Securities Regulation Daily Commissioner Peirce solicits economists’ input on three questions at National Economists Club
Friday, December 13, 2019

Commissioner Peirce solicits economists’ input on three questions at National Economists Club

By Joanne Cursinella, J.D.

She also emphasized the importance of attorneys and economists working together on regulatory solutions because their skills are complimentary.

SEC Commissioner Hester M. Peirce, in prepared remarks, solicited the input of economists at the National Economists Club on three questions: How much data is enough? Are there ways that we can look to academics and market participants to assist us in regulating markets? How can we best explain that "sustainable morality" does not require more government control of economic decision-making, but less? She also said it was important for both attorneys and economists to work in concert to achieve the best results in market regulation.

Importance of working together. Commissioner Peirce first emphasized the importance of attorneys and economists working "hand in glove" because of their distinct skills and analytical tools. Pointing to the SEC, she said the Commission’s team of economists not only "support our rulemaking and enforcement functions" but also have been "extremely helpful" in honing thinking in both realms. Economists are also important partners in analyzing difficult questions of a more fundamental nature—questions that are not specific to any particular rule or enforcement action, she added. That is why in soliciting participants’ input, she said she was looking for thoughtful approaches that balance competing considerations with an eye toward achieving the right outcome, not necessarily the most expedient or convenient one.

How much data is enough? Peirce has noticed that economists love data. They can use it to "finger fraudsters, determine where a regulatory threshold should be set, or assess the effect of a regulatory obligation." She finds it "quite impressive" to see the work SEC economists produce from the data they have more readily at their fingertips than ever before. Economists are not alone in this: regulatory lawyers and examiners also like data because it can give them a better handle on the industry they oversee, she added.

But collecting data is not free, Peirce said, not for us, not for the industry from which we collect it, and not for investors. She pointed to Form PF as one example. This form collects information as part of a post-crisis effort to get better insight into the activity of hedge funds and other private funds. The form takes time to complete and contains commercially sensitive data. Peirce also questioned how useful this data actually is to the SEC and pointing out that there are also inconsistencies between what funds have to supply to the CFTC and what they have to supply to the SEC.

It is also not clear to her whether the data in the form is "fit for purpose." Form PF is supposed to focus on the risk a fund poses to the financial system, but it collects a lot of data points that lack any real nexus to systemic stability, Peirce said. Once we start down the road of collecting data, it is hard to rein ourselves in, she added. "Lest our quest for data haunt us as the hunt of the albatross did the mariner in Coleridge’s poem, we ought to think carefully about how much data is enough," she concluded.

Assistance in regulating markets. As her second query, Pierce asked, given that better data is easier to come by, are there ways that we can look to academics and market participants to assist in regulating markets? There already are natural incentives for market participants to monitor one another’s actions, she said. Armed with the data, market participants are able to make better decisions. Peirce has been a critic of post-financial crisis regulation that looks to regulators alone to identify and solve problems—lots of people working independently are better at identifying problems and generating solutions than a small group of regulators holed up in musty regulatory agencies in Washington, D.C., she claimed. According to Peirce, an important question for both lawyers and economists working in regulatory agencies is: "How can we enlist the help of people outside of government in regulating the activities we are responsible for overseeing?"

"Sustainable morality." Peirce’s final question to her audience was this: How can economists do a better job of explaining the role that a free economy can play in improving people’s lives, particularly the people who face the greatest deprivation and despair? In short, how can we best explain that sustainable morality does not require more government control of economic decision-making, but less?

A topic of conversation in the financial regulatory world these days is the role that regulators should play in fostering "sustainable finance," Peirce said. The idea is that finance has been too focused on raw dollars, and not focused enough on building a financial system that fosters a better, more sustainable society. While she shares the desire to build an economy that serves this generation and future generations well, Peirce disagrees that such an economy will result from regulators taking on the role of "stewards of morality." In fact, she said the opposite is true—financial markets are key to efficient resource allocation, which is key to economic growth, which is key to improving people’s lives. Sustainable morality, then, is morality that reflects the decisions and preferences of individuals throughout society, not financial regulators, she concluded.

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