Analysis: With Clayton leaving, SEC likely to target financial institutions

Clayton’s departure moves up the timeline for change at the SEC by about six months, as he could have stayed on through the end of his term in June 2021. Experts who deal with the agency on a regular basis said the unwritten restrictions placed on Clayton’s SEC by the Trump administration—no new rulemaking but allowance to adjust existing rules—will come off.

“The reflexive reaction is that the pendulum will swing back to the way it was under (former SEC chairwoman) Mary Jo White, where every little foul counts.”

David Tang, Counsel, Seward & Kissel

“I’m telling companies, ‘You’d better batten down the hatches in terms of your compliance, because it’s going to be a much stronger SEC,’” said Amy Lynch, founder and president of FrontLine Compliance and a former SEC regulator with the Office of Compliance Inspections and Examinations.

Vincent Walden, managing director of the firm Alvarez & Marsal, agreed.

“While 2020 has indeed been a challenging year from a bottom line and cash flow perspective, companies still need to maintain diligence in their compliance monitoring and oversight functions,” he said.

Candidates being floated to take Clayton’s place have reputations as strict enforcers of existing financial regulations. One is Gary Gensler, a former Commodity Futures Trading Commission regulator who was tapped by Joe Biden to lead the president-elect’s financial policy transition team. Another is Preet Bharara, the former U.S. Attorney for the Southern District of New York. Both were involved with high-profile prosecutions of large financial institutions following the Great Recession of 2007-09.

A policy of prioritizing cases against large institutions is likely to return to the SEC under Biden, said David Tang, counsel for the law firm Seward & Kissel and head of the firm’s regulatory compliance consulting practice.

“The reflexive reaction is that the pendulum will swing back to the way it was under (former SEC chairwoman) Mary Jo White, where every little foul counts,” Tang said.

Howard Fischer, partner with Moses & Singer’s securities litigation and white-collar practices and former SEC senior trial counsel, said the agency under Clayton “refocused enforcement activity on harm to so-called ‘Main Street’ investors, rather than on larger structural issues or bigger financial entities. Cases pursued under his leadership against larger financial institutions tended to be brought as settled actions.”

Walden said he expects the SEC will be part of a concerted effort by federal regulators to re-examine coronavirus relief packages—including company Paycheck Protection Program (PPP) loans, industry bailouts, healthcare spending, and research and development at pharmaceutical companies.

“I think it is safe to say that a Biden administration will be keenly focused on aggressive postmortem inspections and enforcement of alleged malfeasance, once the dust has settled,” he said. “In addition to traditional anti-corruption enforcement actions, expect increased enforcement actions in SEC financial reporting and disclosures.”

Enforcement by the SEC under Clayton has been far from toothless. Since sworn in in May 2017, the SEC has obtained more than $14 billion in financial remedies through over 2,750 enforcement actions, distributing $3.5 billion back to harmed investors and paying $565 million to whistleblowers, according to the agency.

Clayton has advocated for numerous rulemaking changes during his term, including the implementation of Regulation Best Interest (Reg BI), which set rules on how financial advisers can advise their investor clients; tweaked the SEC’s whistleblower program rules to increase the speed of payouts and, potentially, limit large awards; updated rules involving mergers and acquisitions; and loosened risk disclosure requirements for public companies and conflict-of-interest rules for auditors.

Many rule changes, including all of those just mentioned, passed on 3-2 or 3-1 votes, with Clayton and two Republican commissioners voting in favor and Democrats—whether there were one or two Democratic commissioners at the time—voting no. Biden’s replacement for Clayton will likely swing this pendulum toward the policies and opinions of Biden’s choice.

Under Clayton, the SEC established rules that favored Main Street investors without generating howls of protest from Wall Street while also modernizing, loosening, and streamlining requirements that the financial industry found onerous.

“I think Chairman Clayton made lemonade out of lemons,” Lynch said. While the SEC under Clayton focused on problems and scams affecting Main Street investors, Lynch says the agency under Biden will refocus on issues within financial institutions.

Tang says the SEC still has a few loose ends to tie up on regulatory policy, which Clayton could push through and complete before he leaves. Primary among them is a proposal to increase the threshold for filing Form 13F, which reports information and data about investment activities and holdings under the control of an institutional investment manager.

There was some pushback against that proposal, Tang said, and it’s unclear whether Clayton would want to push it forward only to have the next administration reverse it, he said.

Clayton, who mostly avoided controversy during his time at the SEC, drew criticism in June when he was nominated by President Donald Trump to take over as the U.S. Attorney for the Southern District of New York. That nomination never went anywhere in the Senate, which is required to confirm it.

“That whole situation really put him in a bind. The optics did not look good,” Lynch said of the nomination. “I think his comfort level at the SEC dropped substantially when that appointment was announced.”