Equity market structure reform is largely a bipartisan issue. On this episode of inSecurities, Chris and Kurt take a look at the structure of our stock markets with special guests former SEC Commissioner Robert Jackson and George Mason Law Professor J.W. Verret.

 

 

Featured in this Episode

 

Commissioner Robert J. Jackson Jr.

Commissioner Jackson was sworn in as an SEC commissioner in January 2018. He came to the SEC from NYU School of Law, where he is a professor of law.

Previously, Commissioner Jackson was professor of law at Columbia Law School and director of its program on corporate law and policy. Commissioner Jackson's academic work has focused on corporate governance and the use of advanced data science techniques to improve transparency in securities markets.  

Commissioner Jackson has written more than 20 articles in the nation's most prestigious legal and economics journals, including a study that shines a light on the so-called 8K trading gap. In a past life, Commissioner Jackson was a big law attorney and an investment banker.  

Commissioner Jackson left the Commission in February 2020 and returned to NYU as a law professor.

J.W. Verret

J.W. Verret teaches banking, securities, and corporation law as well as accounting for lawyers at the Antonin Scalia Law School. He's also been a visiting professor at Stanford Law School. Currently, Professor Verret serves on the Investment Advisory Committee of the SEC, where he advises the chairman of the SEC on legal and policy reform.  

He has also served as independent chairman of the board of directors of Egan Jones Ratings, one of the eight domestic credit rating firms licensed by the SEC to provide credit ratings on the debt of public companies and provides recommendations on shareholder proxy votes.  

Previously, Professor Verret served as chief economist and senior counsel to the US house committee on financial services. In recent years, you may have seen him on CNN, MSNBC, and other news networks where he comments on constitutional and political issues playing out inside the beltway.

 

Transcript

 

[00:00:00.33] SPEAKER 1: This program is brought to you by the Practising Law Institute, a nonprofit learning organization dedicated to keeping attorneys, professionals, and accountants at the forefront of knowledge and expertise.  

[00:00:15.90] KURT WOLFE: In 2018, SEC Commissioner Robert J. Jackson Jr. observed that market structure reform is not a partisan issue. Commissioners of all stripes, members of Congress, and our current chairman have all said it is time for us to take a hard look at the structure of our stock markets. We have a rare bipartisan opportunity to move this forward, and we owe it to American investors to take it.  

[00:00:38.91] Recently, George Mason law professor J.W. Verret echoed that sentiment on Twitter, commenting that market structure is a uniquely bipartisan issue. We're fortunate to have Commissioner Jackson and Professor Verret with us today to talk about market structure issues on this episode of inSecurities.  

[00:01:05.22] CHRIS EKIMOFF: Hello and welcome to a special edition of the inSecurities podcast. Today we're recording live at the US Securities and Exchange Commission headquarters in Washington, DC. And as Kurt noted up top, we're joined by two very special guests, SEC Commissioner Robert Jackson and Professor J.W. Verret from George Mason's Antonin Scalia Law School. Both are undoubtedly well known to our listeners, but Kurt, let's do a quick bio for both of them before we get started.  

[00:01:30.81] KURT WOLFE: Commissioner Jackson was sworn in as an SEC commissioner in January 2018. He came to the SEC from NYU School of Law, where he is a professor of law. Previously, Commissioner Jackson was professor of law at Columbia Law School and director of its program on corporate law and policy. Commissioner Jackson's academic work has focused on corporate governance and the use of advanced data science techniques to improve transparency in securities markets.  

[00:01:57.75] Commissioner Jackson has written more than 20 articles in the nation's most prestigious legal and economics journals, including a study that shines a light on the so-called 8-K trading gap. In a past life, Commissioner Jackson was a big law attorney and an investment banker. Commissioner Jackson will leave his post at the SEC to return to NYU as a professor. In fact, as we record today, this is his last week on the job here at the SEC. And importantly, I should note that Commissioner Jackson is a lifelong Yankees fan and a regular participant in the annual SEC versus CFTC softball game. Commissioner, welcome to inSecurities.  

[00:02:36.12] ROBERT J. JACKSON JR.: Thanks so much for having me. I'm delighted to be here.  

[00:02:38.18] CHRIS EKIMOFF: We have to get that stat line for your career in that game down the road here. Switching to our other guest, Professor Verret teaches banking, securities, and corporation law, as well as accounting for lawyers at the Antonin Scalia Law School. He's also been a visiting professor at Stanford Law School. Currently, Professor Verret serves on the Investment Advisory Committee of the SEC, where he advises the chairman of the SEC on legal and policy reform.  

[00:03:01.17] He has also served as independent chairman of the board of directors of Egan-Jones Ratings, one of the eight domestic credit rating firms licensed by the SEC to provide credit ratings on the debt of public companies and provides recommendations on shareholder proxy votes. Previously, Professor Verret served as chief economist and senior counsel to the US House Committee on Financial Services. According to his LinkedIn banner, he's also been professionally admonished by former Federal Reserve Chairwoman Janet Yellen. And in recent years, you may have seen him on CNN, MSNBC, and other news networks, where he comments on constitutional and political issues playing out inside the beltway. Thank you guys both for joining us and welcome to the show.  

[00:03:39.75] ROBERT J. JACKSON JR.: Glad to be here. Thanks again.  

[00:03:40.95] J.W. VERRET: Thanks for having us.  

[00:03:51.87] KURT WOLFE: Today, we want to talk about market structure. And hopefully we'll have a little bit of time at the end for a lightning round with Rob. Market structure issues have been a focus of your tenure at the commission. And it's a topic that J.W. writes and speaks about frequently.  

[00:04:06.54] When I think about market structure, I think about everything from Reg NMS to maker-taker fees to Flash Boys. It's a big topic. So for purposes of the conversation today, we'd like to focus on three areas, all of which I think are near and dear to your hearts-- exchange immunity, competition in the securities markets, and the role of credit rating agencies. If that sounds good, let's dive in.  

[00:04:29.10] J.W. VERRET: Let's do it.  

[00:04:36.17] KURT WOLFE: Let's kick off today's discussion with a conversation about the stock markets or exchanges and the issue of so-called exchange immunity. Rob, in 2018, you appeared at the Scalia Law School with Professor Verret and Tyler Gellasch, who was counsel to former SEC Commissioner Kara Stein and is now an executive director at Healthy Markets Association. You talked about market structure issues.  

[00:04:58.94] In your remarks, you noted that the SEC has struggled to keep up with market structure developments from a regulatory standpoint. And you said, too often, the SEC handles the exchanges with, quote, "kid gloves." Therefore, you joked, it is time to put the exchange back in Securities and Exchange Commission. One of the issues you identified relating to the exchanges is exchange immunity. Can you describe the issue for our listeners?  

[00:05:24.90] ROBERT J. JACKSON JR.: Sure, and thanks again for having me. Fundamentally, what's going on in equity market structure, it's profoundly complex, but it can be summarized by one insight, which is we have a series of laws that are designed on the premise that exchanges would be not-for-profit entities jointly owned by Wall Street. And that's not what they are anymore. Instead, they are for-profit entities, and they act like it.  

[00:05:48.36] And I think part of what I was trying to say in that speech is that the SEC has to begin to acknowledge and think through the fact that the exchanges are and can be expected to act like for-profit entities, that is taking the steps that maximize their profits. And in particular, in an area like exchange immunity, a for-profit exchange can be expected to claim the mantle of immunity at any point in its work. Whether it's regulatory steps that the exchange is taking or for-profit steps that the exchange is taking, you can expect it will be in the interest of their shareholders to claim to be immune. It's not a complicated question to ask your shareholders, hey, there are damages here. Should we be immune or not?  

