Honorable Richard C. Breeden

William O. Douglas Award 2016 Recipient

 

Chief Judge Preska, Judge Rakoff, Chair White and Commissioners, Ladies and Gentlemen.

Thank you Jed for your kind remarks. Working with Judge Rakoff through the WorldCom fraud and restructuring was one of the high points of my professional life since the SEC. Throughout the case, he continually reminded everyone involved that what we did in the case had to be viewed in the light of helping restore public faith in our market system after such a massive abuse of trust. He will always be a hero to me.

I am grateful to ASECA and its board of directors for selecting me to receive the William O. Douglas Award. Coming as it does from the SEC alumni, this award means more to me than I can describe. I will leave to you and to history to decide whether it is deserved, but I thank you most sincerely for giving me this honor. It is especially nice to be able to enjoy this evening with my wife Linda, the love of my life, my sons Todd, Richard, Jr. and Teddy, and with so many friends and people I admire so much. I am also grateful to the incredibly hard working Mitzi Moore and her volunteers who put on this event.

I would be remiss if I did not at the very outset express my thanks to the one individual who made this evening possible -- President George Herbert Walker Bush, or “41” to all who know and love him. I had the great good fortune to join the staff of then-Vice President Bush in the fall of 1982 as his Deputy Counsel. I spent the next 11 years working for him in different capacities, including helping him defuse the savings and loan crisis early in his Presidency. President Bush believed that I could successfully lead this great Agency, and I have always been profoundly grateful for the trust he placed in me. After 33 years knowing him, he remains quite simply the greatest man I have ever known.

There is also a group I wish to thank, for without them the things that were accomplished in my time as Chairman would not have come to pass. Could I ask every person who served at the SEC from 1989 to 1993 to stand please. This group, including many of our former colleagues who are not here tonight, shared the journey with me. While I freely take responsibility for things we might have done better, these immensely talented people rose to the challenges during my tenure as Chairman. THEY are the ones without whom not a single one of the accomplishments during my tenure would have occurred. I therefore accept this award on your behalf as well as mine.

I am so deeply sorry that the amazing and incredibly talented Linda Quinn, Director of Corporation Finance, the warm-hearted and always-positive Commissioner J. Carter Beese, Jim Clarkson, Diane Sanger and too many others are no longer with us, as they would own a big share of this celebration. I will never forget their contributions to the Commission.

An Amazing Agency.

I would like to reflect a bit on the extraordinary times when I was privileged to lead this Agency – surely one of the Crown Jewels of American government. Actually, there were a few early days when I wasn’t quite sure I was going to lead the Agency.

Shortly after my confirmation hearing had finished, I was sitting in my office in the West Wing of the White House trying to answer about 2,000 written questions that Senators had submitted “for the record” on behalf of practically every lobbyist in Washington. My assistant came in and told me that Senate Majority Leader George Mitchell’s office was calling. When I answered, the staff person said that the Majority Leader would like to see me in his office in the Capitol at 4 pm the next day, and then briskly hung up. It seemed a bit unusual, so I walked down the hall to the office of Fred McClure, who was head of Legislative Affairs for the President. I told Fred that Majority Leader Mitchell had asked to meet me in his Capitol office the next day, and I asked if that was normal. He said he had never ever seen Senator Mitchell call in one of the President’s nominees, and that I must have done or said something that was really bad.

The next day, Fred and two of his staff came with me to Senator Mitchell’s office in the Capitol at the appointed hour. Several of Mitchell’s staff members came out to greet us in his outer office. Looking at the two teams of people I started having flashbacks to the movie “Gunfight at the O.K. Corral”, which certainly didn’t help my anxiety.

Senator Mitchell then came out. He greeted everyone but then asked if the staff members from both sides would excuse us, because he wanted to visit with me in private. The two of us we went inside and sat at a table in his formal office that is as close as one might get in the U.S. to the Hall of Mirrors at Versailles. Like the White House, that office has seen more than its share of our history.

Senator Mitchell sat down, offered me some tea, and after a bit of pleasantries he turned to business. He said that Senators in his party spoke very highly of me, and the work that I had done with many of them in passing the massive savings and loan legislation only the month before on a bipartisan basis. He then said words to the effect that “your government career has been in the White House, which naturally is a highly political organization. You’re totally responsible to the President, who I admire. However, now you have been named to head an important independent agency.” He looked me in the eyes and said calmly, “I need to be sure that you understand the difference”.

