On Wednesday July 12, 2017, in his first public speech as Chairman of the SEC, SEC Chairman Jay Clayton laid out a set of eight priorities that will guide his SEC Chairmanship. He said his priorities are consistent with and complimentary to the seven “core principles” set forth in President Donald Trump’s February 3, 2017 executive order regarding the regulation of the U.S. financial system.
The overarching themes in Chairman Clayton’s speech are that he is focused primarily on capital formation, modernizing the trading and markets system, and he favors a disclosure and market-based approach to federal securities regulation . Given the kind words for former Chair Mary Jo White and multiple references of areas of agreement, it is difficult to determine how much of a shift one can expect from the Commission under Chairman Clayton. Nevertheless, the following are a few key takeaways from the speech.
Disclosure-Based Approach: Caveat Emptor
One recurring theme throughout Chairman Clayton’s speech is that he believes that the focus of the federal securities laws should be to ensure that “investors have access to a well-crafted package of information that facilitates informed decision-making” rather than a merit-based approach. Clayton said the touchstones of this approach are disclosure and materiality, citing bedrock Supreme Court precedent TSC Industries and Basic v. Levinson. He also indicated that current regulations and disclosure obligations may be too onerous and signaled that he may seek to dial back some disclosure requirements in Regulation S-K: “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.” He blamed current disclosure requirements for the decline in IPOs and 50% decline in the total number of publicly traded companies, which he said was “not good” for the economy and investors.
It is worth noting that in connection with advocating a disclosure-based approach Chairman Clayton quoted extensively from Commissioner Michael Piwowar’s remarks at the “SEC Speaks” Conference 2017 entitled Remembering the Forgotten Investor. A central element of Commissioner Piwowar’s speech was the recommendation that the Commission revisit “the artificial distinction between so-called accredited and non-accredited investors” created by Regulation D of the Securities Act of 1933 with a view toward eliminating the dichotomy. Given the context in which Chairman Clayton quoted the speech, one might infer some support for Commissioner Piwowar’s position and a willingness to consider the accredited investor paradigm.
Another theme that emerged from his speech is that he favors the SEC’s formal rulemaking process, which includes public notice and comment by the industry, signaling that he disfavors rulemaking through enforcement. He also adopted the Trump administration’s view that the SEC should retroactively reconsider existing regulations based the cost of the regulation and its impact on the markets.
Clarifying and Reducing Compliance Obligations
Similarly, Chairman Clayton said that the SEC must adopt clear compliance rules, and consider the cost of such rules when it adopts them:
“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 overinvestment in control systems. We must recognize practical costs that are sure to arise…. the Commission needs to make sure at the time of adoption that we have a realistic vision for how rules will be implemented as well as how we and others intend to examine for compliance.”
Although Dodd-Frank was not mentioned by name in this context, one cannot help but wonder how much the Chairman’s remarks were directed at that much maligned legislation. This raises the question of whether the SEC may seek to accomplish by implementation — or lack thereof — some of the Administration’s goals to neuter Dodd-Frank even if the efforts to repeal the controversial legislation prove unsuccessful.
SEC Enforcement: Focus on Hard Core Fraud Violations
With respect to SEC enforcement, Chairman Clayton indicated that he may be abandoning the “broken windows” approach adopted by former SEC Chair White, and will focus instead on more traditional hard core fraud such as “microcap fraud” and “pump-and-dump schemes.” His comments may be seen as a reference to the Power Traders Press and Elite Stock Research case, a scam that allegedly saw more than one hundred victims lose over $10 million through high-pressure sales tactics and penny stock fraud. The SEC announced charges in that case (a copy of which can be found here) the same day as Clayton’s speech.
The one exception is cybersecurity. Chairman Clayton noted the importance of cybersecurity multiple times in his speech and the fact that fraudsters are using new technologies to prey on more vulnerable investors. With respect to cybersecurity and public companies, he made the following noteworthy comments:
“Public companies have a clear obligation to disclose material information about cyber risks and cyber events. I expect them to take this requirement seriously. I also recognize that the cyber space has many bad actors, including nation states that have resources far beyond anything a single company can muster. Being a victim of a cyber penetration is not, in itself, an excuse. But, I think we need to be cautious about punishing responsible companies who nevertheless are victims of sophisticated cyber penetrations. Said another way, the SEC needs to have a broad perspective and bring proportionality to this area that affects not only investors, companies, and our markets, but our national security and our future.”
So far, however, SEC enforcement seems to be business as usual and there have been no public reports of any dissent by Chairman Clayton with respect to any charging requests by the SEC’s Enforcement Staff.
Focus on Capital Formation
Chairman Clayton also reminded his audience of his early personal commitment to increase accessibility to public markets, explaining the importance of giving every American the ability to participate in investment opportunities. He expressed concern over the increase in companies opting to remain privately held, saying he had heard firsthand that the regulatory burden on entering the public market was creating barriers for some of these companies. He cited these experiences as support for the decision to expand the JOBS Act on-ramp for emerging growth companies to larger companies that might not have qualified under the earlier system.
Wary of DOL Fiduciary Rule
Finally, echoing comments by former SEC Chair White and Commissioner Michael Piwowar, Chairman Clayton signaled that he may view the Department of Labor’s new fiduciary rule with some skepticism: “any action will need to be carefully constructed, so it provides appropriate and meaningful protections but does not result in Main Street investors being deprived of affordable investment advice or products.”
 (1) Principle #1: The SEC’s mission is our touchstone; (2) Principle #2: Our analysis starts and ends with the long-term interests of the Main Street investor; (3) Principle #3: The SEC’s historic approach to regulation is sound; (4) Principle #4: Regulatory actions drive change, and change can have lasting effects; (5) Principle #5: As markets evolve, so must the SEC: (6) Principle #6: Effective rulemaking does not end with rule adoption; (7) Principle #7: The costs of a rule now often include the cost of demonstrating compliance; and (8) Principle #8: Coordination is key.