Brookings Event with SEC Chair Clayton
“Perspectives on Securities Regulation”
Thursday, September 28, 2017
Key Topics & Takeaways
- DOL Fiduciary Rule: Regarding the Department of Labor’s (DOL’s) fiduciary rule, Securities and Exchange (SEC) Chair JayClayton agreed with some of the motivation behind the creation of the rule related to disclosures, but argued that there should not be two different standards or relationships for the same client when dealing with retirement and non-retirement assets. He continued that DOL Secretary Alexander Acosta has reached out to him to work together on the rule, and that his “4 C’s” for what any such rule should look like are choice, consistency, clarity, and cooperation.
- Cybersecurity: After the recent cyber breach at the SEC, it was asked whether there should be a new government agency that handles cyber risk. Clayton replied that having a coordinated approach to cybersecurity and being able to coordinate quickly during an event is needed, whether in a separate agency or multiple agencies. He continued that a denial of service in the financial markets or other critical infrastructure will undermine the markets and have an impact on asset prices and the general economy.
- Treasury Report: When asked about his reaction to the Treasury Department’s report in response to the Executive Order on Core Principles of Financial Regulation, SIFMA’s Ken Bentsen said that the report was very “middle of the road” that did not call for a total elimination of the Dodd-Frank Act. He praised the report for looking at how different rules conflict with each other, and said this is important to ensure that financial regulations are as “efficient” as possible.
Speakers and Panelists
- Jay Clayton, Chairman, Securities and Exchange Commission
- Ken Bentsen, President & CEO, SIFMA
- Chris Brummer, Professor of Law, Georgetown University
- Annette Nazareth, Partner, Davis Polk & Wardwell LLP
- Thomas Wittman, Executive Vice President, Head of Global Trading and Market Services, Nasdaq
A Conversation with SEC Chairman Jay Clayton
Retirement Accounts/ Fiduciary Rule
When asked what the Securities and Exchange Commission (SEC) can do to help “Mr. and Ms. 401(k)” when making retirement decisions, SEC Chairman Jay Clayton replied that there are many “high quality” opportunities for investors to participate in the retail market, and that the SEC should consider this audience when making regulatory decisions.
Regarding the Department of Labor’s (DOL’s) fiduciary rule, Clayton agreed with some of the motivation behind the creation of the rule related to disclosures, but argued that there should not be two different standards or relationships for the same client when dealing with retirement and non-retirement assets. He continued that DOL Secretary Alexander Acosta has reached out to him to work together on the rule, and that his “4 C’s” for what any such rule should look like are choice, consistency, clarity, and cooperation.
Clayton was then asked about smaller accounts and whether robo advisors could be helpful to those investors. He stated his support for financial technology (FinTech) innovation that helps investors, adding that robo advisors may fall into that, but that the use of a robo advisor does not mean there is not a best interest obligation to the investor.
As for improving financial education, Clayton explained that the SEC has a responsibility to educate investors, and that the Office of Investor Education is actively engaged in this. However, he stressed that financial literacy has to start at a “way younger” age so when people start their first job they know how important it is to set aside some of their earnings for retirement.
Clayton said that the amount of ongoing retail fraud in the markets “surprises” and “bothers” him, and that the Division of Enforcement is analyzing fraud from different angles to try to find the root of the problem. He gave the example of “pump and dump” fraud that targets affinity groups and the elderly, stressing that he wants to do what he can to “stop this nonsense.” When asked if the SEC has access to the data they need to go after this fraud, Clayton explained that the SEC and the Financial Industry Regulatory Authority (FINRA) have data for “bad” brokers and investment advisors, but that there is not good data for unregistered brokers, and that the SEC is trying to put together data for that.
Clayton stressed the importance of economic growth, as nothing will have a greater impact on the economy in the long term than moving from 2 percent to 3 ½ percent annual growth over a period of 10 years. He noted his concern that many companies choose not to go public, as the capital markets fuel growth. When asked if regulation is preventing companies from going public, Clayton replied that “many, many factors” have caused the decline in public companies, adding that he is not trying to remove regulation, as the “package” of rules for a public company are “pretty much appropriate.” However, he cautioned that it “does not make sense” for rules for a large public company to be the same for smaller companies.
Regarding the idea of having more of a vote if a shareholder has a share for five years rather than buying it yesterday, Clayton explained that a one-size fits-all approach is not appropriate on a macro level, and that the size of a company, in addition to their investment objectives, should be considered.
When asked if the SEC is re-examining the Volcker Rule, Clayton explained that the rule should be examined to see if it has been implemented correctly, and that it may be worth a second look, especially if there is no systemic risk benefit. However, he added that as a policy matter, there is agreement among him, the Federal Reserve and Treasury that it is “pretty good policy.”
After the recent cyber breach at the SEC, it was asked whether there should be a new government agency that handles cyber risk. Clayton replied that having a coordinated approach to cybersecurity and being able to coordinate quickly during an event is needed, whether in a separate agency or multiple agencies. He continued that a denial of service in the financial markets or other critical infrastructure will undermine the markets and have an impact on asset prices and the general economy.
When asked how the SEC is approaching FinTech, Clayton replied that there are numerous working groups at the Commission monitoring the different FinTech issues. He continued that there is a lot of technology being examined in the Enforcement Division, but that there are also many positive sides to the technologies, adding that he will embrace them should there be enough investor protection.
An audience member then asked if the SEC is considering third party compliance audits for investment advisors. Clayton replied that while it may not be a bad idea, it is not at the front of his mind.
In response to a question about the benefits of companies going public sooner, Clayton explained that expanding options for investors on a portfolio basis is one benefit. He then added that no company is made a “worse company” through the IPO process.
