I’ve never met Jay Clayton, but I
would love to chat over drinks with the chairman of the Securities and Exchange
My first question would probably go
something like this: with so much regulation in place, how on earth did the SEC
miss Madoff’s ponzi scheme and Enron’s accounting scandal?
But don’t let my tone mislead you.
I don’t want his job, but I do want to help. My follow-up questions would be
designed to better understand the challenges facing the largest financial
regulator in the United States. Only then would I be in a position to
contribute ideas and solutions.
Regulators have a hard job
As the metaphorical policemen of
the financial markets, the SEC and related organizations around the world exist
to keep investment transactions fair and legal. They not only protect the
innocent investor from malicious actors, but track down and punish the bad
guys. Their work adds safety and security to the world’s financial markets.
They’re the white blood cells of the investing ecosystem, a necessary
ingredient to keeping things running normally. But their benefits often come at
the expense of innovation.
Emergent technology unlocks new
capabilities in most fields, and finance is no exception. “Blockchain” is
probably the buzziest word in finance this decade, for example, but its
capabilities need to be sufficiently managed and understood by regulators, or
else those features become liabilities. Regulators are generally between a rock
and a hard place. They have to manage a Pandora’s box of technology that could
make their jobs way harder or way easier. Their decisions about how to manage
that technology furthermore become law. Remember Uncle Ben’s words to
Spiderman: “With great power comes great responsibility.”
The same sentiment applies here.
But innovators usually want to operate unrestricted
Why drive the speed limit when it’s
technically possible for your car to go 120 miles per hour?
Just as a highway patrol cop will
stop someone from dangerous, illegal dangerous driving, the SEC confronts those
who flout regulations. Certain entrepreneurs might argue that they can only
achieve their maximum potential when nothing limits them, and that’s exactly
what regulations are: the limits that stifle their work.
So where is the sweet spot between
protecting investors and fostering innovation?
One word: collaboration
We need improved interface between
the regulators who make the rules and the innovators who want to play by them.
Arguments and PR posturing are not realistic ways forward — these people just
need to talk to each other. They already have a large sphere of shared interest
in financial markets, so there’s plenty to discuss.
Even if they exist at opposite ends
of the investing spectrum, these people are positioned to define the
tech-enabled, regulation-friendly middle ground for the rest of us.