The views that I will express today are my own and do not necessarily represent those of the Securities and Exchange Commission (SEC) or my fellow commissioners. Indeed, with respect to one particular issue I will be discussing today, my disagreement with my colleagues is sufficiently public and pronounced that it may not even warrant a disclaimer. I speak, of course, of my dissent (Peirce 2018) from the SEC's decision to reject an exchange-traded product that was designed to give investors access to bitcoin (SEC 2018a).
A Free-Range CryptoMom
In response to my dissent, I was informally dubbed "CryptoMom." I always have wanted to be a mother, so acquiring this new title was quite an honor. Admittedly, this is not the form of motherhood I envisioned, but one of the wonderful aspects of motherhood is that children are quite different than their mothers anticipated they would be.
If I were a mother, I suspect that I would be a free-range mother rather than a helicopter mom. A helicopter mother hovers over her child in order to ensure the child's success, although this strategy often backfires (Bayless 2013). A free-range mother, by contrast, encourages her child to explore with limited supervision, which requires the acceptance of a certain level of risk (Skenazy 2018). Japanese television affords us a real-life example of this type of parenting in a show called "My First Errand," which portrays children-- some under the age of five--going on errands alone (see Hones 2011). Episodes of the show are worth watching, not only for the inevitable laughter and tears they produce, but for the light they shed on the fact that risk taking is not inherently bad. To the contrary, certain achievements are possible only if we take risks.
It is often difficult for parents to realize this--particularly in affluent, Type A areas like D.C.--and understandably so: risks imply the possibility of harm, and most parents instinctively recoil from the possibility of their child getting hurt. But it is not just parents. We regulators have trouble with that concept as well. This discomfort is understandable--and not just because we live in D.C. and bring our helicopter parenting skills to work. No, the downside risk for the regulator is real: When investor risk taking leads to investor losses, regulators inevitably face criticism for allowing investors to take risks that, in hindsight, appear to have offered nothing but downside. We know what inevitably follows--a chorus of critics insisting that "If you, Ms. Regulator, had simply told people they were not allowed to engage in risky behavior, nobody would have gotten hurt!"
The Regulatory Mindset
We know we will be blamed when something goes wrong, and this fear leads to a default suspicion of risk taking and a regulatory mindset that too often presumes that innovations designed to provide greater access to risk taking are threats, both to our reputations and investor safety. Better, we naturally think, not to allow the investor to leave the house, even for a quick trip down the street, unless properly helmeted, swaddled in regulation protective gear, and strapped into a vaguely European-branded car seat that is secured exactly in the center of the back seat of the largest SUV that an upper-middle class professional's salary can buy. And thus we convince ourselves that nothing can go wrong, at least not until the little one graduates from the car seat and gets her license--but we tell ourselves that that's still 30 years away.
The problem with such an approach, of course, is that something will go wrong. Something always goes wrong. Companies fail. Fraudsters cheat. Nature strikes. Market downturns happen. But the losses of prohibiting risk taking are also real. Even when we cannot readily measure them (or even because we often cannot measure them), these losses are potentially very threatening to investor welfare.
As a society, we readily recognize this reality in other areas. Take a commonly cited example in this regard--driving. Steering a speeding machine down the highway is an enormously complex and cognitively challenging task, one that is dangerous for drivers, passengers, and innocent bystanders. Permitting people to drive means people will be injured and, in too many cases, die. Outlawing driving would save lives, but the costs in terms of lost quality of life of doing so would be enormous, albeit difficult to quantify (see Ashenfelter and Greenstone 2002). Instead of banning it entirely, therefore, we place reasonable restrictions on driving. Some of us may decide to avoid risks the law allows us to take. A speed limit, after all, is not a mandate. Some of us may choose not to drive at night, in bad weather, or at all. But, barring bad behavior on our part, the choice is ours, not the government's.
It puzzles me that it is so difficult for those of us who regulate the securities markets to understand this concept; after all, capital markets are all about taking risk, and queasiness around risk taking is particularly inapt. A key purpose of financial markets is to permit investors to take risks, commensurate with their own risk appetites and circumstances, to earn returns on their investments. They commit their capital to projects with uncertain outcomes in the hope that there will be a return on their capital investment. The SEC, as regulator of the capital markets, therefore should appreciate the connection between risk and return and resist the urge to coddle the American investor.
Although helicopter parents convince themselves that they are "helicoptering" for the good of their children, such parenting sometimes seems to serve the needs of the parents more than the interests of their kids. Similarly, actions that we take at the SEC to protect the American investor may reflect a desire to reduce certain types of investor risk taking that may pose reputational damage to the Commission in the event of investor losses. But Congress did not ask us to guarantee that investors would never lose money. Nor did...