In response, I told the Senator that I had been working with the SEC and the securities laws since well before I ever came to Washington or worked in politics. I added that as far as I was concerned, the law was the law, and it had to be applied equally, and fairly, to all. I said I didn’t think that the public or the markets cared whether people at the SEC were Republicans or Democrats, but only whether they were effective. The Senator smiled and said that his Democratic colleagues had told him I would say something like that, but that he needed to hear it for himself. He then said “Congratulations Mr. Chairman, good luck and go do a great job.” My nomination came to the Senate floor about two days later, and I was confirmed unanimously.

Independence of Thought and Deed.

Senator Mitchell’s message was quite similar to President Bush’s. When I asked him if he had any directions for me, he said that he expected me to use my judgment and always do what I thought was right, not what was expedient. So, I walked into the SEC with a realization that “independence” wasn’t a form of governmental organization, but rather was all about intellectual independence.

For the next four years, I did my best to promote a culture of robust debate, and uncompromising efforts to serve the best interests of America’s investors, and of our markets. Certainly the staff always had the benefit of my views, but equally I benefitted from theirs. And, people like Marianne Smythe, Bill McLucas, Rick Ketchum and Michael Mann weren’t hesitant to let me know when they thought my ideas were off base. Our judgments weren’t always perfect, but we grappled with a world in the midst of tumultuous change and never lost sight that we were there to do the public’s business.

Regulatory Balance, not Overkill.

One of the great challenges we faced in those years, and it remains true today, was protecting the ability of capital markets and their participants to innovate, to compete, and to allocate capital as dictated by market forces, not by government. We didn’t have texting or smart phones or an App Store, but the data processing and communications revolutions were making possible new products to invest in, new ways to trade, and new ways to commit traditional crimes. And, like today there was no shortage of people calling for new controls to be imposed on all manner of things.

From my first day in office to my last, I tried wherever possible to promote competition and investor choice just as much as I tried to promote the strength and stability of the SEC. The dynamism of markets needs to be allowed to work its magic and to promote economic growth in America, and around the world.

I felt then and now that one of the paramount challenges of our time was to generate enough good jobs for all the young people coming of age. Without growth and opportunity, we face a future of decline, and that isn’t my idea of the best to which we can aspire.

We didn’t hesitate to tighten regulations when they needed it, or to stick to our guns when people wanted us to water down our standards as in the great debates about capital rules or foreign listings. I was also never reluctant to use strong enforcement efforts to deter illegal conduct. But, the staff was superb in developing hundreds of new ideas on how to reduce unnecessary burdens constraining markets, and to reduce both the cost and the corrosive effect of needless regulatory complexity.

Only a few examples of what we were able to do because we cared about reducing regulatory burdens when possible:

  • We adopted Rule 144A to eliminate needless restrictions on the liquidity of securities privately placed to qualified institutional purchasers. In the intervening years, probably a trillion dollars in capital has been raised by businesses at lower costs as a result, without adverse effect on anyone; We gave exemptions from the proxy rules so that institutional investors were not swept needlessly into compliance issues for discussing poor corporate performance with other shareholders; We eliminated rules that said that a hostile proxy contest could only be for all the seats on the board, and not for only some of the seats;
  • We authorized hybrid “Spyders”— the first ETFs. They didn’t quite fit the normal SEC boxes, but we made exceptions and today there are trillions of dollars in ETF investments; We licensed nearly two dozen new electronic trading platforms. Our goal wasn’t to hurt the existing trading markets, but to give investors choice in how and where to trade (requiring transparency, however);
  • We cut back the requirements for small businesses to offer securities, and for their 34 Act disclosures. We were 20 years ahead of the JOBS Act in trying to facilitate less costly and more flexible capital raising by entrepreneurial stage companies;
  • We did long term studies of both the national market system and the Investment Company Act to identify how we could better adapt SEC requirements to new technologies and market growth. The ’40 Act study laid the groundwork for scrapping limits on the number of private investors an asset manager could accept. The result was something we refer to as the Hedge Fund industry today;
  • In Market Regulation, we did many things including forcing through multiple trading in options on individual stocks – real competition instead of monopoly trading privileges;
  • We looked at what companies had to do in order to complete an international M&A transaction. The SEC’s rules under the Williams Act were the opposite of the Takeover Panel’s rules in London – it was physically impossible to comply with both. Rather than giving UK companies immunity from US tender offers, we found ways to change our rules so that when they needed to, deals could use other procedural steps to achieve the same goals;
  • We eliminated unnecessary accounting, disclosure or other rules that impeded non-US companies raising capital in the US market. In four years we facilitated first time offerings by over 500 non-US companies, helping make the US markets the true center of global capital flows. Giving Daimler Benz relief from Rule 10b-6 or exempting all foreign companies from the need to file 10-Qs or executive compensation disclosures didn’t hurt core US interests. However, we never budged on the absolute requirement to provide reconciliation from financial results under local accounting to US GAAP, which remains a vital protection for investors.