[00:06:26.18] KURT WOLFE: Of course.  

[00:06:26.63] ROBERT J. JACKSON JR.: That tends to be a short conversation with your shareholders. For that reason, you can expect exchanges to seek immunity whenever they can get it. The question is whether that's right for investors. And my urging to my colleagues in that speech-- and I'm delighted that we have a bipartisan moment, where I've got colleagues on all sides who I think agree about a lot of this-- I think upon reflection, most of us think that it might be time to limit the degree to which exchanges can claim to be immune, that they, like all other private actors, should be held responsible when their commercial interests cause harm. And that's one of the key policy points I've been advancing in this area.  

[00:07:00.75] KURT WOLFE: So I want to dive into that a little bit, because there's some pending litigation right now where it's sort of asking the question about the circumstances where it's appropriate for an exchange to be immune. And in that case, the SEC filed an amicus brief. And they sort of don't take a position on it.  

[00:07:15.74] As I read it, they sort of say there are instances where we think a private litigant ought to be able to sue an exchange, and then there are instances where they're acting like an SRO. And it is really for the SEC to discipline them or to bring some kind of action against them. So where is the line? When do you think immunity should apply?  

[00:07:37.88] ROBERT J. JACKSON JR.: Well, so a couple of things. First of all, I really can't comment about pending litigation, for obvious reasons. But here's what I will say. For me, it's straightforward that to the degree an exchange is acting in the regulatory context, I have no discomfort. And I understand why they should be considered immune under certain circumstances.  

[00:07:59.73] But it's equally clear to me that when they take commercial steps, immunity is almost certainly inappropriate, because what it will do is lead the exchange or any private actor to take more risk than they should because they won't, as an economist might say, internalize the costs of the steps that they've taken. The question is where should that line be drawn.  

[00:08:16.94] And because I'm a governance guy and someone who's interested in who gets to make decisions, let me just say this. In the question about who should draw that line, it's not the exchanges. We can talk about whether it should be the Congress or the SEC. That's an interesting debate that maybe J.W. and I can share a little bit about. But fundamentally, allowing the exchanges to make that decision is unlikely to be in investors' best interest.  

[00:08:39.62] KURT WOLFE: Chris, do you want to tee up a little bit about this case? And maybe we can get a take from J.W. on what that litigation is all about and what it means.  

[00:08:46.61] CHRIS EKIMOFF: Yeah, so referencing the City of Providence versus BATS Global Markets. BATS, obviously, is now known as CBOE. In the case, the plaintiffs allege, among other things, that certain defendants permitted HFT, or high-frequency trading firms, to purchase access to non-public investor order information, allowing them to profit at the expense of the class and to manipulate securities markets in violation of federal securities laws.  

[00:09:11.24] An issue in that case is whether BATS may be sued at all. I think that goes back to that immunity question. J.W., what you make of the City of Providence case?  

[00:09:19.37] J.W. VERRET: I think it was a big moment in that case-- I was watching it very closely. It was a big moment when the SEC did an amicus brief and came out on the side of the plaintiffs. Frankly, I'm kind of-- I don't know how a defense counsel could make the exchange immunity arguments for clearly for-profit activities they made in that case. But you make the best argument you can for your client, I guess.  

[00:09:41.93] To me, it's clear-cut that that was for-profit activity attempting to put an immunity blanket over, not unlike what other SROs do. I mean, PCAOB and Federal Reserve do the same thing. They love to say, oh, we're quasi-private when it comes to contractual issues. But when it comes to being sued, oh, we're a quasi-governmental organization.  

[00:10:01.55] The fact is exchanges aren't primarily regulatory organizations anymore. They've outsourced most of that to FINRA anyway. So I think teeing up a rethink of that totally is a great idea. And we'll figure out, we'll debate how to do it. But a rethink is a great idea. And in City of Providence v. BATS, I mean, just a no-brainer that that stuff is not covered under sovereign immunity.  

[00:10:23.29] KURT WOLFE: So, I do think there's a question or an issue here, potentially, though, because there are examples under the federal securities laws where there is no private right of action for a private litigant. There's no implied right of action for aiding and abetting liability under 10b or rule 10b-5. I think whether or not there's a private right of action under Section 14e is still sort of an open question. It feels to me-- no?  

[00:10:50.44] J.W. VERRET: Well, I would say it's currently contested. I think you're right. It's an open question. It's one that the Supreme Court seems to be thinking about.  

[00:10:57.73] KURT WOLFE: OK. I think that's fair. I think you said it better than I did, of course. So I guess what I'm wondering here is, is the type of conduct we're talking about with BATS, or now CBOE, is it the type of thing that a private litigant should be able to bring suit over? Or is it sort of like some of the other SEC enforcement actions we've seen against other SROs, where it's something more about their systems or their structure?  

[00:11:21.70] We've seen Reg SCI cases where they don't have appropriate information security infrastructure. Here what we're talking about is things like selling rights to data or some of the fees around co-location and things like that. I mean, is that something that should be within the purview of the SEC's enforcement division, rather than a private litigant?  

[00:11:39.88] J.W. VERRET: I would say there are elements of that case. The complaint's big. And the initial complaint was, like all complaints, are kind of rough. You wouldn't want to teach a securities class out of it. In some ways, it was kind of a book report of the Flash Boys book.  

[00:11:53.29] But it does put latency arbitrage front and center. And are those practices consistent with previously disclosed items in the exchange's own governing documents? Which is a fraudulent disclosure issue, which is squarely within private litigant purview, I think.  

[00:12:11.06] KURT WOLFE: So I think-- I'm sort of thinking back across both of your comments, Rob and J.W.. I mean, it seems like you broadly agree that if an SRO is acting like an SRO, they're doing something like member regulation, that perhaps immunity would be appropriate. But if they're doing something in their capacity as a for-profit entity, then we're getting closer to the area where we think maybe a private right of action is there.  

[00:12:35.50] ROBERT J. JACKSON JR.: So I think that's right. And one reason this is so bipartisan, and J.W. and I see it the same way, is that we think of this from a basic law and economics point of view. I mean, J.W. and I have known each other for almost two decades. We were classmates in law and economics seminars together. And this is not a hard--  

[00:12:50.65] J.W. VERRET: He was always a gunner.  

[00:12:51.51] [LAUGHTER]  

[00:12:54.02] I was always the slacker.  

[00:12:56.03] ROBERT J. JACKSON JR.: Doesn't it seem like I'd be the shy one?  

[00:12:57.91] KURT WOLFE: No, actually.  

[00:13:00.01] ROBERT J. JACKSON JR.: So, no, look, this is not hard law and economics, guys. What J.W. and I, the reason we agree and the reason so many of us agree, that the law and economics are straightforward. This is a standard moral hazard problem. If you don't require a private actor to incorporate the costs of their private action, you can expect they will take excessive risk. That's just straightforward.  

[00:13:20.74] Moreover, one thing that was interesting about J.W.-- I don't want to comment on City of Providence or this pending litigation-- but he expressed surprise to a degree that the exchanges were prepared to make that immunity argument, since it was so clear, in J.W.'s view. Is that fair, man, that it was kind of a tough argument to make?  

