Remarks at the Southern African Securities Regulators Regional Training Conference

Good morning and welcome to the regional training conference for securities regulators in Southern Africa.[1] Thank you for your attendance, which reflects your commitment to developing regional capital markets to support economic growth on this continent. [2]

I would like to thank the Capital Markets Commission of Angola ("CMC"), and its leader, President [Vanessa] Simões, Dr. [Sebastião] Manuel, Advisor to the CMC's Executive Board, and Professor [João Manuel] Fernandes, Chairman of the ISPTEC, for their partnership in planning and hosting this event. My colleagues and I from the U.S. Securities and Exchange Commission ("SEC") are pleased to participate and hope that our efforts will contribute to making this event a success.[3]

Thirty years ago, the United States established diplomatic relations with Angola.[4] During that time, we have made great strides in strengthening the ties between our two nations as well as the broader Southern Africa region. In 2002, President George W. Bush hosted President [Festus Gontebanye] Mogae of Botswana, President [Joaquim Albetto] Chissano of Mozambique, and President [Jose Eduardo] dos Santos of Angola at the White House in Washington, DC.[5] At that meeting, the four Presidents discussed opportunities to bring greater peace and stability to the Southern Africa region.[6]

Two decades later, President Joseph Biden invited delegations from 49 African countries and the African Union to the U.S.-Africa Leaders Summit, where an entire day was devoted to increasing two-way trade and investment.[7] As the President remarked: "Africa's success and prosperity is essential to ensuring a better future for all of us, not just Africa."[8]

Last November, President [João Manuel Gonçalves] Lourenço of Angola met with President Biden at the White House to address opportunities to deepen the relationship between our nations over the coming years.[9] One of those opportunities is capital and investment.

This conference will focus on appropriate oversight of the capital markets. To start this conference, I will provide some perspectives on the importance of robust capital markets to a thriving economy.

The Importance of Robust Capital Markets

After its founding in 2014, the Angolan Securities Exchange - known as BODIVA - listed its first initial public offering in 2022.[10] To mark the occasion, Walter Pacheco, BODIVA's Chief Executive Officer, stated: "We come together today to witness the start of a new era for the financial system and the capital markets."[11]

The development of capital markets can create opportunities for prosperity for a nation's citizens. At a basic level, for an economy to flourish, businesses must have access to capital to fund their ventures. One way to access capital is to obtain a loan from a bank. However, bank loans are funded from customer deposits, so banks typically are subject to prudential regulation, which seeks to ensure the safety and soundness of the banking sector. The mere rumor that a bank might be unable to satisfy its obligation to depositors can challenge the stability of a nation's entire banking system.

Another way for businesses to obtain funding is through the capital markets. In contrast to money maintained at a bank, an investment of money in the capital markets has no guarantee of returns. Investment risk is a central feature of the capital markets. Investors can assess the financial prospects of various opportunities and choose where to invest. Through this market-based mechanism, capital is allocated to ventures with the greatest potential for success. While not all investors have the time or sophistication to make informed investment decisions, they can delegate those decisions to financial professionals, such as investment advisers and asset managers.

The benefits of capital markets are twofold. First, businesses needing capital can receive the funding necessary to operate and grow. Second, investors can share in the returns if the business succeeds. This stands in contrast to bank deposits, which typically offer customers nominal rates of return in the form of interest.

Of course, investing entails risk. There is no assurance that a business will succeed, and failure will result in the loss of investor capital. Despite this risk, the benefits of exposure to capital markets are well-established. In the United States, the S&P 500 Index tracks the largest companies listed on U.S. stock exchanges. Since 1926, the S&P 500 Index has gained an average of 10.2% annually.[12] Although, the U.S. markets have experienced periods of volatility, historically an individual with long-term exposure to the stock market would have experienced gains.

Diversification is also important from an investment perspective. Exposure to multiple companies mitigates the risk posed by the failure of any single company. Robust capital markets create opportunities for new businesses to enter the market, which provides investors with a greater universe of investment opportunities. This procyclical dynamic enhances a nation's economy and the prosperity of its citizens.

The Role of Regulators in Fostering Capital Markets

In the United States, households own significant amounts of publicly traded stock, often in retirement accounts. As of 2022, 58% of U.S. families own shares of public companies - either directly or indirectly.[13] One key driver of public participation in the capital markets is a regulatory framework that instils confidence in the financial system.

