SEC’s Clayton pushes modernization at UPenn speech

Getting a bit more specific as he delivered a “Distinguished Jurist Lecture” to the Institute for Law and Economics, Clayton predicted the SEC is likely to take up “proxy plumbing” and a “universal proxy” in the not-too-distant future.

Also on the SEC’s plate is its “engagement agenda,” in which it performs “critical functions” like market monitoring, overseeing enforcement, public outreach, and investor education, Clayton said.

One area the SEC under Clayton’s tenure will likely stay away from is anything to do with antitrust. “I will defer to” Assistant Attorney General for the Antitrust Division Makan Delrahim and FTC Chairman Joe Simons “on antitrust policy and enforcement,” Clayton announced.

Getting things done

In contrast to the early part of this decade, when the SEC only managed to timely complete about one-third of the rules it committed to adopt in its Regulatory Flexibility Agenda, in 2018, the SEC “advanced 23 of the 26 rules in the near-term agenda, or 88 percent of all items,” Clayton reported. “Of those 26 rules, the 11 listed for adoption by 2018 were all completed.”

The Commission has had a similarly good year in 2019. Having committed to work on 39 rules in the near term, the SEC has advanced 33 (almost 85 percent), Clayton said. And the SEC managed to do this “even though our rulemaking efforts were stalled for more than a month as a result of the lapse in appropriations (the government shutdown) earlier this year,” he continued.

“Straying from our statutory mission and authority means expending agency resources to advancing initiatives that are more likely to be subject to legal challenges.”

SEC Chairman Jay Clayton

In 2019, the SEC eyed adopting rules and interpretations focusing on the standards of conduct for investment professionals, Clayton noted. The SEC also this year adopted a new rule expanding “testing the waters” communications that gauge interest from sophisticated investors before an offering is launched. “As a result of these communications, issuers can better identify information that is important to investors and therefore increase the probability of an appropriately priced and otherwise successful registered offering,” Clayton said.

The SEC has managed to accomplish all of this with a staff size that pales compared to that of some banks. With 4,300 staff people, the SEC’s workforce monitors equity trading around the planet and examines more than 2,100 investment advisers every year, among other things, Clayton noted. In contrast, PNC has more than 10 times as many employees as the SEC has, Clayton said. “In fact, it has one branch for every two SEC employees, has revenues that are 10 times our budget, and net income that is three times our budget.”

Other SEC modernization efforts in 2019 include the Commission’s adoption of a new rule that reduces the regulatory burden on certain exchange-traded funds (ETFs) and its issuance of guidance to investment advisers on proxy voting responsibilities. The SEC’s initiatives advance its “tripartite mission” of “protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation,” Clayton said.

Having proposed changes to rules on the disclosure of material conflicts of interest by proxy advisory businesses and on shareholder proposal requirements, the SEC likely next will address “proxy plumbing” (how shareholder votes are actually cast and counted, as Clayton explained in a speech earlier this year) and “universal proxy” cards (that include the names of all board of director nominees).

No need to overreach

In his talk, Clayton acknowledged there are some in the universe that would like to see the SEC, as an independent agency, expand its regulatory authority, but he disagrees. “I often hear, we should ‘stretch our authority’” or “use ‘all available means’ to achieve a particular objective,” Clayton said.

Such an approach is “misguided,” Clayton maintained. “Straying from our statutory mission and authority means expending agency resources to advancing initiatives that are more likely to be subject to legal challenges.” Moreover, although the SEC is independent, it does not operate in a vacuum.

The SEC needs “to respect the role of other departments and agencies,” Clayton said. “The Fed has monetary policy,” he noted. “The Treasury has sanctions,” Clayton continued. “The CFTC has commodities. The Department of Justice and the Federal Trade Commission have competition.”

In sum, even as the SEC is independent, it is not without constraints. “We operate in a regulatory ecosystem that includes multiple other participants, at the state, federal and international level, including the Department of Justice and state attorneys general,” Clayton said. Also, there’s that budget thing. As an “appropriated agency,” the SEC only has “the funds Congress provides us,” Clayton said.

In the end, the SEC’s focus on “substance, core mission and the long-term interests of our Main Street investors has proven, time and again, to be a constructive approach,” Clayton said.

Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.