[00:13:38.02] I've got to say, I feel lots of ways about it, but not surprised. Because a for-profit entity's lawyers are going to make every argument they can, man. That's the job. That's their job. I'm not surprised or mad at them.  

[00:13:47.38] This is a problem of incentives in economics, not a problem of individuals or the way particular institutions choose to act. I'm not surprised that they'd like to be immune from as many things as they possibly can. And by the way, J.W. will tell you, I tend to be a shareholder rights kind of guy. There's an argument that they owe an obligation to the shareholders to go as far as the law will allow.  

[00:14:07.51] KURT WOLFE: To make the argument.  

[00:14:08.71] ROBERT J. JACKSON JR.: To make that argument. So now, that doesn't mean that I'm glad they made it. Doesn't mean that I agree. What it means is I understand. And when I said we should take the kid gloves off and put the exchange back in the Securities and Exchange Commission, what I meant is we should think of them for who they are, which are for-profit entities. That's the basic law and economics here that I think J.W. and I often see eye to eye on.  

[00:14:28.63] CHRIS EKIMOFF: And I think that basic economic discussion really struck with me in reading the speech. I believe the quote is, "like letting Barnes & Noble run the public libraries." You won't be surprised when there's not a lot of books at the public library, right?  

[00:14:39.73] KURT WOLFE: It's the dual data feed stuff.  

[00:14:40.69] CHRIS EKIMOFF: It's similar to that data issue, yeah. That's where it really kind of came out.  

[00:14:42.79] ROBERT J. JACKSON JR.: So just to explain that a little bit to folks who aren't thinking about these issues seven days a week, one of the things that really-- when I came to this area-- look, J.W. has been thinking about this for a long time. Ty Gellasch, Kara Stein, Mike Piwowar, my colleagues have all been thinking about this for a long time. But this was not an issue that I'd spent all that time on in my previous life. I learned a lot of it from my colleagues and friends.  

[00:15:03.41] So when I came upon the way that data is sold in this country on stock markets, I have to tell you it kind of astonished me. You have a situation where we have a public feed of prices. It's got all kinds of regulatory reasons why you've got to be aware of it and understand it and buy it. But then the exchanges who run it also make a tremendous amount of private profit from competing against it.  

[00:15:25.83] And so to be surprised that the public feed, the SIP, is not faster or better is, to me, to hope against experience when it comes to economics. Of course it's the case that the exchanges have few incentives to make a competitive SIP. They're competing with it. And that's why I think this work is so bipartisan, because that's not a Republican or Democratic idea. That's closer to common sense.  

[00:15:47.55] J.W. VERRET: To me, I come to this issue from a very different place. And I find very weird allies in market structure that really surprise me. Progressives have a view, I think it's fair to say, of Wall Street that's very critical. I come from a very different place, a libertarian perspective that is very critical of the government.  

[00:16:02.25] In this area, we have Wall Street entities-- I guess you want to frame it-- that have government-conferred power, government-conferred oligopoly power, the power to regulate their customers. To me, that's very worrisome. That's a crony capitalism framework that I'm familiar with from other areas, like the EXIM bank and stuff like that.  

[00:16:21.36] So that's where I come from this. And I find allies where I fight cats and dogs with over corporate finance, corporate governance issues-- like my friend Commissioner Jackson-- that I suddenly find out alliances with on market structure issues. It's strange, and it's fun.  

[00:16:36.24] ROBERT J. JACKSON JR.: And I'll say one thing about it, now that I'm a few days away from stepping off the commission, one thing that's been great about it is that we've been able to do it in such a bipartisan fashion. I mean, when this building works well, man, you get people together with lots of different views. And we have done some remarkable things unanimously.  

[00:16:54.21] The transaction fee pilot, whatever you think of it-- and I understand his argument is litigation. There's arguments on all sides. We have five very different people with different experiences come into that conversation. And we did it 5-0 by seriatim. I mean, that's really remarkable. That's very, very hard to do in this day and age.  

[00:17:10.99] And I've got to tell you, I'm very proud to have been a part of taking those steps. I know not everyone agrees with us, and I understand. But I think the ability of the five commissioners to get together and do something in a way that shows that we're trying to do the right thing for the market, even if you disagree with us, I think it's important for the commission and for the market.  

[00:17:31.77] KURT WOLFE: All right. Let's switch gears. We've been talking a little bit about competition. So let's dive into that a little bit more specifically. Rob, you, I believe last year, called to create within the SEC an Office of Competition Economics. In 2018, you spoke to the Open Markets Institute about competition, which, according to your remarks, is, quote, "the forgotten fourth pillar of the SEC's mission."  

[00:17:57.57] In your speech, you said, quote, "We at the SEC have forgotten a crucial part of our mission, to pursue the kind of vigorous competition that American investors deserve." Failing to ensure competition in our capital markets, you observed, is, quote, "bad policy." And to help the commission fulfill its mandate in this area, you called for establishing an Office of Competition Economics within the SEC's Division of Economic Risk and Analysis, or DERA. And as I understand it, such an office would look across the markets and study or ask whether or not we have the kind of competition in our capital markets that investors deserve.  

[00:18:33.25] ROBERT J. JACKSON JR.: That's right.  

[00:18:33.98] KURT WOLFE: So two questions. First, why should the SEC be focused on competition? Isn't that really the role of the Federal Trade Commission or the Department of Justice? And second, does the SEC have the necessary expertise to be a competition regulator?  

[00:18:51.14] ROBERT J. JACKSON JR.: So both good questions. This speech, which I gave over a year ago now, was inspired by a number of conversations with folks across the markets, including my friend J.W.. And I want to say a little bit about why I think it's so clear we should be focusing on competition.  

[00:19:04.80] So your first question is why should this be part of our mission? And the answer is that's the law. That's the law, man. I mean, I point out in the speech that all of our operative statutes have been amended to require consideration of competition when we make rules.  

[00:19:20.33] And so it's a little surprising to me when folks have a reaction to this like, oh, this is sort of outside of your purview. I mean, I think they might be right. But they should take that up with Congress, not me. I'm just reading the statute that I'm given. And it's very clear that competition should be part of our work.  

[00:19:34.26] But even if you don't believe me about that, this view that it's got nothing to do with the SEC's mission is ahistorical. Because guys, I know a lot of folks who listen to the podcast might not remember this particular bit of history, but there was federal securities law before there was an SEC. And when the '33 act was passed-- I don't know if anybody at this table remembers-- but Congress chose to locate the securities division inside the Federal Trade Commission, which was then, of course, a competition-related agency.  

[00:19:59.93] And that's no surprise when you think about some of the things that were on their minds when they enacted the '33 and, of course, later the '34 act. Fundamentally, what I worry about is that we're making policy decisions while putting our head in the sand about what it will do to competition. And I just think-- my pitch in this speech, which I tried to scope as a modest pitch, was just to say we should consider that as the law requires.  

[00:20:22.85] We should ask ourselves, hey, if we make this change, what is the implication going to be for competition? By the way, that doesn't dictate an outcome. We have taken a couple of steps lately, for example, with respect to proxy advisory firms. I'm not sure we're going to be able to talk about that today.  

[00:20:37.76] But fundamentally, there are two of them. And if we burden the area with further rules, it's possible that we'll reduce competition. It doesn't mean we shouldn't. And in fact, that's not my view. But it does mean we ought to think about it before we take that step.  

