Heading into a confirmation hearing before the Senate Banking Committee last week, Jay Clayton was both a prominent, sought-after attorney and a man of mystery.
President Donald Trump’s nominee to serve as chairman of the Securities and Exchange Commission is currently a partner with the law firm Sullivan & Cromwell and, by many accounts, is a master of corporate deal making with a long and distinguished career advising on public and private mergers and acquisitions transactions, capital markets offerings, and regulatory and enforcement proceedings.
He is also, perhaps owing to the confidentiality of many mergers and acquisitions, a very private figure, with only a smattering of public press releases, client alerts, and media clippings to tout his accomplishments and elucidate regulatory and enforcement viewpoints.
During the March 23 hearing (a prelude to confirmation by the full Senate), Clayton’s formidable experience in corporate law was leveraged for both partisan praise and pushback.
In a financial disclosure recently filed with the Office of Government Ethics, Clayton revealed that he earned $7.6 million this year from his law firm. In the filing, he detailed how he would unwind his relationship with the law firm that currently employs him.
Sen. Catherine Cortez Masto (D-Nev.) wasn’t assuaged by that plan. Prior to last week’s hearing, she detailed concerns about his ability to “effectively serve” as SEC chairman, citing “numerous conflicts of interest and work on behalf of corporations with ties to Russia and Iran.”
“I am concerned that your long career representing companies regulated by the SEC will require you to recuse yourself from a wide variety of SEC enforcement matters, which may, in turn, limit the SEC’s ability to resolve cases in an expeditious manner,” Cortez Masto wrote to the nominee.
She compared Clayton’s potential conflicts to those of former SEC Chair Mary Jo White. “Like you, Ms. White represented corporate clients at a large law firm before being nominated,” the letter says. “After White was confirmed to lead the SEC, the Commission routinely struggled to resolve enforcement matters because [she] had to recuse herself from participating in dozens of SEC enforcement decisions.”
Because of White’s client list—and her husband’s continuing employment at a large law firm—she had to recuse herself from 48 enforcement investigations. “That often left the Commission deadlocked on decisions relating to enforcement actions, delaying settlements, and opening the door … to a lighter punishment in at least one instance,” Cortez Masto claimed.
These concerns were repeated and amplified at the Committee hearing.
“A big part of the job is being the enforcement cop on the beat for Wall Street,” said Sen. Elizabeth Warren (D-Mass.). “It is clear that the SEC chair will play a critical role in deciding what the enforcement position of the Commission will be.”
White claimed (although her statistics were disputed) that in recent history Republicans have favored weaker enforcement than Democrats on the Commission. The chairman is often the deciding vote when the Commission is deadlocked and, if he or she must recuse themselves, “major enforcement actions don’t go forward and wrongdoing may go unpunished,” she added.
Current government ethics rules would require Clayton to recuse himself from any case involving a former client of his or of Sullivan & Cromwell, for at least two years. That was troubling to Warren, who pointed out that the roster of recusal-mandated clients included Goldman Sachs, Deutsche Bank, Barclays, and UBS, institutions that have violated securities laws in recent years.
“Any strategic company that wanted to avoid an SEC enforcement action could just hire Sullivan & Cromwell to represent them before the agency,” she said.
“Partisanship is pretty strong on Washington right now. But I do believe, having talked to a lot of people, that the mission of the Commission doesn’t have to be a partisan mission.”
SEC Chair Nominee Jay Clayton
“Holding Wall Street firms accountable is a major job of the SEC’s mission. and the chair needs to be able to participate in those enforcement actions and be the cop on the beat for the American people, not on the sidelines as former clients and Wall Street firms are able to skate free. That raises a very serious concern about your nomination,” Warren added.
Clayton debated whether a recusal automatically meant a deadlock. “I’m not sure about the characterization of who goes for more enforcement, Democrats of Republicans,” he said. “On enforcement matters the Commission is almost always unanimous.”
Sen. Sherrod Brown (D-Ohio) continued with that particular line of questioning.
“You spent your career protecting some of the biggest names on Wall Street, and those relationships pose a host of conflicts for this position,” he said. “I'm concerned that you may need to recuse yourself too often at a time when we need a strong, independent SEC chair on the frontline of enforcement.”
U.S. Senator Mike Crapo (R-Idaho), the Committee’s chairman, stressed Clayton’s qualifications over his conflicts.
“He has extensive expertise in our financial markets as a highly regarded securities lawyer,” he said of the nominee. “For decades, he has helped companies access our capital markets, increase their ability to invest in the U.S., and grow and create jobs.”
Crapo said he was pleased that Clayton will focus on capital formation. “The JOBS Act helped revitalize the primary markets, and both Congress and the SEC should continue to find ways to help companies go public and allow investors to share in their success,” he said.
Crapo also cited the need for “the SEC to do retrospective reviews of its own regulations to ensure they are working out as intended and are still appropriate.” This, he said, is in line with the President’s own executive orders on regulation.
“In terms of having fewer public companies, I do think it is a problem, and a problem that is not well known,” Clayton said. “Fewer companies getting in on the growth phase means fewer returns for people who participate in the public markets. I do want to see more public companies.”
