Monday, November 23, 2020

Clayton looks ahead to areas in need of Commission attention

By John Filar Atwood

As his tenure as SEC Chairman winds down, Jay Clayton outlined for the next Commission the issues that he believes require immediate improvements. On his list were a review of money market funds, the rules surrounding residential mortgage-backed securities offerings, modernizing the proxy system, remaining Dodd-Frank rulemakings, and improving climate-related disclosures.

Before looking to the future, he reviewed the agency’s many accomplishments during his time as chairman in remarks to the Economic Club of New York. Those efforts addressed the SEC’s core mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, and Clayton took a moment to address what he believes is a growing misconception that in order to promote one part of the agency’s mission it must detract from another.

In Clayton’s view, this is a false choice and inconsistent with the SEC’s history. He said that the SEC can simultaneously address each part of its mission, and has been doing so for more than 80 years. The most recent example is its work to revamp the exempt offering framework, he said. Those rules allow businesses to more easily navigate the regulatory framework while embedding investor protections into the process, he noted, to concurrently help both small businesses and investors.

Money market funds. With that as a backdrop, Clayton discussed issues he thinks will need further attention from the incoming Commission, starting with money market funds. He said there is no doubt that the SEC needs to re-examine prior reforms as well as the performance of money market funds over the recent period.

He referenced recent comments by Division of Investment Management Director Dalia Blass in which she asked whether the potential for the imposition of redemption gates drove market behavior, and whether the current money market fund rule’s risk limitations provide funds with the necessary liquidity to meet heightened redemptions. Clayton said he expects a review of this area also to include forward-looking assessments to ensure that the policy decisions and modernizations implemented can address issues that have led the government to backstop some money market funds twice within 12 years.

Asset-backed securities. Securitizations is another area where the SEC’s regulations have not functioned as intended, according to Clayton. He noted that since the asset-backed securities rules were revised in 2014, no SEC-registered offerings of residential mortgage-backed securities (RMBS) have occurred. In comparison, in the five years ended June 30, 2019, Fannie Mae and Freddie Mac issued $4.47 trillion in face amount of RMBS, he added.

Clayton emphasized that the asset-backed securities rules need to be overhauled, based on public comments and suggestions the Commission has received. He noted that the staff currently is reviewing RMBS asset-level disclosure requirements, including through discussions with the Federal Housing Finance Agency, with an eye toward facilitating SEC-registered offerings.

Proxies. Clayton also said that he hopes the Commission will continue its work to modernize the proxy system, particularly to improve ways for issuers to engage with their shareholders more directly. In his view, rules surrounding OBO/NOBO (objecting beneficial owners/non-objecting beneficial owners) are overdue for reexamination, as is the growing use of Form 13F by issuers to address the proxy rules’ shortcomings.

Dodd-Frank rulemakings. The Dodd-Frank Act required more than 80 rulemakings and dozens of reports and studies from the Commission. On his watch, the SEC moved a number of the rulemaking efforts forward—the Title VII security-based swap regulatory regime and hedging disclosures, among others—but a handful of the rules still remain undone, Clayton said.

One unfinished rulemaking relates to compensation clawbacks, but he noted that market developments have in some cases overtaken the Dodd-Frank mandate. Progress in the area of shareholder engagement has helped, he said, and in some cases companies’ clawback policies already go beyond what would be required by the Dodd-Frank Act.

Climate-related disclosures. In this area, Clayton acknowledged that to the extent they are material, issuers are already required to disclose the current and expected future effects of climate-related issues on their operations and performance. In his view, it is critical that this disclosure be "decision-useful," meaning that it actually give investors the ability to incorporate the climate-related information into their investment decision process.

Clayton said he has often heard that climate-related disclosure could be more useful if it were uniform. He believes, however, that standardization can be difficult across industries, especially in the context of forward-looking information which would require uniform assumptions about the future.

He is of the opinion that any standardization should be approached on a sector-by-sector basis, starting with those that already use metrics to track and assess climate-related risks. He closed by hinting that he may have more to say on this important issue in the near future.