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Apr. 03, 2025

How do financial economists shape the rules that govern markets? Jessica Wachter, former Chief Economist of the U.S. Securities and Exchange Commission, reflects on three and a half years of high-stakes policy decisions, regulatory shifts, and political pressures in an interview with SHoF. Below is the full transcript.

Can you describe your previous role at SEC?

I served as the Director of the Division of Economic and Risk Analysis (DERA) at the U.S. Securities and Exchange Commission (SEC), which is one of six divisions at the agency. In that role, I also held the title of Chief Economist. DERA comprises approximately 190 professionals, including around 90 Ph.D. economists, and supports the full breadth of the SEC’s mission — from rulemaking and enforcement to examinations and data analytics.

During my tenure, our division contributed to more than 100 rule proposals and adoptions across a wide range of policy areas. This included enhancing the resilience of money market funds, accelerating the settlement cycle for securities transactions, increasing transparency around cybersecurity risks, and advancing central clearing in the Treasury market. We also provided critical economic and statistical analysis in support of enforcement actions — helping quantify investor harm and enabling the return of funds to affected investors.

In addition, DERA led the development of structured data and analytic tools that support decision-making across the agency. As Chief Economist, I served as a principal advisor to Chair Gensler and the Commission, offering economic insights to inform key regulatory and policy decisions.

The SEC’s priorities often change with new administrations. How might a second Trump administration reshape the SEC’s approach to financial markets, particularly crypto, digital assets, and investor protection?

Financial regulation often involves balancing competing priorities, a reality acknowledged in the 1975 amendments to the Securities Exchange Act of 1934.

Those amendments require the SEC to write rules that protect investors and maintain fair, orderly markets — but without imposing an undue burden on competition. What constitutes an “undue burden” is, to some extent, subjective, and shifts with different leadership philosophies.

Under a second Trump administration, I would expect a recalibration of priorities— with relatively less emphasis on investor protection and more focus on promoting competition and capital formation. This could mean a more permissive regulatory stance in some areas.

With respect to crypto and digital assets, several Commissioners have already signaled a desire to change course — including potentially ending certain ongoing litigations. I would expect a greater emphasis on establishing clearer compliance pathways for crypto firms, possibly including temporary regulatory relief to encourage engagement. At the same time, enforcement might become more narrowly focused, likely prioritizing cases involving clear fraud over broader regulatory violations.

That said, it’s important to remember that much of the SEC’s work is nonpartisan and continues regardless of political leadership. The agency’s core mission — investor protection, fair markets, and capital formation — is deeply embedded, and I expect it will remain a guiding principle even amid shifts in emphasis.

Trump’s first administration pushed for deregulation in financial markets. If that trend continues, what do you see as the biggest risks and benefits for investors and market stability?

If the push for deregulation resumes under a second Trump administration, one area likely to receive attention is the regulatory burden on public companies. The Commission has already signaled interest in re-examining the incentive structure that encourages firms to remain private, with the goal of potentially easing the costs and complexities associated with going — or staying — public. Whether that results in concrete rulemaking remains to be seen. In terms of potential benefits, reducing overly burdensome regulations could lower costs for issuers, expand investment opportunities, and promote capital formation — which can ultimately benefit investors through increased access and innovation.

At the same time, there are risks. Loosening disclosure requirements or weakening oversight could reduce transparency and investor protections, particularly for retail investors. This might create more room for misconduct or make it harder for investors to assess risks, especially in fast-moving sectors like fintech and crypto.

It’s also important to note that, unlike banking regulators, the SEC doesn’t have an explicit market stability mandate. While its work has significant implications for financial stability, that’s not its primary charge. And despite changes in leadership, much of the Commission’s work — especially on core investor protections — tends to be bipartisan and grounded in longstanding principles.

A second Trump administration is expected to roll back SEC rules on private market transparency and climate disclosures. How likely is this, and what would the consequences be?

While I was at the SEC, the Commission voted to stay the climate disclosure rule in response to a legal challenge, effectively pausing its implementation, which had been scheduled to begin in 2026. At present, the rule is in a kind of legal limbo. To formally roll it back, the SEC would typically need to undertake new rulemaking and provide a reasoned explanation for the change. However, if the courts ultimately vacate the rule, no further rulemaking would be necessary to eliminate it. Notably, the Commission recently announced it would not defend the rule in court — an unusual move.

The rule itself aimed to bring consistency and comparability to climate-related disclosures, building on prior staff-level guidance. Many companies already disclose climate risks voluntarily, and jurisdictions like California and the European Union are moving toward mandatory regimes. So even if the SEC rule is ultimately withdrawn, climate-related disclosures will likely continue — but without a standardized framework, the disclosures may remain fragmented and difficult for investors to interpret.

A significant amount of analysis and public input informed the development of the SEC’s climate rule. If a future Commission revisits the issue, they’ll have a strong foundation to build upon, rather than starting from scratch.