The experience of the United States is that capital markets thrive when they are allowed operate freely within broad guardrails. In the United States, securities regulation focuses on: (1) requiring that companies seeking to raise money from the public provide full and fair disclosure and (2) prohibiting persons from engaging in fraud in the markets. The United States also has laws that govern the conduct of investment advisers that manage assets on behalf of investors as well as other market participants like brokers, dealers, exchanges, transfer agents, and credit rating agencies.

The U.S. framework is not merit-based and the SEC does not evaluate whether an investment is good or bad. Instead, companies are required to provide truthful disclosures in order to raise capital. Under this framework, investors are not protected against making their own bad investments decisions. Instead, the transparency afforded by disclosure allows investors to reach their own conclusions.

The SEC works to detect and address possible violations of the securities laws, such as by engaging in market surveillance activities, monitoring filings and media reports, and assessing tips and complaints submitted by investors and other market participants.

Activities that could trigger an SEC investigation include: (1) misrepresentation or omission of important information about securities; (2) manipulating the market prices of securities; (3) stealing customers' funds or securities; (4) insider trading, which generally means violating a trust relationship by trading on material, non-public information about a security; and (5) selling unregistered securities.

The SEC's efforts to bring enforcement actions against individuals or entities that engage in this type of conduct helps to maintain the public's confidence in investing in U.S. public companies. At the same time, U.S. securities regulations do not punish companies merely because they go out of business or perform poorly - if those results are accurately disclosed. Indeed, in a competitive environment, it is expected that some businesses will fail over time.

The African Union's Agenda 2063 - which was adopted in 2015 - expresses a goal of strengthening continental capital markets and financial institutions.[14] Evidence suggests that the continent is on the right track. One report states that the number of stock exchanges on the African continent increased from five in 1989 to twenty-eight in 2021.[15] That same report reveals that the market capitalization of African stock markets increased from $113 billion in 1992 to $1.1 trillion in 2018.[16]

The report also indicates that African capital markets have significant room for additional growth, noting that these markets can "increase their investor base by tapping into the huge financial resources sitting in deposit accounts of African pension funds and sovereign wealth funds."[17] According to the report, "if these funds were channelled into the continent's local capital markets, they would improve the liquidity of many African exchanges and bond markets."[18]

Adopting and implementing regulatory frameworks that strike the appropriate balance between free market economics and investor protection can contribute to the in-flow of assets into the capital markets of African nations. These measures can also attract foreign capital.

Pitfalls of Regulation

While effective regulation can cause capital markets to flourish, regulators must avoid attempts to venture beyond the limited scope of ensuring transparency and preventing fraud. The strength of the U.S. public company regulatory regime has been that disclosures are generally mandated only if they are material to investors from a financial perspective.

The power of the public company disclosure regime has tempted certain constituencies to use the disclosure rules to effect social or political change. For example, the SEC recently adopted a climate disclosure rule, which appears designed to exert societal pressure on public companies to reduce greenhouse gas emissions.

This region of Africa has directly felt the consequences of another U.S. securities disclosure rule that is trying to effect social or political change. In 2010, the U.S. Congress passed a law called the "Dodd-Frank Act" which mandated certain disclosures about conflict minerals originating from the Democratic Republic of the Congo (DRC). This law sought to use securities disclosure to reduce conflict and violence in the region. In 2022, the U.S. Government Accountability Office, in studying the law, concluded that peace and security have "not improved" in the region.[19] Nonetheless, the region continues to suffer from many public companies simply avoiding any acquisition of tin, tungsten, tantalum, and gold from the DRC or countries adjacent to the DRC.[20]

While reducing greenhouse gas emissions, or conflict and violence in the DRC, might be worthy goals, those types of policy decisions are appropriately handled by political leaders rather than financial regulators. Straying from the guiding principle of financial materiality risks degrading the integrity of the capital markets and ought to be avoided.

Additionally, financial regulators must not be tempted by retroactively imposing rules through enforcement. Market participants should know the rules in advance. Circumventing the rulemaking process with novel or creative interpretations of the law for the purpose of bringing an enforcement action can disincentivize market participants from engaging in otherwise productive activity. Regulators can also be tempted to squeeze new activities into existing rules, even when they do not fit. This approach can stifle innovation and deprive companies and investors of the benefits of new products, services, and emerging technologies.

Conclusion

The importance of the U.S.-Africa relationship has been made clear over the course of multiple U.S. presidential administrations. This relationship has many components, but as a financial regulator, I am particularly excited to be here in Angola to support you - our partners in Southern Africa - in optimizing your respective regulatory frameworks. The United States owes much of its wealth and prosperity to the development of its own capital markets, and I am hopeful that the information shared at this conference will contribute to the growth of the capital markets in Southern Africa.

Thank you.

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