Bates Research - 03-30-17
Nominee for SEC Chair Testifies Before Senate Banking Committee
Brushing back criticisms that he is too much of a Wall Street insider to effectively regulate the securities industry, Jay Clayton testified before the Senate Banking Committee on the independent approach he would take if confirmed as the next Chair of the Securities and Exchange Commission.
Through his written and oral testimony, Mr. Clayton shared his personal story and his perspective concerning key issues facing the capital markets. He reassured the Committee of his general commitment to the fundamental responsibilities of the agency, including “making sure our markets are fair, open, orderly, and efficient – and ensuring that investors are protected.” His testimony centered on: 1) the importance of a well-functioning capital market to every American; 2) that every American should be provided accurate information about what they are buying when they invest; and 3) that there is “zero room for bad actors.”
Beyond that, however, he expressed an ambition to “pursue regulatory improvements to make the public offering process more appealing for companies” and to continue the processes of evaluating equity market structure issues as they are shaped by new technologies. Mr. Clayton pledged to “work with [his] fellow Commissioners, the SEC Staff, this Committee, and the many others who support and defend our capital markets.”
Capital Formation and Deregulation
Mr. Clayton argued repeatedly for reinvigorating the public capital markets through deregulation. In apparent agreement with Senator Mike Crapo (R-Idaho), Chair of the Senate Banking Committee, Mr. Clayton stated that “it is clear that our public capital markets are less attractive to business than in the past;” that “we have to reduce the regulatory burdens of becoming a public company;” and that “complex regulations create loopholes – regulations need to be practicable and less complex.” Citing a 35% drop in IPOs since 1997, Mr. Clayton argued to ease the onramp process and make it less costly upfront to become a public company. As a consequence, he argued, the IPO market would result in “investment opportunities for Main Street investors." Here, he sees "meaningful room for improvement...”. In response to Senate questions, he committed to working with Congress to implement legislation (such as crowdfunding and Reg A+) to ensure the Commission “gets the rules right” and “to find ways to improve access to capital for small businesses.”
Equity Market Structure
Mr. Clayton responded to the senators’ questions on data-driven analysis of the equity markets by expressing support for the work of the Equity Market Structure Advisory Committee (“EMSAC”). He recognized that “technology continues to change market structure, and that the Commission should continue its ongoing analysis and review of market effectiveness and fairness.” But he also suggested that the SEC must ensure that stock market rules and regulations are still appropriate, “given that most of them were promulgated in a time where technology was much less advanced.” He asserted that the SEC should conduct retrospective reviews of its own regulations to ensure they are working out as intended and are still appropriate, consistent with the President’s Executive Order on regulatory review. Additionally, he said, it is important for the SEC to conduct robust cost benefit analysis of its regulations. “Economic impacts are very important, not only quantitatively but also qualitatively. Rigorously examining a rule’s impact and its far-reaching costs are a very important aspect of the Commission’s work,” he said.
Enforcement: “Zero Tolerance”
Mr. Clayton repeatedly committed to vigorous enforcement of the law. He made several statements suggesting that he had “zero tolerance for bad actors” and that he believes that “individual accountability is extremely important in setting the tone for the industry.” He also expressed concern that victims receive fair treatment in financial fraud matters and argued that regulators should utilize technology more efficiently to better monitor individual financial advisors and brokers. In response to a question by Senator Sherrod Brown (D-OH), regarding the application of the Foreign Corrupt Practices Act, Mr. Clayton stated that he would advise a client to “think long and hard about whether [they want] exposure to similar oversight and enforcement of other OECD countries.” Finally, in response to questioning by Senator Dean Heller (R-NV), Mr. Clayton committed to working with state regulators on enforcement issues impacting their industries and states.
Mr. Clayton spoke at length about the importance of “material” disclosure and applied that standard to respond to questions concerning disclosures of a social or political nature, as in certain instances of stock buy-backs, climate impacts and cybersecurity. Interestingly, he stated that: “A number of companies are voluntarily making political disclosures, and shareholders may access this information through resolution or the proxy process. If confirmed, I will think about a federal mandate to require political spending disclosure.” He also committed to looking at making disclosure changes to Industry Guide Seven related to the US mining industry.
Despite sharp questioning concerning conflicts of interest and his likely need to recuse himself from issues related to his many former clients, Mr. Clayton asserted his independence and a commitment to show “no favoritism to anyone.” He stated that he has severed his ties to his law firm, Sullivan and Cromwell and divested all financial assets as required by law. Furthermore, his wife will leave her position at Goldman Sachs, should Mr. Clayton be confirmed.
The Committee on Banking, Housing and Urban Affairs will meet in executive session to vote on the nomination of Mr. Clayton to be a Member of the Securities and Exchange Commission at 10:00 a.m. on Tuesday, April 4, 2017. Mr. Clayton is expected to be confirmed by a wide margin.