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SEC Chair Jay Clayton Lays out Regulatory Agenda

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

At the nonpartisan Economic Club of New York, SEC Chair Jay Clayton highlighted the guiding principles behind his regulatory agenda. Mr. Clayton stated:

  • Staying up to Date with Market Evolution - the SEC must keep pace with evolving technologies and utilize advancements to improve regulatory efficiency, while also monitoring costs and additional burdens associated with technological evolution in the capital markets.

  • Cooperation with Other Entities - the SEC must coordinate and cooperate with domestic and foreign regulators, other government entities, and self-regulatory organizations in order to ensure an effective regulatory environment. In particular, Mr. Clayton pledged to focus on (i) SEC and CFTC coordination concerning authority over swap markets and (ii) cybersecurity management.

  • Importance of Cumulative Consideration - the SEC must consider the cumulative effect of incremental regulatory changes, and the decline in initial public offerings in the United States (which reflects the unwanted effect of regulatory adjustments). He suggested that increased disclosure requirements and other regulatory burdens have contributed to the decline.

  • Prioritization of Main Street Investors - the SEC must prioritize the needs of Main Street investors, and ensure that the markets foster a diversity of investment opportunities.

Mr. Clayton explained how the SEC plans to put these principles into action. He pledged:

  • Enforcement and Examination - to take action against scammers who manipulate microcap offerings, as well as those who target elder investors, and to utilize enforcement abilities to protect market liquidity and integrity. He also committed to develop sound strategies for evaluating enforcement actions against companies that are victims of cyberattacks.

  • Investment Advice and Disclosures - that the SEC will cooperate with the Department of Labor in order to effectively navigate the development of a fiduciary standard. He added that the Commission will work to improve disclosures so that investors and their advisors have more access to information about potential investments.

  • Capital Formation - to facilitate increased participation in public markets, and to make adjustments that will encourage more companies to go public without depleting the availability of capital from private markets.

Mr. Clayton described further areas of focus regarding equity market structure and the improvement of educational resources available to investors.

Commentary

Mr. Clayton’s speech is thoughtful and wide-ranging and could elicit a number of different responses. Here a few:

  • Swap Regulation. While he does not go into the substance of the rules or set a timeline, Mr. Clayton uses Title VII as an example of an area where "coordination is essential," in particular between the SEC and CFTC. He also says that he is committed to exploring ways to achieve "greater harmonization" of Title VII rules and to "reduce unnecessary complexity." Given the current state of play with the SEC's Title VII rules (i.e., three rulemakings to be completed before the compliance clock starts), Mr. Clayton's comments could be read to indicate he is either (i) urging coordination on the remaining rules or (ii) urging a reconsideration of the numerous rules the SEC has completed and the remaining rules to be completed. The latter approach could mean that the implementation of security-based swap regulation is still a long way away.

  • Cybersecurity. Mr. Clayton mentions cybersecurity multiple times: first, as an area for regulatory coordination, and, second, as an area where he does not view enforcement as a panacea. In particular, Mr. Clayton urges caution in punishing "responsible companies who nevertheless are victims of sophisticated cyber penetrations."

  • Capital Formation. Mr. Clayton wants to spur capital formation. In this speech, he hones in on the JOBS Act rulemaking and the elimination of costly disclosures that may not be material.

  • Market Structure. Mr. Clayton notes that "an enormous amount of thought" has already been given to equity market structure, and urges the adoption of a pilot program to test how adjustments to the access fee cap under Reg. NMS Rule 610 would affect trading. In particular, he turns his attention to fixed income market structure, noting that he has asked SEC staff "to develop a plan for creating a Fixed Income Market Structure Advisory Committee." While this may seem like nothing (or the equivalent of saying, "I have asked other people to find some other people who might, but won't be required to, suggest things I might want to consider doing"), when combined with Congressional hearings on the same topic, it could mean that changes to the way debt securities are regulated are on the way. One of Mr. Clayton's predecessors at the SEC, Dan Gallagher, also made changes to the regulation of fixed income markets a point of emphasis.

  • Fiduciary Rule. Mr. Clayton does not show his cards on this issue, but notes that the SEC is soliciting further comment, and expresses hope that the SEC can work with the Department of Labor to best serve the interests of "Mr. and Ms. 401(k)."

  • Main Street investors. Mr. Clayton emphasizes the SEC's mission to protect "Main Street" investors. A regulatory approach that overemphasizes retail investors has the potential to lead to unintended consequences for the remainder of market participants (who make up the vast majority of the volume of the securities and derivatives markets). This is not to say that retail investors should not be a focal point (full disclosure: I like puppies and apple pie, too); rather, it is to say an appropriate regulatory approach would be to treat retail investors as a part (perhaps even a large part) of the regulatory analysis, not the alpha and omega.

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