[00:20:51.77] And Kurt, you asked about whether the SEC has the expertise. We have some brilliant folks in DERA, but this is not a competency that we focused on building out. Competition economics is extremely challenging. It's changing all the time.  

[00:21:04.67] And I think we talked to the DOJ and FTC, and that's a good start. But I think we ought to have a group down there who, every time we make a rule, should ask themselves, is that going to make it harder to compete for American investors' dollars and to provide better service to American investors? If the answer to that is yes, it doesn't mean we shouldn't do it. It just means we ought to think about it before we vote on the rule. And that's the pitch I made there.  

[00:21:26.12] J.W. VERRET: I think it's fair to describe the SEC and the FTC in this space as, like, two English gentlemen come to a turnstile. And they say, after you. No, no, no, after you. No, no, no, after you. And we have 50 years of that.  

[00:21:35.56] We can take different approaches to antitrust, as we do. And there's the old Chicago school approach to antitrust, which is associated with the right, very critical of easy assumptions about market power, which I'd probably go toward. And then there's I guess maybe the Ivy League or Wilsonian progressive view of antitrust, which is strong trust-busting. But we should be at least having that debate. And we're not even there. But that's not even on the table here.  

[00:21:59.66] Courts have encouraged the SEC to focus on it. It's not just Rob's speech. Susquehanna versus SEC, the judge admonishes the SEC to focus more on its competition mission and fee oversight, which is just a part of the broader market structure issue, where it has these competition obligations. So we should be having that debate here, a discussion with a bunch of new IO economists, according to Rob's suggestion, in a competition office.  

[00:22:22.79] KURT WOLFE: I mean, I can tell you from a practitioner's perspective, or from the defense bar, I mean, I have been in cases where antitrust or competition issues are at the heart of the case. And I'm often sitting across the table from somebody at the Department of Justice, often someone in antitrust, who maybe has spent their career figuring out whether someone is rigging the price of bubblegum.  

[00:22:43.70] But now all of a sudden, we're talking about a security. And it's very, very different for them. If we're lucky enough to get some of the good folks from the SEC involved, I think they can provide a little bit of color or context. But it does seem like, at the very least, we need some cooperation if, at the SEC, they're not going to take steps to acknowledge that this is perhaps part of their mandate.  

[00:23:04.58] ROBERT J. JACKSON JR.: Yeah, no, look, I think building that competence inside the SEC is just hard to be against, if I'm being perfectly candid. And that doesn't suggest-- I'm sensitive to the concerns around mission creep, et cetera. I don't think we're antitrust regulators. That's not my claim.  

[00:23:19.67] My claim is that we're going to have to make hard regulatory choices. When we do, there's certain things we have to weigh. Like cost benefit, for example. DERA provides us with an analysis. My job is to read it and see if I'm persuaded, and if I'm not, to push back, et cetera. I don't know why we wouldn't be doing that about competitive effects of any choice that we're making.  

[00:23:37.05] And by the way, guys-- and I said in the speech-- when I went out to interview on Wall Street, when I was looking for a job, there were a lot more investment banks than there are today. There were a lot more accounting firms than there are today. We have made a series of choices over decades that have led to tremendous concentration in the American marketplace. And the SEC ought to be thinking about that, because the law says so, because history suggests it's good policy, and because, in fact, as J.W. points out, it's a conversation that American investors deserve.  

[00:24:03.68] J.W. VERRET: I'd love to have a discussion about the extent to which securities law has created barriers to entry for new firms. So we can have that debate later too.  

[00:24:10.54] ROBERT J. JACKSON JR.: Well, look, so that's a good example. J.W. and I will not agree about the implications of this. Many times, he would say, well, you want a list of laws that create the kind of barriers-- you know, he's going to give me a list of laws that I would have voted for.  

[00:24:22.82] J.W. VERRET: I have it in my pocket right now.  

[00:24:23.12] ROBERT J. JACKSON JR.: Yeah, yeah.  

[00:24:24.49] CHRIS EKIMOFF: He came prepared.  

[00:24:25.79] ROBERT J. JACKSON JR.: But again, where there ought to be bipartisan, broad agreement is that it's a consideration that should be on the table. Now, where you take that consider-- like, for example, on proxy advisors, I don't think J.W. would agree that because there are only two, and burdening them with regulation means that we shouldn't regulate them. Is that right? Yeah, so I'm not going to draw that inference.  

[00:24:45.14] But he, I think, would agree that he should consider it with respect to the kinds of regulations he might favor in the context, just like I would agree that I'd be required to consider competitive effects where the SEC seeks to regulate corporate governance, if you like. So I think the premise that we can agree on and should agree on as a commission is that this is relevant to our work. Because it's relevant, we need to build the expertise, for the reasons you've given, Kurt.  

[00:25:11.00] KURT WOLFE: I think that at least one former SEC commissioner would probably agree with you. I've heard many speeches by Mike Piwowar where he is just dying to get more economists in the building. So maybe this is a good example.  

[00:25:23.94] CHRIS EKIMOFF: One of the things I want to go back to, Rob, you brought up the number of accounting firms over time. And on the CPA side, we often date each other based on how many firms existed and the big number when you came in. And we're seeing a lot of these kind of discussions happen overseas.  

[00:25:38.45] In the European markets, the market and Conduct Authority in the UK is talking about breaking up or making some changes to the accounting firm structure over there. Is that kind of in play as well from a competitive perspective or something that we can comment on today? Or how do we see the accounting firms' role in the broader discussion of the market infrastructure?  

[00:25:55.82] ROBERT J. JACKSON JR.: So, obviously, audit and accounting firms provide a crucial service to the market. And without strong auditing standards and strong accounting firms, investors just can't get the information they need to accurately price securities. And so it's enormously important work.  

[00:26:12.05] I think what you're seeing in the UK and elsewhere is a reminder of the importance of the space and that there are real risks to having a lack of competition among those firms. Again-- and I'd be curious, J.W., to hear your views, because I know this is a space you've been thinking a lot about lately. We might come to different inferences, different conclusions about exactly what that means we should do from a regulatory point of view.  

[00:26:35.18] But I will say that the quality of audit financials is incredibly important. I've got to tell you, Jay Clayton has been a leader on this front, in particular when it comes to the work papers issues with Chinese-related subsidiaries. I mean, that's a hugely important issue.  

[00:26:51.86] And I'll tell you right now, that's not an easy thing for a US regulator to get out headlong and say, hey, this is a problem, and let's all be aware of it. I was really glad that he took that step. Again, not an easy thing to do, but the right thing to do.  

[00:27:03.38] And I think what I would say is careful oversight of these accounting firms is going to continue to be important, because their work is so crucial to price formation. And I think there's broad agreement about that. But J.W., what's your point of view?  

[00:27:18.80] J.W. VERRET: I love the focus on China. That's a big issue for me. There's a lot of issues with China I have, but that's one where the SEC can do something quickly. In the near term, I'd love first projects out of Rob's competition office would be a full sort of soup-to-nuts review of why doesn't the big five to eight have more ability to challenge the big four?  

[00:27:39.83] Is it economies of scale? Like I'm sure the big four would probably say, it's economies of scale. It's just undoable. Once you're in the big four, you've got to stay here. And you've got to come with one of us.  

[00:27:48.83] Or is it regulatory issues? Or is it something else that's related to this kind of milieu of stuff? I'd to see a great project from the new office just trying to figure all that out, because I think making assurance more competitive, while not undermining the value that assurance provides, would be a good thing. I don't have that magic answer yet. But I think your little office could help us get there.  