These are only a few of the innovations that the staff pioneered in less than four years. Every time I look at the 9,000 regulations that Dodd Frank mandated the SEC should enact on an accelerated timetable, all I can think of is the tragic waste of the SEC’s time. The Dodd Frank mandates have resulted in the lost opportunity to let the professionals at the SEC achieve the best balance of robust competition and investor protection.

For me, intellectual honesty today would mean pushing back hard against those who would mandate ‘34 Act disclosures about financially irrelevant matters such as Conflict Minerals, the ratio of CEO pay to that of the average worker or disclosures about political contributions. These issues may need to be pursued somewhere, but not by loading prospectuses or 10-Ks with disclosures on financially immaterial matters. In the long run, that simply injects politics into the disclosure system, where politics don’t belong. These types of mandates erode and degrade the SEC’s independence, and hopefully the SEC will be successful in fighting off these types of mandates when they come along in the future.

Of course Congress has vital input on SEC issues. I was fortunate to be able to work with Congressional leaders such as Chris Dodd, John Dingell, Ed Markey, Mike Oxley and others, and they gave me hugely valuable advice. They had a longstanding and extremely well-informed perspective on SEC issues, and we consistently benefitted from their thoughtful input, and from the accountability they demanded.

A World In Change.

Early in my tenure, Michael Mann, Linda Quinn, Rick Ketchum and I rode a bus through a gate in the Berlin Wall manned by East German guards. I was the first American government official on a diplomatic passport to cross into East Berlin since 1947. Not so long before, those guards would have been prepared to shoot people trying to cross the Wall, but by then they just waved everyone through the piles of rubble that used to be the Berlin Wall. The euphoria of crowds with sledgehammers knocking down sections of the Wall around us was intoxicating.

Apparently really intoxicating, as I later learned to my horror that Michael Mann had decided to climb over a rope line in the East German antiquities museum to get a better picture from the top of an Egyptian temple of some kind. As Linda Quinn told the story, the East German Stazi guards unlimbered their guns and were ready to put a prompt end to the SEC’s International Division before it even got going. Happily they didn’t shoot, and Michael climbed down. Personal liberty was not a well understood concept among East German security guards at the time. I am glad Michael will not be portrayed in any sequel to Bridge of Spies.

We worked with the East Germans, the Poles, the Czechs, the Slovaks, the Hungarians, the Chinese, the Mexicans and many others. Governments all over the world that were suddenly trying to develop free, or freer, capital markets.

Privatization was the rule of the day, and the SEC had a great deal to contribute to countries that wanted to create, or re-create, capital markets. Through the International Institute we began to train financial leaders from over 100 countries in how to operate markets. No one will ever be able to measure it, but billions of people live in countries where we helped foster more efficient markets and the stronger economic growth they bring. Almost every global company, and most purely domestic ones as well, have indirectly benefitted from a lower cost of capital because of the work our staff did to facilitate global capital flows, and our efforts to build trust and cooperation among regulators.

The Looming Threat of Bank Regulation.

I must close, but I cannot do so without commenting on the greatest threat I see today to the independence of the SEC, and to the interests of investors. I refer, of course, to the aggressive push for hegemony in regulation by the world’s banking regulators.

President Eisenhower famously warned of the dangers to liberty of excessive power in a growing “military-industrial complex”. That warning echoed for decades in policy debates in the U.S. Today we need a leader willing to warn about the dangers to economic growth of the “banking -regulatory complex”, and its quest for power and dominance over not just monetary policy, but also over financial competition and economic policymaking. These broader issues traditionally have been in the hands of accountable democratic institutions and agencies, not invisible mandarins of monetary stimulus.

