of time.

AN: Compliance officers have told me that they are really struggling with this, particularly at registered investment advisers and broker dealers. They just feel overwhelmed, and I hope that future decision-making will take more of that into account.

HP: Some of the most meaningful meetings I’ve had have been with people who are doing compliance at typically smaller investment advisers or broker-dealers.

They’re looking at the rules coming out and they’re saying, ‘We want to do the right thing. We certainly want to be in compliance, but the amount of time it takes us to get a rule, to absorb it, to think about it, to think about how it applies to our unique facts and circumstances—that time it takes means that we can’t be focusing on 10 other rules that are also coming out. If you really want us to do this right, as we want to do right, then you’ve got to pace these things a little bit.’

AN: That follows right into my next question, which is about small firms. Small firms are being hit with high compliance costs as a result of these new rules. Do you think the SEC has given enough consideration to the effect these new rules have on small firms?

HP: We’re statutorily required to think about that. I think sometimes people, including me, take issue with what we think about as being a small firm. Sometimes we’re looking at it through the lens of assets under management, but maybe we should look at it through the number of employees because those are the ones who are actually going to have to think about how to implement these things.

In general, it can be harder to get the voices of those small firms because they’re so busy running their businesses and they don’t have a stable of lobbyists who can come in and talk to us about the effect of the rules on them.

There are certainly organizations that represent those views to us, but it can be very helpful to hear from the actual people who are implementing the rules. And it’s just harder for them to take the time to do it. As a result of that, sometimes those voices do get lost in our rulemaking process.

One recent trend that has concerned me at the SEC is that we’ll look at a rule and say it has a lot of benefits. We know it’s going to cost disproportionately more for these small firms to put it into place, but the benefits of this rule are so great that we want firms of every size to do exactly the same thing. What I worry about there is that it really doesn’t take seriously the unique challenges faced by small firms.

It is helpful when we give small firms a little more time to comply, which is something that we sometimes do. That way not only do they get more time, but they can benefit from the learning of the larger firms. But I think we need to continue to try to be better about listening to those smaller firms.

AN: Some of our readers and listeners will be happy to hear that because they’re struggling.

Another point you’ve made in recent years is that all this regulation stifles entrepreneurship and creativity. Can you give me some examples of industries or technologies in which the SEC has discouraged entrepreneurship?

HP: Across the board, anything that runs into the securities laws is going be a place where people are going have to think twice about whether they want to innovate. … There are some gates that Congress has put up, but Congress has also given us a lot of authority to make exceptions.

We have an exemptive process on the investment company side. For example, we can use that process to tailor regulatory conditions for new products. I think we need to make more use of our tools to do that.

There’s a lot of talk now, obviously there has been over the past several years, about crypto and how the agency has affected entrepreneurship in the crypto space. And I do worry about this because this is a matter of a lot of debate, but I am on the side of thinking that we don’t have the regulatory clarity that we need. If we did have regulatory clarity, I think we would actually see a lot of really interesting innovation in this space. Some of it would be directly relevant to the traditional financial industry, some of it might have nothing to do at all with the financial industry, but people are holding back because they’re scared to walk into a space where they might a few years down the road facing enforcement action.

Another area where I’ve seen a stifling of innovation is communications between financial firms and their customers. We tend to be very paper based at the SEC, and that’s changing a little bit, but we always want to default back to paper. That’s just not how customers, how people, want to communicate with firms, whether those are financial firms or other firms.

I think financial firms really want to innovate in this space. But again, they feel very bound by our paper-first mentality at the SEC. So, I would love to see a way of opening up the ability to experiment and innovate there.

AN: One of the areas that there’s been a lot of talk about stifling has to do with blockchain and cryptocurrency. Do you think that the SEC’s stance on that is chasing away opportunities to other countries and other parts of the world?

HP: Yeah, I do. And I think some people would say, ‘Well, that’s good because we don’t see anything of value in in crypto.’ But I think part of the reason you don’t see anything of value in crypto is because we make it really hard for people with interesting ideas to try to experiment. We’re seeing other countries very much embrace the idea of experimentation using blockchain.

Again, blockchain is not going be a solution to every problem in the world, but it might actually be a solution to some of the problems that we see in the financial system now.