[00:28:13.45] ROBERT J. JACKSON JR.: I'll have to open it first, man. But yeah, I think that's right, exactly. I think that's exactly right. And just to add a thought to it, the accounting profession, I think, is in an interesting place, because there's going to be transformation in that space.  

[00:28:27.41] And it's such a funny thing, because when I came to office, people had just begun to think seriously about blockchain and where it would go. And I've got to be honest with you. Off the top my head, money was not the first and most obvious application of blockchain technology. To me, audit was a much more obvious fit.  

[00:28:42.98] CHRIS EKIMOFF: Auditors have been worried about that for a long time, in terms of the automation and things. So definitely those discussions are happening.  

[00:28:48.68] ROBERT J. JACKSON JR.: Yeah, and I think-- I don't know that they should be worried.  

[00:28:51.90] CHRIS EKIMOFF: Yes. Gut reaction was not positive.  

[00:28:55.88] KURT WOLFE: You're not going to be replaced by a bitcoin. Don't worry.  

[00:28:58.55] CHRIS EKIMOFF: I don't know if that's how it works, Kurt.  

[00:29:00.17] ROBERT J. JACKSON JR.: Very few industries welcome this kind of change with open arms. But I think what they can do is, in my humble view, make the profession more value add, because the sort of judgment and advice that truly exceptional accounting professionals can provide is all the more valuable in a space where the other tasks are, as you say, automated. For me, one thing that's sort of interesting about the question J.W. poses as to why we haven't gotten more competition has to do with the degree to which we have transparency and accountability for actual audit oversight functions.  

[00:29:31.81] For example, the PCAOB some time ago put out a new rule, the AP disclosures, which require detail on audit partners and their performance. And I understand that that's been the subject of some controversy. But I'm a guy who would love to see more transparency in the area, because to me, transparency helps markets do their work. To the degree that good audit partners are known as such and to the degree less good audit partners are known as such, that helps the markets suss out exactly what kind of value they're getting when they look at an audit and financial statement from a particular firm or partner. And I think that's-- in the long run, that'll lead to more competition in the space.  

[00:30:06.78] CHRIS EKIMOFF: So last word on the concept of an Office of Competition here. I mean, it sounds like we are all sort of broadly in agreement that it would be a good idea for the commission to set up an office and at least take a look. Let's see where it might be appropriate for the commission to do more.  

[00:30:21.71] I'm not sure that there is necessarily agreement in the building. And I'm thinking about a speech the chairman gave recently, where he talked about avoiding the desire to stretch the mandate of the SEC. I mean, do you think that's how he might think about this competition initiative?  

[00:30:37.49] ROBERT J. JACKSON JR.: So, as a rule, I try hard not to speculate about what the chairman might think. Look, I've been so lucky to work with a thoughtful chairman like Jay Clayton. It's been extraordinary. I'm just fortunate, not only with Jay, but to have colleagues like Elad Roisman, Hester Peirce, Mike Piwowar, I mean, Kara Stein, Allison Lee. I've been very, very, very fortunate.  

[00:30:55.76] And I think one way I might talk about this or think about this is that Jay and I have different jobs. Jay is a CEO, so to speak. And I think he's extraordinary as a CEO. He's got to run the building he's got on the budget he's got with the mission he's got.  

[00:31:10.07] And commissioners sometimes have the luxury-- and some of the very best predecessors I've have had the luxury-- of looking beyond the limits of the law that we have and think more about the future and what it should look like. And I would characterize, to the degree that there's disagreement, it might be because we sit in different places, have different roles, and different perspectives on questions about the future of the place.  

[00:31:29.80] CHRIS EKIMOFF: Would we need to change the phrase that I became aware of last year, the tripartite mission? Would that need to be the quadpartite mission? I don't know what the right Latin is for that.  

[00:31:40.17] [INTERPOSING VOICES]  

[00:31:41.36] ROBERT J. JACKSON JR.: But I'll tell you, it's such a funny thing, man, because it is a ritual. And I say this in the speech, that during the confirmation process, you are asked about what you'll do about the tripartite mission. And if you go to get the statute and just read the law, there is this fourth thing that everyone seems to lead out.  

[00:31:56.51] And I should say that, again, it doesn't, to me, have an obvious partisan bent. J.W. and I agree about the importance of the board. And by the way, I think Congress ordinarily doesn't put words in statutes that they don't intend to have import or meaning. So I-- J.W.'s not so sure.  

[00:32:11.65] [LAUGHTER]  

[00:32:13.46] But anyway, what I would say is we should take that mandate seriously. And part of what that means is having the expertise in DERA, I would say through an office of economists who can give us some analysis as to what we should think about the competitive effects of our choices.  

[00:32:29.85] KURT WOLFE: So let's stick with competition but focus on a slightly different area here. And that is credit rating agencies, where, I mean, arguably, competition hasn't solved the problem. So the SEC and its Office of Compliance, Inspections and Examinations, OCIE, have oversight of credit rating agencies registered with the commission as Nationally Recognized Statistical Rating Organizations, or NRSROs. These are entities like Moody's, Standard and Poor's, Fitch, Japan Credit Rating Agency, and Morningstar Credit Ratings.  

[00:33:01.22] Your friend Ty Gellasch, who we mentioned earlier in the podcast, recently lamented on Twitter that the SEC's recent annual report on credit rating agencies, quote, "suggests all sorts of problems but declines to show any meaningful changes," end quote. He explained that the credit ratings industry suffers from potential conflicts and, quote, "experts, investors, administration officials, members of Congress, and others have all recommended fixing the facially conflicted business model. Yet nothing happens."  

[00:33:32.75] So what's going on here? Can you tell us a little bit about this, J.W., and why is the issue unresolved?  

[00:33:39.34] J.W. VERRET: Yeah. And I should say I served a brief term as an interim chairman for one of the credit rating agencies. And I'm off, and I've been out for a year now, so I'm not talking about any firms in particular. And I don't have any interest in this other than academic interest at this point.  

[00:33:54.70] I think it's unfortunate. I was interested in this when the Dodd-Frank Act came through. There are some good ideas in there, the separation between-- as long as we have the world we have now, there are some ideas that are very good, like the separation between marketing and ratings, for example, because there was just a horror show of things that happened in advance of Dodd-Frank and leading up to the financial crisis. What I'd like to see going forward, to deal with the problems of lack of competition and just incredible-- I mean, this is an oligopoly market for sovereigns, for ABS.  

[00:34:27.85] I'd like to see a couple of things. I'd like to see, first, I think the easiest thing to do is the way the PCAOB handles a similar situation, external assurance and conflict of interest with issuers who pay-- the issuer-pays model and all of that-- is PCAOB does public inspection reports. It says, we went through, we kicked the tires, here are some problems. And the firm name is at the top.  

[00:34:49.03] Credit ratings, they don't do the same thing. Credit ratings, they take it a little easier on the credit ratings firms. And they have an anonymized annual exam that says, a big firm did this, a small firm did this. And you have to try to guess and say, which big firm? What do you mean by big? The big three? The big four? The five? What?  

[00:35:05.68] Let's make a report of everybody. And let's see who's who on the naughty list, the annual naughty list, which actually comes around Christmas. So it's colloquially known as the naughty list in the industry. Let's see who's on the naughty list. Let's see who's on the naughty list year after year.  

