On September 26, 2017, SEC Chairman Jay Clayton testified before the Senate’s Banking, Housing and Urban Affairs Committee regarding the direction of the SEC under his Chairmanship. He also took the opportunity to address the 2016 cyberattack on EDGAR, the agency’s electronic filing system.
As in his first public speech as SEC Chair, in July 2017, Chairman Clayton’s testimony reveals his focus on issues related to cybersecurity, capital formation, and enforcement actions addressing traditional forms of fraud and misconduct. His testimony further reveals his position that regulations should be retroactively evaluated and relaxed as necessary, in order to account for the direct and indirect costs of compliance.
Below are key highlights of Chairman Clayton’s testimony:
Chairman Clayton first addressed the issue of cybersecurity, noting his—and the SEC’s—increased focused on cyber risk matters. He announced a number of cybersecurity initiatives, including the formation of a senior-level cybersecurity working group, internal and inter-agency incident response exercises, and increased investigations of disclosures by issuers related to cybersecurity risks and data breaches. He also addressed the 2016 cyberattack on the SEC’s EDGAR filing system—which resulted in the unauthorized access to nonpublic information that was potentially used for illicit trading—and the agency’s remediation efforts. Chairman Clayton revealed that, in response to the cyberattack, he formally requested an investigation from the Office of the Inspector General into the cause of the attack, the scope of the data compromised, and the SEC’s response efforts. Further, the SEC initiated an investigation into trading potentially related to the cyberattack.
A recurring theme of Chairman Clayton’s testimony is the need to re-evaluate and simplify existing disclosure and regulatory obligations based on compliance costs and the interests of companies and everyday investors (whom he referred to as “Main Street investors” or “Mr. and Ms. 401(k)”). To that end, Chairman Clayton announced that the agency would consider a proposal to simplify disclosure requirements under Regulation S-K. Similarly, the agency will undertake efforts to eliminate “redundant, overlapping, outdated or superseded disclosure requirements.” Chairman Clayton particularly focused on the simplification for rules under Regulation S-X and industry-specific disclosure requirements, and the reexamination of CEO pay ratio disclosure rules under Dodd Frank. He also announced the SEC’s continued examination of the Department of Labor’s fiduciary rule, including through the solicitation of public comments from investors and industry participants.
As in his July 2017 speech, Chairman Clayton reiterated his personal commitment to facilitating and promoting capital formation. He noted his concern for the decline of IPOs, resulting in a decrease of opportunities for Main Street investors to directly invest in high-quality companies. He attributed this decline to increased regulatory compliance costs, and touted a scaled-back disclosure and regulatory system as a way to incentivize companies to go public, while maintaining robust investor protections. To that end, the agency would seek to promote capital facilitation by relaxing disclosure requirements under Regulator S-K (see above), expanding the confidential draft registration statement process under the JOBS Act, and providing increased guidance as to what information may be omitted from registration statements. The agency would also hire an Advocate for Small Business Capital Formation, who would work on facilitating capital formation for small businesses.
Equity, Fixed-Income, and Securities Markets
Chairman Clayton expressed his support for efforts undertaken by the agency prior to his Chairmanship to enhance the transparency in securities markets, including proposed amendments to Regulations NMS and ATS. He also announced the agency’s increased focus on the protection of sensitive market data, including its own use of such data. He also addressed the agency’s efforts to analyze market structures through two pilot programs: the Tick Size Pilot program—which tests the impact of wider tick sizes on the trading of certain companies’ stocks—and a proposed pilot program analyzing the efforts of adjustments to fee caps on equity trading. Separately, Chairman Clayton pushed for increased review and oversight of fixed income markets, particularly through the soon-to-be established Fixed Income Market Structure Advisory Committee.
Enforcement and Examinations
Signaling a departure from former SEC Chair Mary Jo White’s “broken window” approach—which encouraged the pursuit of even the smallest securities violations—Chairman Clayton indicated that he intends to focus the agency’s enforcement efforts on retail investor fraud, investment professional misconduct, insider trading, market manipulation, accounting fraud, and cyber actions. Chairman Clayton also noted the SEC’s increased focus on the examination of registered entities, touting an anticipated 30% increase in investment advisor examinations in 2017 over 2016.
The Agency’s Budget Requests
Chairman Clayton also discussed the SEC’s budget requests, which amounted to $1.6 billion for FY 2018 and $1.7 billion for FY 2019. Chairman Clayton testified that these requests were necessary to lift the hiring freeze implemented at the start of FY 2017, support the agency’s information technology initiatives, and address anticipate real estate costs.
Chairman Clayton’s testimony reflects that we can expect a definite shift in the Commission’s regulatory approach from that of his predecessors. However, time will tell whether, or how, Chairman Clayton’s objectives come to fruition.