I have the greatest possible respect for the Fed, and for the critical judgments it must make on inflation, stimulus, interest rates and other factors that affect every American. However, most countries that comprise the G-20, or that are members of the FSB, have financial systems that are “bank-centric”. With the exception of Great Britain, none of them have an IPO market for startups, or venture capital investments, that are more than a small fraction of the comparable investment volumes in the U.S. It was true in my era, and it is true today that the US relies vastly more on open capital markets to fuel its economy than any other country.

After the debacle of 2008, and the widespread failure of the major banks, as well as investment banks, there was an enormous regulatory push to prevent such a disaster from happening again. Over and over again, the mantra of “financial stability” is used to justify expanding Fed supervision over large asset managers, mutual fund complexes, insurance companies and other large institutions about which the Fed staff knows absolutely nothing. Similarly, the high priests of bank regulation and politicians alike warn of the dangers of “shadow banks”, as if investment funds want to be remotely like that fine 17th century institution called a bank. In the name of systemic stability we are told we must control, limit, and dismember money market funds, or hedge funds, or independent asset managers, or at least curtail their investment freedom and that of their investors. Sometimes it is euphemistically called “adding another layer of review”, but that is just another way of saying applying punitive regulatory costs to selected companies. Of course no one would wish to repeat 2008, or the savings and loan crisis for that matter. History will tell us, eventually, whether those crises came from not enough regulation or from too much. However, I believe we are being stampeded by a rather shallow analysis of history to adopt regulatory policies marketed under the banner of “financial stability” that could do unnecessary long run damage to our country. Not to be simplistic, but cemeteries are places of great stability, but they don’t generate much GDP growth. We need a balanced pursuit of growth and innovation, and also practical efforts to insure the stability of a core banking system. But outside that core, people must be free to innovate, to take risks, and to fail.

We faced the failure of Drexel Burnham Lambert in our era, and Fed officials urged a bailout of the creditors of its holding company in order to prevent any risk of “disorderly markets”. But we were the supervisors, and I wasn’t about to allow taxpayers to be socked to pay windfalls to Drexel’s creditors. So, we argued vehemently, and ultimately Treasury Secretary Brady backed me in opposing any bailout. Drexel failed, and markets rallied. Life went on, and markets were just as “disorderly” as they always are.

Similarly, we faced several years of pressure to slash the SEC’s capital requirements for broker dealers, in the name of adopting uniform global Basle II capital standards on market risk that, among other things, allowed almost unlimited netting of long and short positions. However, we had done our own studies that showed that if the Basle II proposed rules we had in effect during the Crash of 1987, almost every one of them would have failed. Mike Macchiaroli was a rock of reason and sound analysis during these years.

The argument then, as now, was that things needed to be “uniform”. Why? Nobody could answer, since the markets themselves are the dramatic opposite of “uniform”.

If the only threat of bank regulatory imperialism was occasional excessive costs or inefficiencies, perhaps that would be tolerable. But the threat, manifested through the “FSOC” provisions of Dodd Frank, is nothing less than a steady dimunition of the independence of the SEC and the legal rights of non-banking companies and their shareholders. The threat is also that government intrusion and distortion of capital allocation will grow and grow and grow. One look at the European banking system shows the potential dangers we face.

Further, in the push for “systemic stability”, the interests of savers and investors will simply trampled. What will happen if Fed supervisors decide to tell a major asset manager that systemic stability requires them not to sell assets during a time of stress? What losses will be imposed on investors, and how much of their private wealth will be sacrificed, because an unidentified and utterly unaccountable bank regulator somewhere – maybe in the US or maybe in Switzerland – decides that they shouldn’t be allowed to sell. Among other things, what happens to the Fifth Amendment rights of those investors? And, what happens to the rights of investors to full and complete disclosure if transparency is seen as inconsistent with “stability” by banking regulators acting through a non-transparent and unaccountable FSOC? Don’t bet on investor rights in that case.

For centuries, we have pursued stability and growth by balancing our system. We had a regulated banking system covered by a federal safety net, and we had a risk-taking system where firms, like Drexel or Bear Stearns, were allowed to fail. Regulatory decisions were taken in one system that differed from the other, and as a result the public enjoyed choice and economic liberty. Transparency about regulatory issues and differences among regulatory approaches also allowed Congress, and the public, to make the ultimate choices. The American investor should not be forced to become a serf with his or her savings and investments tied to banks or their regulators, and if we go down that path we will forever lose a part of our economic strength.

For me, the men and women of the SEC are on the front lines, protecting as they always have the interests of our investors. That role has never been more important, and I am proud of being part of that extended family.