Jay Clayton, the new chair of the Securities and Exchange Commission (SEC), outlined his agenda in a recent speech before the Economic Club of New York, which were among Clayton’s first public remarks as the head of the SEC provide insight into his regulatory philosophy.[caption id="attachment_21610" align="aligncenter" width="550"] Photo courtesy of Stocksnap.io[/caption]
SEC Chair’s Guiding Principles
In his speech, Clayton detailed the principles that will guide his leadership of the SEC. Many of the principles were expected, i.e. “the SEC’s mission is our touchstone.” However, there were also a few that stood out:
- The SEC’s historic approach to regulation is sound: While this principle wouldn’t normally make waves, it is significant given the Trump Administration’s focus on deregulation. “I believe in the regulatory architecture that has governed the securities markets since 1933,” Clayton stated. “It is abundantly clear that wholesale changes to the Commission’s fundamental regulatory approach would not make sense.”
- Regulatory actions drive change, and change can have lasting effects: Clayton emphasized that incremental regulatory changes may not seem individually significant, but, in the aggregate, they can dramatically affect the markets. Clayton stated that the public company disclosure system “has worked so well that we — not just the SEC, but lawmakers and other regulators — have slowly but significantly expanded the scope of required disclosures beyond the core concept of materiality.” He added: “Those actions have been justified by regulators and lawmakers alike, often based on discrete, direct and indirect benefits to specific shareholders or other constituencies. And it has often been concluded that these benefits outweigh the marginal costs that are spread over a broad shareholder base.” In support of his belief that analysis should be cumulative as well as incremental, Clayton cited the 50 percent decline in the total number of U.S.-listed public companies over the last two decades. He also noted that studies show the median word-count for SEC filings has more than doubled, yet readability of those documents is at an all-time low.
- As markets evolve, so must the SEC: Clayton highlighted the increasing role of technology, both for the SEC and those under its purview. Clayton specifically stated that the SEC must be mindful that implementing regulatory change has costs. “Companies spend significant resources building systems of compliance, hiring personnel to operate those systems, seeking legal advice concerning the design and effectiveness of those systems, and adapting the systems as regulations change,” Clayton stated. “Shareholders and customers bear these costs, which is something that should not be taken lightly, lest we lose our credibility as regulators.”
- Effective rulemaking does not end with rule adoption. Clayton believes that the SEC should review its rules retrospectively, “We should listen to investors and others about where rules are, or are not, functioning as intended. We cannot be shy about being introspective and self-critical,” he said.
- The costs of a rule now often include the cost of demonstrating compliance: “Rules are meant to be followed, and the public depends on regulators to make sure that happens,” Clayton said. “It is incumbent on the Commission to write rules so that those subject to them can ascertain how to comply and—now more than ever—how to demonstrate that compliance. Vaguely worded rules can too easily lead to subpar compliance solutions or an over-investment in control systems. We must recognize practical costs that are sure to arise.”
SEC Initiatives Going Forward
Clayton also discussed several initiatives that the SEC plans to pursue in the near term. He first addressed enforcement and examinations, emphasizing that he “fully intend[s] to continue deploying significant resources to root out fraud and shady practices in the markets, particularly in areas where Main Street investors are most exposed.” He specifically referenced affinity fraud, microcap fraud, pump-and-dump scammers, those who prey on retirees, and “increasingly, those who use new technologies to lie, cheat, and steal.”
“Turning to the more sophisticated participants in our markets, the Commission will continue to use its enforcement and examination authority to support market integrity,” Clayton stated. “Market professionals have a special place in our economy, do not take unfair advantage of it.”
Jay Clayton on Capital Formation & Regulatory Compliance
Regarding capital formation, Clayton acknowledged that successful companies are increasingly electing to stay private. Accordingly, the SEC’s new chair stated that he hopes “to increase the attractiveness of our public capital markets without adversely affecting the availability of capital from our private markets.”
As for the burdens of regulatory compliance, Clayton highlighted the extension of the non-public review process to all IPO draft registration statements. He also issued the following reminder:
There are circumstances in which the Commission’s reporting rules may require publicly traded companies to make disclosures that are burdensome to generate, but may not be material to the total mix of information available to investors. Under Rule 3-13 of Regulation S-X, issuers can request modifications to their financial reporting requirements in these situations. I want to encourage companies to consider whether such modifications may be helpful in connection with their capital raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.
Notably, Clayton did not ignore the controversy surrounding the fiduciary rule, for which he had already sought public comments from retail investors and other interested parties. “With the Department of Labor’s Fiduciary Rule now partially in effect, it is important that the Commission make all reasonable efforts to bring clarity and consistency to this area,” he said. “It is my hope that we can act in concert with our colleagues at the Department of Labor in a way that best serves the long-term interests of Mr. and Ms. 401(k).” Further, in subsequent comments before the U.S. Chamber of Commerce, he indicated that he wanted to find “common ground” with the Labor Department’s rule requiring brokers who give investment advice to put their client’s interest ahead of their own potential commissions.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Jeffrey Cassin, at 201-806-3364.