With growing cybersecurity threats, how can the SEC ensure financial market resilience if regulatory enforcement becomes lighter under Trump?

I’m proud of the work we did on the SEC’s cybersecurity disclosure rule for public companies. That rule is now in effect, and I expect it will be enforced like any other SEC rule, regardless of changes in administration. I’m also proud of the customer notification rule for broker-dealers and investment advisers, which has been adopted and is currently being implemented.

Beyond public companies and customer notifications, the SEC has several mechanisms to support financial market resilience in the face of cybersecurity threats. For example, key market participants — such as national securities exchanges and clearing agencies — are subject to Regulation SCI (Systems Compliance and Integrity), which establishes specific requirements related to operational resiliency.

Other parts of the market are covered under different frameworks. Investment advisers are subject to fiduciary duties that include safeguarding client data and assets. Broker-dealers are overseen by FINRA, which examines for operational risks, including cybersecurity.

But two points are worth keeping in mind. First, there are market-based incentives for firms to invest in cybersecurity, even in the absence of regulation.

Second, cybersecurity — like any form of risk management — involves tradeoffs.

Every dollar spent on cybersecurity is a dollar that could have been invested elsewhere. As with many areas of regulation, it’s about striking the right balance.

You’ve been a strong advocate for improving data accessibility. How can regulators leverage data more effectively to enhance market oversight and investor protection?

I was privileged to participate in a number of pro-transparency rulemakings during my time at the SEC, and I consistently emphasized the importance of making data machine-readable. We advanced several key initiatives to that end: new structured data requirements for pay-versus-performance disclosures, cybersecurity policies and incident reports, and Schedule 13D and 13G filings. These steps help ensure that investors, researchers, and regulators can analyze the information efficiently — which is especially important in an era where tools powered by artificial intelligence are becoming central to financial analysis.

The official sector holds a great deal of valuable data, but I was a consistent advocate for broader public dissemination wherever appropriate. While it’s essential for regulators to have access to confidential information — and some data can and should remain within official channels — there’s often no substitute for the power of transparency and the crowd-sourced insight that comes from public access to high-quality data. High-quality data are a public good.

At the same time, effective oversight depends on internal capacity. It’s critical that SEC staff have access to modern data analytics tools that allow them to carry out examinations and other core functions efficiently. DERA plays a central role in this effort — not just by analyzing data, but also by creating structured datasets, such as those related to money market funds and Rule 605 order execution quality. Wen the underlying data are machine-readable and standardized analysis can be far more efficient.

Artificial intelligence is also opening up new possibilities. At the 2024 SEC Speaks event, DERA staff presented work showing real promise in applying AI to financial regulation. I believe this is an area of enormous potential — and one where thoughtful investment now can pay long-term dividends for market integrity and investor protection.

If a Trump administration moves to weaken financial regulations, how can research and economic analysis push back against potentially harmful deregulation?

There are a couple of important points to consider. First, the role of economists within DERA is to provide the Commission with objective, high-quality economic analysis. That includes evaluating the potential costs and benefits of proposed rules. Ultimately, however, it’s up to the Commission — whose members are confirmed by Congress — to weigh that analysis and make decisions. A Commission led by a Trump-appointed Chair may have different priorities and may interpret the tradeoffs differently, but that doesn’t automatically mean the outcomes will be harmful. Reasonable people can disagree on where to place regulatory emphasis.

Second, any effort to change existing rules must go through the formal notice and-comment process. That means issuing a proposal, inviting public comment, and then finalizing the rule with a reasoned explanation of how comments were considered. Anyone — from academics to investors to advocacy groups — can submit comments, including feedback on the underlying economic analysis. And SEC staff take those comments seriously. It’s a transparent, deliberative process that not only helps surface a wide range of perspectives but also serves as a meaningful check on regulatory overreach or underreach. In that way, economic research — both inside and outside the agency — plays a critical role in shaping policy that serves the public interest.

You’ve spoken about the importance of research in shaping public policy. What was the biggest adjustment you had to make moving from academia to a government role?

Economists are in the minority at the SEC. The structure tends to emphasize the skill set of lawyers. Even the economic analysis is a legal document. It was a big adjustment, but ultimately it was very valuable for me to get to see things from a different perspective.

You’ve mentioned feeling a high level of trust placed in you and your division at the SEC. What was the most challenging decision you had to make in that role?

In a role like Chief Economist, you are constantly faced with a decision of what to prioritize as many things come at you at once. I learned to delegate, but also to pivot quickly if information changed. I was lucky in that I had amazing staff.

In your speeches, you’ve emphasized that economic research plays a crucial role in regulatory decision-making. Could you share an example where academic research directly influenced a key SEC policy or rule?

There were many rules that literally could not have been written without economic analysis. One that comes to mind lowers the so-called tick size, the minimum pricing increment for quoted stocks, from one penny to half a penny for stocks that meet a certain criterion. Many months of careful data work went into determining what this cutoff should be.