Wednesday, June 03, 2020

Chairman Clayton, industry leaders weigh on current market state

By Amy Leisinger, J.D.

SEC Chairman Jay Clayton and asset management leaders considered recent market and industry steps in addressing the COVID-19 pandemic and the more recent bouts of civil unrest around the country in recent Bloomberg interview. Clayton stressed that disclosures of material issues will remain crucial for investors, and the industry heads opined that consolidation of firms could be on the horizon as markets begin to rebound.

Securities regulation concerns. In response to questions regarding SEC operations, Chairman Clayton noted that the Commission remains committed to inclusiveness and virtual staff support. The SEC still has a job to do to ensure that the markets are fair and transparent, he said. The markets look down the road to tomorrow (to recovery and rebuilding), but the Commission’s purpose is to be the "referee," according to the official. The Fed and the Treasury have brought functionality back by reacting quickly, and it is our job to ensure stability and fairness going forward, Clayton stated.

The information that is important to investors and regulators may be different now and going forward, according the chairman. However, he explained, the fact remains that public companies should communicate material information to investors to enable them to make informed investment decisions, including disclosures about operational changes and what these could mean for revenue and growth. Further, safety should be the primary concern at present, Clayton stated.

The chairman noted the SEC continues to assist in evaluating improper federal loan claims and is working to shut down trading if necessary and encouraged investors to be wary of potential scams. If a company is communicating with the marketplace, these communications should be consistent with those provided to the Commission, he said.

Chairman Clayton also discussed the potential for specific risk in connection with domestically listed Chinese companies. According to the chairman, one of the most substantial benefits of the Sarbanes-Oxley Act was the requirement of independent audit committees and presentations and the availability to the PCAOB of inspection of audit work papers. "The bedrock of our system is good financial information," and the dichotomy between Chinese companies and those in other jurisdictions has gone on too long, he said.

The chairman also suggested that the discussion regarding ESG disclosures needs to go back to materiality with a focus on changing times and customer preferences. The "E," "S" and "G" are all different considerations, and a single ESG score is highly skeptical, Clayton opined.

"We’re darn lucky we were not in this 10 years ago," according to Clayton. Workers and investors, as well as the economy, are under a great deal stress, he said. Together with industry leaders, regulators must continue pay attention to cybersecurity, particularly in connection with ongoing transitions to sophisticated private markets, the chairman concluded.

Industry observations. PGIM President and CEO David Hunt cautioned that the economy will likely come back more slowly than current numbers indicate. Franklin Templeton President and CEO Jenny Johnson suggested that there may a disconnect in the markets, with substantial positives in online markets. However, she said, it may be the time to be discriminate in equity investments, particularly regarding companies dealing in potential COVID-19 vaccinations. Active management now needs to focus on companies that are sustainable and investments in a broader asset base, she said. Kristi Mitchem, CEO of BMO Global Asset Management, commended efforts to draw from 2008 financial crisis "playbook" and roll out liquidity but opined that digital platforms could be creating a new divide disadvantaging under represented populations and even amplifying inequity.

However, according to Mitchem, the trend toward firm consolidation will likely continue, especially as the U.S. recovers from the crisis. Hunt agreed, noting that his firm focuses on serving investors and that therefore consolidation has been slower. Scale does matter more than ever, but it will happen slowly, he concluded.