In the final audience question, it was asked why Clayton is hopeful for a uniform fiduciary standard even though previous SEC chairs have expressed interest in it the past 10 years. Clayton replied that since the DOL has moved on the rule, the SEC does not “have a choice but to try.”
The moderator began the Q&A by noting that the current political environment is pushing the regulatory pendulum in a new direction, and asked the panelists for their thoughts on what the new administration’s regulatory priorities should be. Ken Bentsen (President and CEO, SIFMA) said that over the last 15 years there have been major changes in financial markets and in the economy more broadly, while new financial regulations were overlaid onto preexisting regulation. Bentsen said that any financial regulatory review should consider these changes to make sure that the regulatory framework fits the industry to make sure that “our rules match where the markets are today.” Bentsen also said that now is an opportune time to step back and “see what’s working and what’s not working” and to identify regulations that may be impeding economic growth, especially given the current benign economic environment and the strength of bank balance sheets. Chris Brummer (Professor of Law, Georgetown University) and Annette Nazareth (Partner, Davis Polk) both also identified data security and data collection, as well as cybersecurity, as areas needing regulatory changes. Nazareth specifically noted that the recent hack of the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system will put a new emphasis on the importance of cybersecurity for both regulators and regulated entities.
Executive Orders on Financial Regulations
The moderator asked the panel about the recent Executive Orders on financial regulation (as well as the Treasury Department’s report in response to the order), and asked what these signal for the future of financial regulations. Bentsen said that the Treasury’s report was very “middle of the road” that did not call for a total elimination of the Dodd-Frank Act. Bentsen praised the report for looking at how different rules conflict with each other, and said this is important to ensure that financial regulations are as “efficient” as possible. Nazareth said that some Dodd-Frank regulations, including the Volcker Rule, went too far. She noted that former Federal Reserve Governor Dan Tarullo even agreed that the Volcker Rule needed reform, and said that many swaps margin rules do not “fit well” with capital rules. Nazareth also said that swaps clearing rules were another area that regulators should consider, and that while there is no support for returning to the pre-Dodd-Frank Act environment (with most swaps handled over-the counter), there may be ways to improve clearinghouses.
Fixed Income Market Structure
The moderator then asked the panel to give Chair Clayton “advice” on fixed income market structure and to give their thoughts on the future of market structure regulation. Thomas Wittman (Executive Vice President, Head of Global Trading and Market Services, Nasdaq) said that it is important to look at all facets of market structure, including rebates, access fees, and market maker incentives, as the state of the public capital markets impacts whether or not companies choose to go public. Bentsen said that while improvements to the U.S. equity and fixed income markets should always be explored, the U.S. capital markets are the “envy of the world” and Europe and Asian regulators view our capital markets as something to be emulated. Bentsen said that while there are concerns about market fragmentation and certain trading practices, the narrowing of bid-ask spreads and the enormity of corporate debt issuance are evidence that these markets are healthy, and regulators should be careful with changes. Bentsen also specifically stressed that care be taken with changes to the market for U.S. Treasury bills. Nazareth agreed that the Treasury market is an important one but expressed concern at how long it took regulators to gather the information necessary to determine what happened to that market in the 2014 Flash Crash.
Public Capital Markets
The next question asked the panel to discuss the importance of having strong public capital markets, and what the benefits of these markets are. Wittman said that public capital markets are critical for individuals to take advantage of the gains of corporate growth, and said that there are currently many hurdles for companies exploring initial public offerings (IPOs). Wittman argued that companies could be encouraged to go public by promoting long-termism and reforming market structure. He specifically called for changes to prevent “frivolous lawsuits” that surround almost every decision public companies take, to reduce the burden of corporate disclosure for small and mid-cap companies, to avoid double taxation (especially on dividends), and to concentrate liquidity in equities for smaller companies. He also called on regulators to require short position disclosure. Brummer said that in recent years many regulatory changes have helped the private capital markets, and that policymakers should be cognizant of this and avoid undermining either the public or private capital markets by helping the other. Bentsen said that business formation numbers are down historically in addition to IPO totals, and said there are ways to encourage business creation by building on the Jumpstart our Business Startups (JOBS) Act of 2012 without upending important investor protections.
The moderator then turned to the asset management industry, noting the recent debate about designating asset managers as systemically-important financial institutions (SIFIs), and asked the panel for their thoughts on how asset management regulation may change in the future. Nazareth said she believes the Financial Stability Oversight Council (FSOC) “got ahead of themselves” by debating SIFI designation for asset managers, saying the SEC has the expertise to regulate this industry. Bentsen said that many prudential regulators had the view then that asset managers should be treated like commercial banks, but that today there is an understanding that the business models of banks and asset managers are “totally different.” Brummer said that regulators should carefully consider the “nightmare scenario” of a major asset manager collapsing, possibly due to exposure to derivatives transactions, and said that regulators should think about how to protect both investors and market stability to guard against that eventuality.
The first audience question asked the panel for their view on the impact of the decline in IPOs on competition generally. Bentsen said that today, when smaller companies cannot access capital markets on favorable terms, their financial advisors and bankers may advise a merger or sale instead of an IPO. Bentsen said that this environment is harmful and it is better for corporate sales to be one possibility for a business, in addition to raising equity in public markets or issuing debt to fund acquisitions.
The second audience question was for Ken Bentsen, and asked for his reaction on to Chairman Clayton’s statement that he is not interested in a third-party exam for investment advisors, and asked for clarification on comments Bentsen previously made about self-regulatory organizations (SROs). Bentsen said that it is important to reevaluate the current status of the SROs, as they have changed significantly over time and now have majority public representation on their boards instead of being exclusively member-run. Bentsen said that this is an area ripe for a fresh look.
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