[00:35:19.63] Let's see what's going on here, have some transparency. And if firms have an issue, they get a chance to respond too, like in the PCAOB report. Firm response, we don't agree for this reason or that reason. Let the market figure it out.  

[00:35:29.80] I'd love to take a broader look at, again, barriers to entry. I sound like a broken record. But that's a second project to me. I think the fintech guys could come up with better models than we have now if they had the chance. But for now, public inspection reports. That's my new thing.  

[00:35:44.35] ROBERT J. JACKSON JR.: So let me start by saying the folks in our Office of Credit Ratings are just extraordinary public servants. I spend a lot of time around this table debating these issues with them. I think-- I wouldn't speak for any my colleagues. And I should say, everything I say here are my views and not my mother's views or my chairman's views or any of my colleagues' views.  

[00:36:03.97] CHRIS EKIMOFF: You might be looking forward to not having to say that after the end of the week.  

[00:36:06.83] ROBERT J. JACKSON JR.: Yeah, I've got to say, man, I am. Because it's true of anything I've ever said. And I always like to add my personal caveat to this, which is, I'm sure, given enough time and wisdom, they're going to realize I was right all along.  

[00:36:15.74] [LAUGHTER]  

[00:36:16.93] KURT WOLFE: I didn't hear that at SEC Speaks last year.  

[00:36:20.74] ROBERT J. JACKSON JR.: But look, I've spent a lot of time talking with them. And look, there are real practical issues with having a public disclosure report of the kind J.W. is describing. Just to give a couple of examples, our colleagues and staff have close relationships with the credit rating agencies. We rely on them for engagement, for reporting, for being forthcoming. We have limited resources, and those relationships are important.  

[00:36:40.78] And I fully understand that. But I've got to tell you, I think J.W.'s got the better of the argument here. And he's building on work by one of my favorite academics, Berkeley Law's Frank Partnoy, who's been thinking about this for a very long time. Very thoughtful academic. And he's also suggested for some time that public accountability makes some sense.  

[00:36:59.73] And let me just say, the reason why, again, I think students of law and economics would agree about this is guys like us think a lot about not just the rule that we'll have, but how people will respond to it, knowing the rule exists. We think about it as an ex-ante effect of a rule. J.W. and I spend a lot of time thinking, if we make this rule, what are the consequences that will flow from it? And do we like those?  

[00:37:20.08] One of the problems with not having public accountability is you worry that if someone at a credit rating firm knows that if they make a mistake or if they engage in something that is not good for investors, they won't end up in the public record, there won't be public accountability for it. And I'm afraid that affects their thinking about what they should and shouldn't do in an area where conflicts are rife with the issuer-paid model and where the judgments are fundamentally-- I mean, look, I was a banker for a while. I'd love to tell you that a financial model tells you exactly what a credit rating should be. It does not.  

[00:37:52.79] There's a judgment call that people have to make, man. And they're doing that in a highly conflicted environment. And I want them to think that if they do the wrong thing, there's going to be a public accountability moment for the firm, at a minimum. And so I think on the long economics of this, Professor Partnoy and Professor Verret have this one right, that we should be thinking about public means of accountability in credit ratings.  

[00:38:14.56] CHRIS EKIMOFF: And I would add, having been regulated by OCR for nine months or so, they're incredibly professional. I loved working with them. And Director Kane, Director Jessica Kane, is a GMU alum, GMU Law School alum. We're very proud of her. She's our top alum in the building.  

[00:38:30.10] ROBERT J. JACKSON JR.: What a great team. I mean, really, seriously. One of the great things of this job, besides having the great colleagues I do up here on the 10th floor, the staff are extraordinary. And that team is a great example.  

[00:38:39.31] I mean, we sit around here, man. I'd love to tell you. If you guys had sat in on it, it's the kind of conversation you want us to have. We're talking about the puzzle of competition and how you bring more firms in. We're talking about how do you make sure credit ratings are accurate, but then not burden a new entrant.  

[00:38:53.10] We're having the conversation that we should. On this one, I have to say I think J.W. has got the better of the argument. We should be having public accountability for credit ratings.  

[00:38:59.82] KURT WOLFE: I think that's two for you so far, J.W..  

[00:39:02.55] CHRIS EKIMOFF: We're going to have to get a sound effect.  

[00:39:03.84] J.W. VERRET: Let's move to Sarbanes-Oxley.  

[00:39:05.28] [LAUGHTER]  

[00:39:07.26] CHRIS EKIMOFF: Open the big box here.  

[00:39:08.92] KURT WOLFE: So let me ask a question. Why are we having this conversation now? I mean, it seems like something we might have talked about after the financial crisis 10-plus years ago. Arguably, the credit rating agencies played a role in what happened there. So how come we're talking about it today?  

[00:39:28.71] ROBERT J. JACKSON JR.: Well, I think there are many observers out there-- and I won't speak to whether they're right. But there are many who are worried that we're returning to the same movie again that we experienced in the mid-2000s, that the issuer-pays model is creating conflicts that are encouraging credit ratings analysts and agencies to be more generous than they otherwise could or should be. And the worry about that is we still have a lot of the regulatory arbitrage that exists in having a particular rating and the degree to which you can attract investors on the basis of that rating.  

[00:39:59.16] Because that's true, I think there's real concern in the marketplace about the model and whether it works. And I've got to tell you, just the other day, our Fixed Income Market Structure, our FIMSAC Committee, came out with a wonderful set of recommendations that I encourage folks who are interested in the space to take a look at. It's a really good example of a well-functioning, thoughtful advisory committee. FIMSAC has done great work.  

[00:40:20.73] And in particular, these recommendations reflect some things that were considered for Dodd-Frank but didn't become part of the bill. So the Franken-Wicker amendment, which would randomize the assignment of issuers to credit rating agencies, so that there's less commercial incentive for conflicts of interest. Interesting ideas.  

[00:40:39.77] I'm not prepared at this moment to pick one. I will say this. We've been having this conversation curve for a long time. It may be that it's time to take some steps in the area. So I'm going to be paying a lot of attention where FIMSAC and my colleagues end up in this area.  

[00:40:52.94] KURT WOLFE: J.W., do you agree? What steps do we need to take?  

[00:40:56.37] J.W. VERRET: I'm not going to go full on Franken amendment, though I'm willing to talk about randomization generally in some contexts. But I would like to see-- a world in which, in consumer credit rating-- and I know it's very different in the field. But where they can track-- you can enter into, voluntarily into, app-based tracking of where you go and what you do-- for an alternative credit rating, I can't imagine what fintech could do with company credit ratings with harnessing big data.  

[00:41:22.05] That would totally blow the current model-- broken model, I would say-- of sort of subjective, eh, it's double A, eh, it's triple A, based on a bunch of models, but essentially just subjective judgment. I mean, let's be honest here. Fintech guys can blow all of that out of the water if given the chance, I think. So that's what I'd like to see.  

[00:41:38.48] CHRIS EKIMOFF: Hey, you're not the only broken record here, J.W.. I always kind of think of the issuer-pay model through the lens of audit and accounting firms, a very similar setup, where the client or the auditee is incurring the fees to have the audit performed. Are we thinking of that along the same lines here? Or do we see a similar issue with the audit model? Or are there other considerations on the credit rating side that don't apply?  

[00:41:59.08] J.W. VERRET: I think it's the closest analog. It's not assurance. It's rating, not assurance, which is different. Assurance is actually harder, I think. But the closest analog we have, yeah.  

