Key Topics & Takeaways
- Capital Markets and Capital Formation: A frequent topic of discussion was the current state of capital markets in the United States, and steps the Securities and Exchange Commission (SEC) could take to improve them. Clayton argued that the best way to encourage public offerings is to ease the compliance on-ramp for newly public companies. He also criticized the SEC for its implementation of capital formation rules related to the Jumpstart our Business Startups (JOBS) Act, saying the agency could “do better.”
- Regulatory Affairs: Several Senators asked Clayton about his views on regulatory affairs, and Clayton stated his belief that cost-benefit analysis was a useful tool for assessing the value of different regulations. Clayton also said he would push the SEC to publish “clear” rules so companies understand what is expected of them.
- Enforcement: Democratic Senators frequently queried Clayton on his views on the proper use of the SEC’s enforcement powers. He was pressed specifically for answers relating to matters he might have to recuse himself from, as well as his views on adjusting the mens rea standard for prosecution of corporate executives.
- Jay Clayton, to be Chairman of the Securities and Exchange Commission
In his opening statement, Chairman Mike Crapo (R-Idaho) discussed Jay Clayton’s qualifications for the role of Securities and Exchange Commission (SEC) Chairman, and praised his interest in prior meetings in capital formation issues. Crapo said that the Jumpstart Our Business Startups (JOBS) Act has helped many companies both raise private capital and go public, and has allowed everyday investors to share in their success. Crapo called on Clayton to help identify new securities measures Congress could pursue to further encourage capital formation. He also asked Clayton to help Congress change the SEC’s rules to account for changes in the economy and technology, saying it is “imperative these rules serve the needs of companies and investors.” Crapo also called on the SEC to conduct a “retrospective review” of existing regulations to make sure they are still relevant, useful, and justified by cost-benefit analysis.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) called on the Clayton and the SEC to aggressively protect investors from fraud. Brown brought up then-candidate Trump’s promises to crack down on “Wall Street” but questioned his dedication to those promises. Brown argued that Americans do not trust financial markets and said that many feel the system is “rigged against them.” He also then expressed support for the Department of Labor’s fiduciary duty rule and criticized the rule’s opponents, describing them as part of the reason Americans mistrust financial markets. Brown expressed concern over Clayton’s “record representing banks and bankers” and called on him to explain how he will protect investors and workers.
Jay Clayton, to be Chairman of the Securities and Exchange Commission
In his brief testimony, Clayton discussed his work as an attorney dealing with the U.S.’s capital markets. He highlighted his work on international financial issues, which he said showed him the interconnectedness of global financial markets. Clayton said that well-functioning capital markets benefit all Americans, and that all Americans should have the opportunity to participate in those markets. Clayton also promised repeatedly during the hearing that he would have “zero tolerance” for bad actors in the marketplace.
Question & Answer
Capital Markets and Capital Formation
Crapo led off the questioning by asking Clayton how Congress and the SEC could encourage initial public offerings (IPO’s), which he noted have fallen in number for years. Sens. Bob Corker (R-Tenn.) and Pat Toomey (R-Pa.) similarly asked about regulatory impediments to public offerings. Clayton said a good course of action would be to ease the “on-ramp” of regulatory compliance for newly public companies. Clayton repeatedly stated that IPO filing costs, as well as continuing compliance costs, are the main factors discouraging companies from going public. Clayton also said that the generally fixed compliance costs are disproportionately larger for smaller and early-stage companies, and that these regulations make public offerings less attractive to those companies.
Sen. Heidi Heitkamp (D-N.D.) asked how the SEC could improve small businesses access to capital. Clayton said he would work with the Senate Banking Committee on legislation to improve small business access to capital, and agreed to appoint commissioners with rural backgrounds to the SEC’s Advisory Committee on Small and Emerging Companies.
Sen. Pat Toomey (R-Pa.) asked Clayton about the SEC’s implementation of new capital formation regulations under the JOBS Act. Clayton said the SEC could “do better” and argued its implementation of JOBS Act regulations has been poor. Clayton specifically mentioned Reg A+ and crowdfunding as areas where the SEC could improve regulations.
Crapo also asked Clayton about the SEC’s review of the U.S.’s equity market structure. Clayton said the current review “should continue.”
Sen. Richard Shelby (R-Ala.) asked Clayton for his view on conducting comprehensive cost-benefit analyses on proposed rules that would evaluate the cost of the rule in isolation, as well as its additive cost to the regulatory burden on regulated entities. Clayton said that the economic impact of rules and regulations “is very important” and noted that often regulations turn out to be costlier in hindsight than they appeared to be when promulgated.
Brown brought up President Trump’s recent executive orders outlining principles for regulating the financial sector, and asked Clayton if he would “attack” the rules the SEC issued as part of the Dodd-Frank Act. Clayton said he would review Dodd-Frank Act rules to see if they are “achieving their objective.”
Sen. Brian Schatz (D-Hawaii) asked Clayton about the numerous rules that the SEC has not yet promulgated that are statutorily mandated by Dodd-Frank. Clayton said that this rulemaking should go forward, agreeing the SEC does not have the authority to refuse to implement rules required by statute.
Sen. Bob Menendez (D-N.J.) asked Clayton about acting SEC Chair Michael Piwowar’s recent decision to end a 2009 policy that granted enforcement staff at the SEC the ability to issue subpoenas. Piwowar reversed this decision to sharply limit the number of SEC employees who can issue subpoenas. Menendez asked if SEC enforcement staff have abused their subpoena powers, to which Clayton demurred, saying he has “not seen abusive enforcement.”
Heitkamp and Catherine Cortez-Masto (D-Nev.) asked Clayton about enforcement actions against both financial services firms specifically and public companies generally. Heitkamp asked about the utility of criminal liability for executives as a “deterrent” to illegal behavior, and Cortez-Masto asked Clayton about changing the mens rea standard for reckless activity. Clayton argued that the question of criminal liability was best handled by the court system.
Sen. Thom Tillis (R-N.C.) asked Clayton about the relationship between rulemaking and enforcement, and Clayton said that overly complex rules can lead to “gotcha” enforcement – where companies attempt to comply with an ambiguous regulation only to find out post-hoc that they misunderstood the rule. Clayton said the SEC should make its regulations and their intent clear so that all actors know the rules.
Possible Conflicts of Interests
Several Democratic Senators sharply criticized Clayton for possible conflicts of interest that could arise during his Chairmanship of the SEC. Sen. Elizabeth Warren (D-Mass.) asked directly about matters involving firms he previously represented and matters involving his former employer (Sullivan & Cromwell). Clayton confirmed he would have to recuse himself from matters involving those entities. Warren argued that these recusals would “deadlock” enforcement actions at the SEC. Clayton assured the panel on several occasions that his prior representations would not color his decisions as Chairman, and that he has discussed all possible conflicts with the SEC’s ethics office.
During the hearing, several Democratic Senators asked Clayton about changes to corporate disclosures. Sen. Chris Van Hollen (D-Md.) began by asking if companies should be required to disclose political contributions. Clayton merely replied that disclosures should touch all issues of “materiality” for investors but declined to endorse specific items that should be disclosed. Other Democratic Senators asked questions about cybersecurity preparedness disclosures and disclosures relating to the risks of climate change.
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