CLAYTON’S OPENING STATEMENT
The following is a selection from the opening statement offered by Jay Clayton, nominee for chairman of the SEC, during a hearing before the Senate Committee on Banking, Housing, and Urban Affairs on March 23.
Making sure our markets are fair, open, orderly, and efficient—and ensuring that investors are protected—is the fundamental responsibility of the SEC. If confirmed, I will take up this responsibility with energy and purpose. I pledge to work with my fellow Commissioners, the SEC Staff, this Committee, and the many others who support and defend our capital markets.
Based on all of my experiences, nationally and internationally and on Wall Street and Main Street, I firmly believe that:
Well-functioning capital markets are important to every American;
All Americans should have the opportunity to participate in, and benefit from, our capital markets on a fair basis, including being provided accurate information about what they are buying when they invest; and
There is zero room for bad actors in our capital markets.
I am 100 percent committed to rooting out any fraud and shady practices in our financial system. I recognize that bad actors undermine the hard-earned confidence that is essential to the efficient operation of our capital markets. I pledge to you and the American people that I will show no favoritism to anyone.
One last comment: For over 70 years, the U.S. capital markets have been the envy of the world. Our markets have allowed our businesses to grow and create jobs. Our markets have provided a broad cross-section of America the opportunity to invest in that growth, including through pension funds and other retirement assets. In recent years, our markets have faced growing competition from abroad. U.S.-listed IPOs by non-U.S. companies have slowed dramatically. More significantly, it is clear that our public capital markets are less attractive to business than in the past.
As a result, investment opportunities for Main Street investors are more limited. Here, I see meaningful room for improvement. I am excited to work with you, my fellow Commissioners and the SEC staff to pursue those improvements and, in doing so, will always be vigilant to ensure that the Commission is steadfast in protecting investors.
Source: Senate Banking Committee
Easing the “on-ramp to the public capital market process,” was cited by Clayton as a priority. “By easing the on-ramp I don’t mean easing the important regulations that public companies face,” he clarified. “I mean making it less costly upfront to become a public company.”
Clayton weighed in on corporate governance concerns, in particular efforts by some pre-IPO companies to proactively limit shareholder voting rights.
“My sense is, and I could be completely off on this, that there is so much thirst for public companies that it is easier for a company to set a particular set of governance requirements than it might have done in the past,” Clayton said. “I don’t know if that is a good thing or a bad thing, but it is a change in the balance.”
Brown made a thinly veiled (if not direct) reference to President Trump’s business dealings when he asked Clayton how he would advise a client interested in complying with the Foreign Corrupt Practices Act if that client was considering a business opportunity in Azerbaijan with a politically connected family “known to be corrupt and tied to the Iranian revolutionary guard.”
“I think you need to tell that client to think long and hard about whether they want to have the potential exposure, not just to the FCPA but similar oversight by other OECD (Organisation for Economic Co-operation and Development) countries,” Clayton said. “There are some jurisdictions where, in the vast majority of the cases, it may just not make sense to participate.”
On the topic of enforcement, Sen. Mary Kathryn “Heidi” Heitkamp (D-N.D.) once again raised the complaint that no one went to jail in the aftermath of the 2008 Financial Crisis. She asked: “Do you believe that executives who act recklessly, but not knowingly, and as a result cause significant harm to our financial system, should be held criminally liable for financial crimes?”
“That’s a question for the courts and the legislature,” Clayton initially answered.
“Far too often you can hide behind the ‘knowing.’ It is hard to prove someone actually knew, but it isn’t hard to prove that someone should have known or acted recklessly. Moving forward we could enact that criminal standard,” Heitkamp said, suggesting that the difficulty in reaching the level of criminal intent could be rectified by lowering the standard.
While Clayton agreed that individual accountability drives behavior more than corporate accountability, he was not willing to fully support the idea of altering established rules for individual liability. “I’m not really sure about that,” he said. “It strikes me as a very big step.”
“Companies should be held accountable if they make illicit profits and those profits should be disgorged,” Clayton added. “There should be deterrents at the company level, but keep in mind, shareholders do bear those costs.”
Brown reminded Clayton that President Trump, and various advisers, have said they plan to “to do a big number on Dodd-Frank.” He asked the nominee: “What aspects of the Dodd-Frank Act will you be attacking?”
“I don’t have any specific plans for attack,” Clayton said with a slight chuckle. “I do believe that Dodd-Frank should be looked at, in particular, those rules that are already in place regarding whether they are achieving their objectives effectively. I have no plans, however, for attacking a specific provision of Dodd-Frank.”
In a separate line of questioning, Clayton spoke of the importance of agency-directed cost-benefit analysis.
“The economic impact of rules and regulations that are promulgated, especially by the SEC, is very important,” he said. “We are often looking back after a decade or two and discovering profound effects we didn’t realize.”
Although not his final words at the hearing, Clayton offered what may be his final thesis for wanting the SEC’s top post. “My job for 20 yeas has been to reach consensus,” he said. “People don’t do transactions unless they agree to them. I believe in consensus and I would very much like to as chairman, have unanimous votes on important matters.”
“Partisanship is pretty strong on Washington right now,” Clayton added. “But I do believe, having talked to a lot of people, that the mission of the Commission doesn’t have to be a partisan mission.”