[00:42:08.73] ROBERT J. JACKSON JR.: I think that's why some of the steps that I've been taken in the US market on the audit side are so important. I mean, when you say that, my answer to you would be, that's why we've got audit committees. And some of the audit chairs I've worked with, man, in the boardrooms across America are some of the smartest guys I know-- thoughtful, prepared to push back, prepared to ask hard questions, prepared to get an answer that's not the easy answer. And I think institutionally that plays a very important role.  

[00:42:33.93] But otherwise, there are some parallels there. And you do have to wonder what our audit world would look like if we didn't have independent audit committees and chairs. And that's, I think, what people are concerned about in this space.  

[00:42:43.71] J.W. VERRET: It was funny. And to me, there is a sort of a trade-off here, a balance between liability and regulation. And in audit, they kind of have the worst world here, because they don't have much liability relief but lots of regulation. And credit ratings, they have the opposite. They have ultimate liability relief and not nearly as much regulation. So I don't know who the lobbyist is for the credit rating guys, but they're beating the accounting guys out of the water.  

[00:43:09.42] KURT WOLFE: All right, I think we've made it through our big three topics for today. Not the big four, the big eight, but the big three topics for today. We want to kick over to a lightning round. But first, I want to give both of you guys, any last thoughts before we move on?  

[00:43:21.90] J.W. VERRET: It's good to be here, good to be here to celebrate Rob's last week at the commission. If you'd told me 10 years ago, five years ago, that the guy I disagree most in all law review articles would become one of my best friends in Washington, a guy I'd work with on issues, market structure, et cetera, or debate in a fun way, in a way where I have to say, huh, how do I deal with that when he'd do speeches on the court fin stuff, congrats, man. And good luck to what comes ahead.  

[00:43:47.47] ROBERT J. JACKSON JR.: Well, thanks very much. I've got to say, I don't think J.W. is the only one celebrating that I'm coming off the commission.  

[00:43:51.14] [LAUGHTER]  

[00:43:52.60] But no, look. It's been such an honor. And I've got to be honest with you. I just look back at this experience and say I was so fortunate to get to work with the incredible staff here, but also with a guy like J.W., who, you know, this is not an easy moment for bipartisanship in this town. But he and my colleagues on the commission have just been-- have made that possible for me in a way that, if you told me two years ago, hey, Rob, you're going to be ending a term where you've got a lot of initiatives that you managed to move forward on a bipartisan basis, I would've been surprised but proud and excited. And yeah, I'll never forget the experience. I've been very, very lucky.  

[00:44:28.87] KURT WOLFE: Well, congratulations.  

[00:44:29.83] ROBERT J. JACKSON JR.: Thanks, man.  

[00:44:30.31] KURT WOLFE: And thanks for being with us today.  

[00:44:35.35] CHRIS EKIMOFF: We want to finish today with a little bit more fun. We've talked on previous episodes of the podcast, Kurt and I, about the importance of footnotes, whether they're in a Supreme Court opinion or other decisions being made around the area. So Commissioner Jackson, it's been noted, both as an avid reader of SEC-related activity as well as a huge Star Wars fan, that sometimes you'll fit some pop culture references into your thoughts and into your speeches. So if it's OK with you, I want to run through a few questions just to flesh out some of those ideas.  

[00:45:03.42] ROBERT J. JACKSON JR.: Yeah, sure. It's securities law, man. You've got to spice it up somehow.  

[00:45:05.86] CHRIS EKIMOFF: So first off, just yes or no answer, are these the droids you're looking for?  

[00:45:11.28] ROBERT J. JACKSON JR.: These are not the droids you're looking for.  

[00:45:13.95] CHRIS EKIMOFF: I wish that you guys listening could see the face that Rob made there. It was great. I don't know if you're familiar with the phrase, who shot first?  

[00:45:21.51] ROBERT J. JACKSON JR.: Come on, man. Of course I'm familiar with it.  

[00:45:22.95] CHRIS EKIMOFF: OK, just want-- I'm just measuring the, gauging the--  

[00:45:25.68] ROBERT J. JACKSON JR.: Listen, I don't want to offend anybody. I know it's a very sensitive subject, especially at this moment in our nation's history. But I think it's very clear that Han shot first.  

[00:45:33.15] CHRIS EKIMOFF: There'll be-- how many internet trolls do we have now for the podcast, Kurt? There'll be--  

[00:45:36.76] KURT WOLFE: 10 more.  

[00:45:37.75] CHRIS EKIMOFF: They'll be writing in.  

[00:45:38.72] ROBERT J. JACKSON JR.: I just disqualified myself from future office. But you've got to speak your mind, man.  

[00:45:42.84] CHRIS EKIMOFF: Wookiees or Ewoks?  

[00:45:44.11] ROBERT J. JACKSON JR.: Oooh, interesting. I've got to go Wookiee. I don't know if this is going to be a partisan issue. J.W., what do you think?  

[00:45:50.11] J.W. VERRET: No, Wookiees are-- who would beat who in a fight? Clearly, Wookiees would win.  

[00:45:53.13] ROBERT J. JACKSON JR.: It's true. Now, look, also Wookiees, they played a major role throughout all of the prequels, sequels, and sequel sequels. So I've got to go with the Wookiees.  

[00:46:05.08] CHRIS EKIMOFF: Understood. I'm thinking about the Battle of Endor, if Chewie played a bigger role than the entire group of Ewoks.  

[00:46:11.73] KURT WOLFE: Imagine an army of Ewoks-- an army of Chewies.  

[00:46:15.65] CHRIS EKIMOFF: Chewies, yeah.  

[00:46:16.11] ROBERT J. JACKSON JR.: I've got to tell you, I feel like this is an enlightened view for me to take, because as a man who stands at 5' 6", I'm very sensitive to the plight of the Ewoks.  

[00:46:23.88] CHRIS EKIMOFF: You could have gone with the easy answer there.  

[00:46:25.89] ROBERT J. JACKSON JR.: Yeah, but I feel like I have to keep an open mind.  

[00:46:28.05] CHRIS EKIMOFF: Do you have a favorite Skywalker?  

[00:46:30.57] ROBERT J. JACKSON JR.: Oh, that's tough, man. I mean, I've got to tell you, what I love about-- I've told J.W. this a couple of times. What I love about Star Wars is that a guy like me looks at Star Wars, and I see a lesson about corporate governance.  

[00:46:47.19] Say what you want about the Empire, but centralized control has its benefits, man. They had lots of Death Stars. Look, the Jedi are fantastic. But they're often squabbling and not paying attention.  

[00:46:59.22] CHRIS EKIMOFF: Living in huts out there.  

[00:47:00.16] ROBERT J. JACKSON JR.: Irrationally apathetic. It's complicated. So yeah, so I'm going to say Anakin Skywalker. And I'll say why. The first few movies make you feel like this is an easy thing to understand. This is just a bad guy.  

[00:47:12.75] It's easy to understand. Evil versus good, them versus us. That's easy to understand. It turns out it's more complicated than that. And I think that's a really valuable lesson.  

[00:47:20.52] J.W. VERRET: I would say-- because I'm an enlightened guy-- I would say Shmi Skywalker, Anakin's mom, because where would we be without our moms? Where would Darth Vader be without his mom?  

[00:47:29.34] KURT WOLFE: That's a hot take. That wasn't even on the list of options.  

