In his first public speech, SEC Chairman Jay Clayton outlined eight principles that would guide his tenure:1
#1: The SEC's mission is our touchstone. Chairman Clayton indicated that all three elements of the SEC's mission are equally critical: (1) to protect investors; (2) to maintain fair, orderly, and efficient markets; and (3) to facilitate capital formation.
#2: Our analysis starts and ends with the long-term interests of Main Street investors.
#3: The SEC's historic approach to regulation is sound. Chairman Clayton summarized the SEC's regulatory approach as utilizing disclosure-based rules, placing heightened responsibilities on certain people and organizations active in our securities markets, and an anti-fraud regime. He further asserted his belief that this approach is sound.
#4: Regulatory actions drive change, and change can have lasting effects. Chairman Clayton observed that incremental regulatory changes in the aggregate can dramatically affect the markets and pointed to the 50% decline in the number of U.S-listed public companies over the last two decades as cause for a cumulative regulatory analysis.
#5: As markets evolve, so must the SEC. The SEC is capable of developing and utilizing technology that it can apply to the detection of "companies and individuals engaging in suspicious behavior."2 However, Chairman Clayton cautions that implementing regulatory change has costs, which shareholders and customers ultimately bear.
#6: Effective rulemaking does not end with rule adoption. Chairman Clayton urges the SEC to review its rules retroactively to evaluate whether they are functioning as intended.
#7: The costs of a rule now often include the cost of demonstrating compliance. Chairman Clayton states that "Vaguely worded rules can too easily lead to subpar compliance solutions or an overinvestment in control systems." He uses a CEO certification to illustrate that both financial and time costs can skyrocket, which requires the SEC to have a realistic vision of how rules will be implemented and examined for compliance.
#8: Coordination is the key. Chairman Clayton comments that the SEC works with more than 15 U.S. federal regulatory bodies, more than 50 state and territory securities regulators, the Department of Justice, state attorneys general, SROs, and non-SRO standard-setting entities. He argues that coordination between these organizations is essential to a well-functioning regulatory environment. In particular, he highlighted the dual regulatory structure of the SEC and CFTC regarding over-the-counter derivatives and how critical it is for regulators to coordinate with respect to cybersecurity.
Chairman Clayton then identified certain areas in which he anticipates the application of these principles, including (i) enforcement and examinations, (ii) capital formation, (iii) market structure, (iv) investment advice and disclosure to investors, and (v) resources for educating investors. We take specific note of three of these areas:
In terms of enforcement and examinations, Chairman Clayton indicated that the SEC is taking further steps to eliminate "pump and dump scammers, those who prey on retirees, and . . . those who use new technologies to lie, cheat and steal." He also issued a warning to market professionals, asserting his expectation that they will adhere to and be guided by the rules, but he also stated that, in the area of cybersecurity, "we need to be cautious about punishing responsible companies who . . . are victims of sophisticated cyber" attacks.
With respect to capital formation, Chairman Clayton stated his belief that the SEC needs to increase the attractiveness of our public capital markets and cited the expansion of the JOBS Act non-public registration statement review process to larger domestic and non-U.S. companies.
Finally, regarding investment advice, Chairman Clayton articulated his hope that the SEC and the Department of Labor can "act in concert" regarding the Fiduciary Rule, but also stated that any regulatory action in this area "will need to be carefully constructed, so it provides appropriate and meaningful protections but does not result in Main Street investors being deprived of affordable investment advice or products."
For the full text of Chairman Clayton's remarks, click here.