Personnel Is Policy — And Innovation Depends on Both
Leadership at federal financial regulators is shifting agencies from enforcement-first habits to a future-focused, innovation-oriented posture
As the saying goes, personnel is policy. New personnel can offer the promise of new ideas and renewed vigor to advance what’s tried-and-true in service of an agency’s mission, or to rethink ways in which agency activity or mission should change. This is something our outdated and sclerotic government sorely needs. Between nominations, confirmations, and reductions-in-force, the federal government’s ultimate composition is in flux. But times of change offer opportunity, and this is nowhere more apparent than among federal financial regulators. Over the first 11 months of the second Trump administration, federal financial regulators have enjoyed new leadership, and this new blood has infused important ideas with renewed vigor. A common theme has stood out over the past year, and that’s innovation.
This is not to say that federal financial regulators haven’t adopted an innovation-oriented perspective in their past work, but that fresh leadership and staff can better facilitate that kind of progress – the kind the federal government is famously slow to deliver. The United States Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are excellent examples of the way in which regulators can break out of their enforcement-first mold and meet (potential) regulated entities on a constructive footing. The change from regulation by enforcement to working groups, sandboxes, and safe harbors demonstrate how changes in leadership can shift an agency’s posture from skeptical, reactive, and downright adversarial to curious, open, and forward thinking. Personnel selections like these can completely reshape the way the institution fulfills its mission.
Regulated entities, new or old, benefit when innovation-oriented regulators address the issues participants are facing or may face in the future. This requires intention and action on the part of personnel. Nearly a year into the second Trump administration, we’ve already seen both intention and action at work. Over the course of the last year, former SEC Chairman Gary Gensler stepped down, and Commissioner Mark Uyeda became Acting Chairman and launched the Crypto Taskforce led by Commissioner Hester Peirce. In a speech at the SEC Speaks Conference this year, Commissioner Uyeda was right to point out the necessary move away from “tackling perceived social ills” and returning to matters relevant to the agency’s tripartite mission: investor protection, capital formation, and maintaining fair, orderly, and efficient markets.
The CFTC provides a parallel example. The CFTC’s mission is to “promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation”. Regulatory sandboxes are one tool innovative regulators can utilize to observe and learn from new industries seeking regulatory clarity. Several government agencies have utilized regulatory sandboxes in the past as a cautious approach. In a speech at the Cato Institute, Commissioner Caroline Pham announced the proposal to establish a crypto sandbox at the CFTC in 2023. And recently, the CFTC announced the launch of a tokenized collateral and stablecoin initiative. Efforts like these capture the “resilience” and “vibrancy” facets of its mission while making room to address the future head-on. This shows us that regulators don’t have to choose between fulfilling their mission of “promoting integrity” or “investor protection” (in the SEC’s case) and innovation. They can and must do both.
At the current moment, Acting Chairman Caroline D. Pham is the CFTC’s sole Commissioner. A regulator with a full regulatory agenda and a multi-pronged mission either requires a full commission to undertake the major workload or a reconsideration of the necessity of the multi-member commission structure. To be sure, the President has nominated Michael Selig who served on the SEC’s crypto task force. Nominees with direct experience with policymaking in a particular sector have knowledge of how to increase regulatory clarity and can help move the agency’s activities in an innovation-oriented direction.
An innovation mandate – in the form of the incorporation of innovation as a part of an agency’s mission — could provide small companies with small compliance departments a sense of ease and clarity that their best efforts are met in good faith rather than inherent suspicion. Asserting the importance of innovation from the outset signals to industry that questions, concerns, and efforts to comply are not only necessary but welcome. Commissioner Peirce has made similar points in the past, echoing calls for an innovation mandate during her Fireside Chat this past September at the Cato conference on “Right-Sizing Regulation.” Steps needed to fulfill an innovation mandate require a careful selection of personnel. For far too long, federal financial regulators haven’t just lagged behind industry in understanding or information, but have offered too little, too late, in the way of accommodations for participants in nascent industries.
Commissioner Peirce, among other current and former regulators, has also raised the importance of a principles-based regulatory approach. In the same way that principles like investor protection explicitly shape the SEC’s mission, an openness to innovation could also serve as a guiding principle for regulators. Tom Hoenig, former Vice Chairman of the Federal Deposit Insurance Corporation and former CEO of the Federal Reserve Bank of Kansas City, has also suggested that the Federal Reserve adopt a rules-based monetary policy.
To be clear, this is not a call for federal financial regulators to look through rose-colored glasses at anyone or any company claiming an innovation. Discernment is essential. This is why getting personnel right is so important. But our current moment provides a ready opportunity to do just that.
As long as federal financial regulators are around, regulators with a favorable view of innovation are an essential component to an American growth strategy. The years of regulation by enforcement (a concept notably absent from the SEC’s tripartite mission) deserve their place in the dustbin of history. To his credit President Trump – whose sound judgement has yielded impressive selections thus far – should continue to heed the calls of advisors who favor innovation-minded nominees to lead and staff federal financial regulators. These instincts toward innovation, and a future in which progress isn’t slowed by outdated rules or stalled by uncertain compliance dates, have been indispensable thus far. Nominees who favor innovation always look to the future, and because of that, they act on the assumption that it will be there. The right personnel are key to an innovative and resilient American future.