[00:47:34.21] CHRIS EKIMOFF: Speaking of significant capital expenditures, what was the most valuable investment, the first Death Star, the second Death Star, or the more recent Star Killer Base?  

[00:47:43.44] ROBERT J. JACKSON JR.: Wow. I mean, it all ended badly.  

[00:47:45.66] CHRIS EKIMOFF: Yeah, might be a time value of money, return issue there.  

[00:47:49.39] ROBERT J. JACKSON JR.: But I think J.W. would agree that regulators should be careful about making ex-post judgments about ex-ante considerations. So don't you think, J.W.? I mean, I shouldn't be analyzing this in front of you.  

[00:48:00.72] J.W. VERRET: All I know is we need spending caps in the Empire, man.  

[00:48:05.25] ROBERT J. JACKSON JR.: Here's what I'll say. Did you guys ever look at-- so for the first couple of years of the Obama White-- I think I was still in the Obama Treasury-- they accepted petitions at the White House. And they would actively consider-- I don't know if you remember this. But someone petitioned, hey, we should consider building a Death Star.  

[00:48:22.71] I can't think whether it was with NASA or somebody else, but someone had to-- there was a response. And I remember very clearly the first item of response, here are the reasons why we're not going to build a Death Star. And one was the administration is not in favor of blowing up planets. I feel like that--  

[00:48:36.26] CHRIS EKIMOFF: That's a strong position we can all get behind.  

[00:48:38.35] ROBERT J. JACKSON JR.: Yeah, I'd like to think it's bipartisan.  

[00:48:40.47] CHRIS EKIMOFF: If you remember from Episode 1, which again is the fourth movie in production, the Phantom Menace, Senator Palpatine, later the emperor-- sorry, spoiler alert for those of you who haven't followed along the past 40 or so years of film-- his rise to power is set in motion because the Trade Federation did not comply with their need to pay appropriate trade taxes. Had the Galactic Senate better managed expectations with its taxpaying base, do you think we could have avoided the entire Star Wars saga?  

[00:49:09.78] ROBERT J. JACKSON JR.: Well, as it turns out, the conflict, as you know, was manufactured. So I think there might be a lesson in that, that conflict is not what it seems. And look, fundamentally it would've been a shame. I mean, they're great movies. Come on. So I'm kind of glad they didn't work it out.  

[00:49:28.08] CHRIS EKIMOFF: With the blown-up planets aside, I mean, there was a lot of good to come out of it as well.  

[00:49:31.59] ROBERT J. JACKSON JR.: Yeah, I mean--  

[00:49:33.39] KURT WOLFE: Trade wars are not easy to win.  

[00:49:35.25] CHRIS EKIMOFF: It's very, very humorous how topical we're being today with our Star Wars. Bringing it back to the SEC, Kurt and I had kind of been kicking around, we've got a little running theme here, where Kurt has to bring up Reg BI at least once an episode.  

[00:49:47.13] J.W. VERRET: All right, I'm out of here. I'm out of here.  

[00:49:48.67] KURT WOLFE: No, I mean, and so full disclaimer, this question is just designed so that I can refer to Reg BI as the Phantom Menace. But with that in mind, there's always a lot of debate about what's your favorite Star Wars. So thinking about SEC rule makings, if we thought that maybe Reg BI is the Phantom Menace-- and you can tell me if you agree with that-- what's your favorite Star Wars movie, and what's the SEC rule-making analog from your tenure?  

[00:50:16.81] ROBERT J. JACKSON JR.: So I have a controversial answer to the Star Wars question. It's gotten me in a lot of trouble over the years. And man, I hope this doesn't come up in the Senate ever, because I'm going to be in trouble. But I think Revenge of the Sith is the finest Star Wars movie. And here's why. Yeah, I know.  

[00:50:31.18] CHRIS EKIMOFF: That's one vote for Revenge of the Sith.  

[00:50:33.19] ROBERT J. JACKSON JR.: Yeah, I'm like the only guy in America. Here's why I think that's-- so telling the story isn't easy. And the challenge, if you think about it, when he sat down to write this, here's the challenge. Everybody knows what happened before. Everybody knows what happens next. And you have to write a story in between that's sort of compelling and makes sense.  

[00:50:49.51] And I think the movie achieves that. My own sense is that people should be graded against a reasonable set of expectations. We should be careful about how we define success. And in that situation, when he knows that everybody knows what happens next, it's one of the most iconic moments in movie history that Anakin Skywalker becomes Darth Vader.  

[00:51:07.42] To have made it compelling is really an extraordinary achievement. It would be like me dunking a basketball. I mean, really not likely, but would be delightful if it happened.  

[00:51:17.89] I think, if you ask me about the things I'm most proud of here, most of them have to do with market structure. But we've talked about that a lot. And so I'm going to give you a different one. Something that just shows you how well this building has functioned under Jay Clayton's leadership is that we unanimously adopted our ETF rule last year.  

[00:51:35.97] Guys, again, this is trillions of dollars of ordinary families' money. More and more people are using this vehicle. It reduces-- it's put tremendous pressure on costs in a way that's really important for those families. And there was debate for 10 years or more about what the right shape of a rule looked like, about whether it could move through the commission, et cetera.  

[00:51:56.32] We adopted that rule 5-0 through our seriatim internal process. I'm extremely proud of that. And again, it's not the-- I understand it's not the world's most sexy subject. It didn't get as much attention as Reg BI or as other things that I care about. And there are a lot of high-profile losses that I've had in the job, no doubt. I lost a lot more often than I won.  

[00:52:16.30] But I'm really proud that that kind of thing, we're so engaged in the work of protecting investors that we do something like that would be remarkable under different circumstances. And the market just expects the place to work. And that's been very rewarding. And I think it's a tribute to Jay and my colleagues on the commission.  

[00:52:32.73] KURT WOLFE: I think that's a perfect way to end it. Thank you both again for being with us today. Hope to see you again soon.  

[00:52:38.32] J.W. VERRET: Thanks, guys.  

[00:52:38.70] ROBERT J. JACKSON JR.: Thanks, guys.  

[00:52:39.69] CHRIS EKIMOFF: That's it for our episode today. Thank you for joining us for the "inSecurities" podcast from PLI.  

[00:52:45.84] KURT WOLFE: As always, you can find us on Twitter. I am @enforce_update.  

[00:52:52.00] CHRIS EKIMOFF: And I'm @ekimoffCPA. Be sure to check us out on Apple, Spotify, or wherever you get your podcasts. And feel free to jump into the conversation using the hashtag insecuritiespod to share some topics, cases, information you'd like to hear more about.  

[00:53:06.87] KURT WOLFE: Thanks for tuning in, everybody. Hope to see you next time.  

[00:53:09.31] CHRIS EKIMOFF: Have a good one.  

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[00:53:21.26] SPEAKER 1: Thanks for listening to "inSecurities," a podcast from PLI, the Practising Law Institute. PLI is a non-profit provider of authoritative professional services training and continuing education. In an increasingly complex business environment, where intricate corporate structures reign, "inSecurities" can help you make sense of it all.  

[00:53:40.34] A special thanks goes to the producer of "inSecurities," Daniel [INAUDIBLE], as well as hosts Chris Ekimoff and Kurt Wolfe. For more information about PLI's SEC Institute, or to view hundreds of hours of fresh and relevant on-demand programming covering changes within the securities sector, visit PLI.edu/membership and sign up for a privileged membership.  

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