Embracing Risk: Remarks at the Ethiopian Capital Market Authority Industry Day

Thank you, Glenn (Gordon), for that introduction. Glenn has served the SEC for many years, and so I encourage you to draw upon his deep expertise this week. On this fine American morning, I wish you a wonderful Ethiopian afternoon. I would like to begin by thanking Director General Hana Tehelku of the Ethiopian Capital Market Authority for allowing me to be a part of this wonderful, collaborative opportunity. My thanks as well to Scott Hocklander, our USAID Mission Director, and, of course, the fantastic team of experts from across the US Securities and Exchange Commission. My views are my own as a Commissioner and not necessarily those of the Securities and Exchange Commission or my fellow Commissioners.

The SEC turned ninety this year, and those decades of experience have taught us a lot about regulating capital markets. We are happy to share those lessons with you, even as we seek to learn from your experiences. I, for example, hope to learn whether the ECMA's "Capital Market Regulatory Sandbox"^[1] could serve as a model for regulators seeking to foster creative disruption and innovation. Creative ideas for new processes and products need space to grow and stretch their legs, but when faced by a thicket of existing regulations blocking their path, many of these ideas never get out of the starting blocks.

Since 1948, the SEC has made it a priority to work with fellow regulators and international law enforcement agencies. In the last seventy-six years we have sent teams of experts to more than 100 countries eager "to pursue larger and more robust capital markets," as a former SEC Chairman once put it.[2] Last year alone, we engaged with a record 3,113 regulatory and law enforcement officials. We are continuing that fine tradition here in Ethiopia, and my only regret is that I am unable to be with you in Addis Ababa today to convey in-person my enthusiasm for this shared commitment to well-functioning capital markets.

Capital markets, at their core, are not about money, but about people. If capital markets work properly, they unleash human potential and improve people's lives. Capital markets can support someone's dream of building a business, buying a home, going to school, or retiring. Capital markets fund companies so that they can make products and services that people need. As we think about how to regulate capital markets well, we must never lose sight that their purpose is to serve people. And therefore, the purpose of a capital markets regulators is also to serve people. How can we serve well?

To answer that question, let me start by telling you about a favorite moment as a Commissioner. One of the true joys of my job is having the opportunity to speak with people from all walks of life and, indeed, all parts of the globe. While each of my interactions is important to me-and I come away from every meeting having learned something-some engagements keep returning to the forefront of my mind. One of those memorable moments was a conversation I had with the head of a financial regulator eager to see a "larger and more robust capital market" develop in her country. My guest emphasized the presence of risk in capital markets. Strikingly, she was concerned not with how best to avoid risk, but with how she could better convince her countrymen of the importance of embracing risk.

I left that meeting with a spring in my step. Usually when I talk to fellow regulators about risk, the conversation revolves around protecting unwitting investors from risky financial products, people, and practices. These conversations are important, but so too is the simple truth that the visiting regulator expressed, a truth that too many market observers and regulators choose to ignore or, worse yet, seek to expunge: risk-taking is a welcome and essential part of our capital markets. Investors' willingness to take risks on new and growing businesses is an essential ingredient of a dynamic, growing economy. Without risk-taking, there can be no innovation-no challenge to the status quo. Without risk-taking, economies and nations stagnate.

Risk-taking is more than a necessary ingredient to economic growth; it is a manifestation of our humanity. It is often tied to a desire to improve our own and others' lot in life. Sometimes the risk-taking is for the immediate thrill-racing down a ski slope or betting at a casino. But often risk-takers have a much longer view. A person forgoes income temporarily to go to school to improve her career prospects or drops out of school to start a company. A person quits a well-paying job to commercialize an innovation. Instead of putting her money in the bank or spending it, a person sets aside part of her salary to invest in stocks or bonds or in a friend's start-up. All of these activities involve risk-taking, as a person invests in herself or others.

The capital markets work because of countless individual decisions to take risks. Unlike more centralized sources of funding, such as banks or governments, capital markets draw on a crowd of risk-takers, none of whom views the world exactly the way anyone else does. Risk-takers in the capital markets include the people who invest in companies and the people who provide liquidity to the markets so that when someone wants to sell her stock or bond someone else stands ready to buy it. Both sets of risk-takers are essential to make markets work. As my regulatory visitor understood, a good capital markets regulator does not push risk-takers out of the markets, but invites them in because they make the markets function. The invitation comes in the form of sensible regulation: a stable, principles-based ruleset administered impartially by a transparent, deliberative regulator.

