Paul Hodgson: Trump’s SEC under newly confirmed chair Jay Clayton

Now Clayton has been confirmed as the 32nd Chair of the Securities and Exchange Commission with a 61 to 37 vote, what does that mean for investors?

Not many of Donald Trump’s nominees have received Democratic support. James Mattis was pretty overwhelmingly approved as Secretary of Defense, but that was about it.

In early April, Clayton received a 15-8 vote from the Senate Banking Committee, which included backing from Democratic Senators Heidi Heitkamp (North Dakota), Jon Tester (Montana) and Mark Warner (Virginia). “Bottom line:” said the Council of Institutional Investors’ Ken Bertsch, “Clayton’s not as polarizing as some of the Trump folks being nominated, but there are reasons for concern.”
Bertsch offered support as well, albeit tempered with concern: “He’s a mainstream securities lawyer. I would expect that he is going to defend the SEC, defend its budget, defend its functioning, which I think is very important in this administration because there’s a temptation to just slash away at things.

“I put a pretty high value on that defence because we’re worried about the SEC’s funding and its authority as an independent regulator, and I’m hoping and expecting that he will be a good advocate for that. I’m also thinking about who he’s going to be put in some of key positions at the Commission and I don’t expect them to be very different from the kind of people that Mary Jo White would’ve appointed.

“On the other hand, he was the lead lawyer on the IPO of Alibaba, which went public on the NYSE, in a big way, with differential voting rights to preserve founder control. And Clayton has said he wants to do more to see more IPOs on US exchanges, which, like Alibaba, could involve rollback of shareholder rights and decreased disclosure and control requirements, which obviously would be concerning.”
In his own statement at the initial confirmation hearing, Clayton complained that US securities markets were not seeing the robust growth they had in the past. “In recent years,” he said, “our markets have faced growing competition from abroad. US-listed IPOs by non-US companies have slowed dramatically. More significantly, it is clear that our public capital markets are less attractive to business than in the past. As a result, investment opportunities for Main Street investors are more limited.” Clayton added he hoped to find ways to make going public and listing in the US more attractive.
While some Democrats did eventually vote for Clayton, others, such as Bob Menendez (New Jersey) and Elizabeth Warren (Massachusetts), were critical and questioned his past ties to Wall Street.
While at Sullivan & Cromwell, Clayton was involved with major transactions following the financial crisis, including the purchase of Lehman Brothers’ assets by Barclay Capital, the sale of Bear Stearns to JPMorgan Chase, and the investment in Goldman Sachs (where his wife works) by Berkshire Hathaway and the US Treasury as part of the Troubled Asset Relief Program (TARP). Former clients also include Valeant Pharmaceuticals and Volkswagen, whose governance records are far from stellar.Because of these connections, Clayton will need to recuse himself from, potentially, a large number of enforcement actions during the first half of his tenure. Said Warren: “In your first two years, you can’t vote to punish [companies designated for a conflict of interest] and I think that’s a problem, but just the tip of the iceberg.

“It’s important to think about the fact that if President Trump wanted to make sure the SEC had a hard time going after his Wall Street friends, you would be the perfect SEC chair. This is not a theoretical problem.”
As far as rulemaking goes, Clayton said during the initial hearing that he believes Dodd-Frank rulemaking should continue and has not discussed getting rid of any parts of it. But when questioned on the pay ratio rule by Menendez, Clayton prevaricated and Menendez said he was not satisfied with his answer. Menendez also said he was disappointed in Clayton’s refusal to answer questions about the conflict mineral rules, corporate political spending and enforcement.
Finally, Senator Sherrod Brown (Ohio), who also voted against Clayton’s predecessor Mary Jo White for SEC Chair, pointed out that White also had to recuse herself from dozens of cases. White has now returned to her old law firm Debevoise & Plimpton, which Brown called an “unfortunate precedent”.
Meanwhile, back at the SEC, the SEC’s acting chair, Republican Michael Piwowar, has called for a fresh comment period so that companies can say all over again why they don’t like the pay ratio and conflict minerals rules. Democrats, including Vermont independent Bernie Sanders, and many on the Senate banking committee, wrote a letter to Piwowar which said they were “extremely troubled” by the recent delay and accused the SEC’s acting chairman of attempting to “discredit the rule and generate momentum to repeal” it. Another letter went to SEC inspector general Carl Hoecker asking him to investigate whether Piwowar had gone beyond his powers as acting chair. He also reportedly rescinded the ability for senior enforcement officials to issue subpoenas.
In a statement accompanying the announcement of a new comment period, Piwowar said he is “seeking public input on any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed”.
While unsure of his eventual position, Bertsch said that Clayton is no Piwowar. “He’s not as ideological as Piwowar. As far as I know, I don’t think Clayton has a view or position, for example, on the universal proxy. It would be nice to get that done and there doesn’t seem to be a party line on it. There’s also the Disclosure Effectiveness Project that could turn out to be quite negative for shareholders if it’s used as a tool for eliminating a lot of disclosure. Some areas of debate on disclosure effectiveness involve big differences between companies and investors, but there are other areas of potential consensus, such as on the use of technology to make disclosure more accessible. It’ll be interesting to see what he does about that.”
But Clayton’s SEC has almost more vacancies than commissioners; the only two others being Piwowar and Democrat Kara Stein. Bertsch asked: “Also, what about the other two Commission seats?

There has been some speculation that the seats may not be filled for a while, but I would think that Clayton is going to want those other two seats filled, regardless of whether the Trump administration is contemplating not filling them.” While Trump has the power to fill those seats, he is unlikely to do so without input from Clayton.Bertsch summed up Clayton’s coming rule on a different positive note: “Clayton may have the ability to be more of a consensus builder than Mary Jo White was, which would be good at the SEC, where commissioners sometimes have seemed unduly in tension with each other, and not just along party lines. He’s not a litigator, but rather a lawyer whose work required building consensus to get things done, and those skills could have positive impacts at the SEC.”