Thursday, July 13, 2017

Clayton lays out guiding principles for SEC in first public speech as Chair

By John Filar Atwood

SEC Chair Jay Clayton said that under his leadership the Commission will be guided by eight core principles, and gave initial indications of how the agency will proceed on issues such as enforcement, capital formation, and equity market structure. In his first public remarks since taking over as Chair, Clayton emphasized that that he will not pursue wholesale changes to the Commission’s fundamental regulatory approach.

In a speech to the Economic Club of New York, Clayton said the SEC plans to adhere closely to its mission of protecting investors, maintaining fair and efficient markets, and facilitating capital formation. In addition, all agency actions will be analyzed through the lens of how they impact the long-term interests of the average investor.

As a third principle, Clayton said that he believes the SEC’s historic approach to regulation, which is based on disclosure and materiality, is sound and he does not intend to seek major changes to the agency’s approach. In his view, the Commission should strive to ensure that investors have access to a well-crafted package of information that facilitates informed decision-making.

Effect of regulatory changes. Clayton said that under his leadership the Commission will be mindful that even incremental regulatory changes can have dramatic and lasting effects on the market. He believes that the disclosure-based regime has worked so well that the SEC, lawmakers and other regulators have slowly but significantly expanded the scope of required disclosures beyond the core concept of materiality.

Each change has been justified by specific benefits afforded to certain shareholders and constituencies, he noted, but he believes the SEC and other regulators must evaluate the cumulative effect of the changes. In particular, he noted the 50 percent decline in the number of U.S.-listed public companies over the past 20 years, and said that it worth considering whether increased disclosure and other burdens have rendered alternatives for raising capital, such as the private markets, increasingly attractive.

Another principle under which the SEC will operate is that the agency must evolve with the markets, Clayton said. The Commission will use technology to improve and make more efficient its regulation and oversight of the public markets. On this point, he cautioned that the agency should not take lightly the fact that regulatory changes often impose significant implementation costs on companies and shareholders.

Periodic review of rules. Clayton said that going forward the SEC will operate under the principle that effective rulemaking does not end with rule adoption. The Commission should review its rules retrospectively, he said, and seek feedback on whether its rules are, or are not, functioning as intended.

While he is Chair, the Commission will be mindful that the cost of a new rule often includes the cost of demonstrating compliance, he said. The requirement that a CEO certify that a new requirement has been met, for example, may involve auditors, outside counsel or other third parties, he noted. This is the appropriate regulatory approach in some areas, Clayton said, but the SEC needs to be sure that it understands how a new rule will be implemented and how the staff will examine for compliance with it.

The final principle articulated by Clayton is that the Commission will seek to coordinate its efforts with federal and state regulators, the Department of Justice, self-regulatory organizations, and standard-setting entities, among others. He cited over-the-counter derivatives and cybersecurity as areas where effective coordination will be critical.

Principles in action. Having stated the eight principles, Clayton turned to some specific areas where he plans to apply them. With respect to enforcement, he stated that he intends to continue deploying significant resources to rooting out fraudulent market practices. He urged market professionals, who are essential to the proper operation of the markets, not to take advantage of their special place in the economy.

On the enforcement of cybersecurity rules, he emphasized companies’ obligation to disclose material information about cyber risks. However, he believes that Commission should be cautious about punishing responsible companies who nevertheless are victims of cyber attacks. In his opinion, the SEC needs to take a broad view and bring proportionality to this area.

Capital formation. With regard to capital formation, Clayton said that the agency needs to work to improve the attractiveness of the public markets, an effort that began with the recent extension of the JOBS Act confidential filing privilege to all companies. He hopes this approach will encourage companies to sell shares in the public markets and to enter them at an earlier stage in the companies’ development.

Clayton also said that he understands that in some cases the SEC’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 urged companies to make use of Rule 3-13 of Regulation S-X, which allows issuers to request modifications to their financial reporting requirements in these situations. The staff is placing a high priority on responding with timely guidance to these requests, he said.

Market structure. Regarding equity market structure, Clayton noted that a lot of thought has been devoted to the topic at the Commission, in Congress, and in the private sector. It is time to take action, he said, adding that the SEC may launch a pilot program to test how adjustments to the access fee cap under Exchange Act Rule 610 would affect equities trading. He expects the Commission to consider a proposal on the pilot program in the coming months.

Clayton said that he hopes the tenure of the SEC’s Equity Market Structure Advisory Committee will be extended into 2018. In addition, he has asked the staff to develop a plan for creating a Fixed Income Market Structure Advisory Committee that would be asked to give advice to the Commission on the regulatory issues impacting fixed income markets.

Fiduciary rule. Clayton briefly touched on the fiduciary rule, noting that with the Department of Labor’s rule now partially in effect, it is important that the SEC make all reasonable efforts to bring clarity and consistency to this area. The SEC issued a statement seeking public input on standards of conduct for investment advisers and broker-dealers in June, and he urged interested parties to provide feedback to help shape the Commission’s actions in this area.