The capital markets regulator will face challenges in achieving and maintaining a sensible regulatory framework. The capital markets regulator's job is not to direct market participants' risk-taking, but to cultivate the environment within which market participants dare to take risks. On one hand, insufficient or inept market oversight may dissuade risk-taking by leaving market participants stymied by fear of being victimized by bad actors. Why invest your hard-earned dollar - or birr - if you think the market is rigged? Why study a company's financial statements if you cannot trust that they are accurate? Why hand your money over to a broker if you fear she will use it to buy herself a car instead of the stock you directed her to purchase for you? Why buy a mutual fund if its adviser might be forcing the fund to buy securities at inflated prices from the adviser's own account? Why trade on an exchange if you worry the exchange operator is front-running you? Sensible, appropriately enforced rules can give investors the confidence to step into the marketplace.

On the other hand, too much regulation at the expense of investor autonomy is also a surefire way to squelch the risk-taking that is essential to economic growth and human flourishing. Why invest your hard-earned dollar - or birr - if you think the government will punish you for being a successful investor, for example, by taxing away gains or, more subtly, regulating them away? Why study a company's financial statements if the regulator forces you to reveal the insights you gleaned to other market participants? Why hand your money over to a broker if you fear that regulatory costs passed on by the broker will eat away your profits? Why buy a mutual fund if regulatory constraints on the fund's operation interfere with the adviser's ability to generate meaningful returns? What can you trade on an exchange if regulatory burdens make being a public company uneconomic?

The role of the capital markets regulator is to facilitate private decision-making, which can include setting financial accounting standards and ensuring that companies adhere to them, establishing a materiality-based disclosure framework for issuers of securities, setting rules for marketplaces on which securities trade and other market infrastructure, and governing how financial professionals and financial intermediaries interact with their customers. Principles-based rules do these things while still providing great latitude for private market participants to transact in the way that makes most sense for them within basic regulatory parameters.

As daunting as the regulator's balancing act might appear, collaboration with the public helps. The old proverb says, "Many hands make light work." So too many minds bring the right balance to regulation. A good regulator listens more than it speaks. It draws heavily on input from market participants-investors, issuers, and the firms that serve them-and from academics who study the markets. A good regulator operates with radical transparency which helps ensure that no market participant gets preferential treatment or wields the regulator as a weapon against competitors. A regulator cannot rely on its own enforcement muscle to force everyone into compliance, but must work with people in the marketplace to build a culture of compliance with a shared goal of creating markets in which people feel comfortable taking risks.

Ethiopia's economic plan recognizes that economic growth is not a top-down exercise, but that "[t]he private sector is . . . an essential stakeholder in fighting poverty, creating employment opportunities, ensuring long-term economic growth, and hence providing a pathway towards inclusive economic growth and transformation of the economy."^[3] Ethiopia is taking an important step in enlisting the private sector with the opening of the Ethiopian Securities Exchange. The quintessential marketplace, a stock exchange brings buyers and sellers together, and the bargains they strike help inform the rest of the market about the value of the companies the securities of which are being traded. They offer a chance for people to participate in the growth of companies and thus in building the economy. In 1990, then-Securities and Exchange Commission Chairman Richard Breeden expressed the significance of a stock market beautifully on a visit to Hungary, which had only recently shaken off the shackles of Soviet rule, had just held its first free election in forty-five years, and was re-opening its stock exchange after more than forty years of being shuttered. As he explained, "Free capital markets will help open the door of economic opportunity to all citizens of Hungary . . . . A successful securities market in Hungary will hasten the pace of reform. It will help privatize state-owned institutions, mobilize investment and make it possible for privately owned organizations to raise working capital. It will give all Hungarians a tool for contributing to rebuilding Hungary's economy and future."^[4] The circumstances here in Ethiopia are different, but the stock market offers similar promise of serving the Ethiopian people and facilitating their contributions to the growth of their nation.

Free markets are fundamental to enabling people to live abundant lives in the service of others. A nation's greatest resource is its people, but their talent too often goes untapped because the markets necessary to unlock them are broken or non-existent. Ethiopia-with more than forty percent of its population under fifteen^[5]-has great wealth. Hidden within your young people are innovations that will improve lives, medical breakthroughs that will ease pain, software code that will run the cities of tomorrow, engineering wonders that will render obsolete many of today's technologies, scientific breakthroughs that will answer age-old questions, books that will enlighten future readers, and art that will grace physical and digital walls.

The capital markets you are working to develop are not the only ingredient to unlocking all this latent talent, but they can play an essential role. When people have a place to invest the money they earn and funding flows easily to its highest and best use, human talent gets developed. Well-functioning capital markets produce companies that make things that people need, such as housing, food, and medicine, but also create the wealth that enables societies to fund things they want, such as great art, music, and scientific exploration. The stakes of this capital markets project are high: your young people count on you to build and operate these markets well so that they can reach their full potential to benefit themselves, their families, their nation, and their world. I look forward to seeing your important work unfold and to continuing to partner with you in it.