Same with AI (artificial intelligence), where we run the risk of a similar problem. AI has been used in the financial industry for a long time, but there may be other uses, particularly uses that are customer facing. That’s going be the kind of thing where when clients are involved, when retail investors are involved, the SEC’s going to get more concerned. Rightly so. But we have to be careful not to say to firms you can’t experiment with using AI to serve investors because I think that could be a real game-changer, particularly for investors without a lot of money to invest—the idea that they can get advisers (who) can use AI to help serve that population.

AN: I can tell you that the compliance industry is very leery of AI tools generally, and they’re walking it very slowly. I think they would appreciate any guidance that regulators would give them, the SEC included.

HP: I understand the leeriness, too. I don’t know if that’s a word, but I understand why people are leery about that.

The wariness is because you want to understand what the tool is doing. This is a great opportunity for us to sit down with people in the industry, with AI experts, and talk about what the challenges and opportunities are, rather than just rushing into rulemaking.

AN: On the flip side, from the industry side, they don’t want to rush into anything and then be told later on that they went too far or they trampled on some norm that they shouldn’t have when they were rolling that out.

HP: Yes, exactly. That’s why we have to make this a conversation.

AN: You’ve been an outspoken proponent of creating a properly calibrated liability framework for chief compliance officers, something that you also discussed at Compliance Week’s National Conference. Has there been any progress on this issue, and what do you think is holding the commission back from implementing a CCO liability framework?

HP: There has been progress from outside the commission, people thinking about this problem and putting forth different ideas, which has been fantastic. Within the commission, we certainly haven’t come out with a framework. I think that’s a reflection of where the commission is right now on this kind of thing. It’s not providing up-front guidance about how things will work. It is the theme that this commission follows—the modus operandi of this commission.

Each time a case comes out that involves a compliance officer, I am using those cases to inform my own view and think through what should this kind of framework look like. I’m continuing to think about it.

AN: I’m preaching to the choir here, but I know that compliance officers are really nervous that they’re going to be held to a standard if their firm has made a mistake. And then that mistake reflects on them, rather than them being the gatekeeper trying to prevent the firm from making mistakes. There’s a real concern that they’re going to get swept up in things that they didn’t have as much control over as they might have liked.

HP: That’s exactly the kind of situation a good liability framework could get at and could provide some comfort to those folks. The idea is that you want to have great people in compliance roles and you want to have people who are willing to walk into firms that are not perfect and try to help them get to a better place.

And it’s one thing, of course, if the compliance officer is engaged in bad behavior. I don’t think anyone would say in those instances the person shouldn’t face the same liability that anyone else would. But it’s another when the compliance officers are really trying to do the right thing and the firm for some reason chooses not to do the right thing.

I really want us to live in a world where excellent people want to go into compliance, and that will be better for all of us.

AN: You recently proposed creating an advisory committee of chief compliance officers. I know the committee has not been formed, but can you share some of the concerns that compliance officers have shared with you? What are they worried about?

HP: There’s so much coming through now. It’s really hard to deal with one rule and then face another and try to get the compliance policies and procedures into shape to handle all of these new rules.

We want to encourage excellent people to go into the profession. I’ve met a lot of really excellent, dedicated people, and I can tell through my conversations with them how earnest they are about their responsibilities.

The challenge they’re facing is just the volume (of regulations). The second challenge that I hear a lot about is wanting a place to go where they can get advice about how to deal with issues.

You’ve seen a lot of risk alerts coming out and those kinds of things, but I think looking for other avenues to let people come in and ask us questions and talk about these issues with us would be helpful.

AN: I know in talking with compliance officers that they are always looking for guidance, answers, or even if it’s just they can glean some insights from an enforcement action that has come down and apply those insights to their own situation. That’s always really helpful; a big part of what we do is try and deliver that news to them.

HP: That’s something that’s really come through in all these conversations I’ve had, which is that they are looking at everything they can get their hands on to try to get ideas of what they can be doing at their firms to improve the environment and the way they serve their clients.

I want to put one final plug in, which is that I do hope we’ll get to a place where we have an advisory committee made up of chief compliance officers because I do think that they have a unique perspective to add to regulation. I think it could be quite beneficial to us in our in our role as a regulator to hear from these people in a routine, systematic way.

AN: Well, anything that we here at Compliance Week can do to help connect people in that effort, we’ll do it. We’ll put the word out.

HP: Thanks so much. I appreciate it, Aaron. This has been a fun conversation.

AN: Thanks for joining us on Compliance Week podcast. This has been a chat with Hester Peirce, SEC commissioner. We’ll talk to you next time.