President-elect Donald Trump has revealed his choice to replace Mary Jo White, outgoing chairman of the Securities and Exchange Commission. The nomination, subject to Senate confirmation, is Jay Clayton, a partner with Sullivan & Cromwell and a former adjunct professor at the University of Pennsylvania School of Law.
What we know about the nomination is that he is a respected expert in mergers, acquisitions, and capital formation. Also, he views the corporate disclosure regime as a brilliantly constructed system for ensuring transparency and empowering investors. More controversial: his suggestion that the Foreign Corrupt Practices Act has led to an overly aggressive, unchecked enforcement stance by the SEC and Department of Justice that may, ultimately, be counterproductive to the goal of decreasing global corruption.
“Robust accountability will be a hallmark of his tenure atop the SEC, and the financial security of the American people will be his top priority,” a statement from the new administration’s transition team says.
According to Clayton’s law firm bio: “[His] practice involves public and private mergers and acquisitions transactions, capital markets offerings, regulatory and enforcement proceedings, and other matters where multidisciplinary advice and experience is valued. [He] also advises several high-net-worth families regarding their public and private investments.” Cyber-security was also among his practice specialties.
His clients have included Castleton Commodities, the Atlanta Hawks, Ally Financial, British Airways, Barclays Capital, Goldman Sachs, Bear Stearns (in connection with its post-financial crisis sale to JPMorgan Chase), and Alibaba (with its $25 billion initial public offering).
Reactions to the nomination, as expected amid the current political climate, are mixed.
“Mr. Clayton is a highly regarded, respected, and accomplished securities lawyer, with a deep understanding of the complexities of modern securities transactions and regulations,” Karen Barr, president and CEO of the Investment Adviser Association, said in a statement.
Sen. Sherrod Brown (D-Ohio), ranking member of the Senate Banking, Housing, and Urban Affairs Committee, struck a far less enthusiastic tone. “It's hard to see how an attorney who's spent his career helping Wall Street beat the rap will keep President-elect Trump's promise to stop big banks and hedge funds from 'getting away with murder,” he said. “I look forward to hearing how Mr. Clayton will protect retirees and savers from being exploited, demand real accountability from the financial institutions the SEC oversees, and work to prevent another financial crisis.”
Dennis Kelleher, the president and CEO of Better Markets, expressed similar consternation. “While Mr. Clayton may be an excellent lawyer representing Goldman Sachs and Wall Street’s too-big-to-fail banks, America’s families need to know that he will represent them as zealously and as effectively,” he said. “He must lead without fear or favor and he must not bring the failed mindset that ‘what’s good for Wall Street is good for America,’ which the 2008 financial crash proved catastrophically wrong.”
“The SEC is supposed to be the cop on the Wall Street beat,” he added. “When it fails to do its job, the American people pay the price in lost homes, jobs, savings and so much more. We saw that when the SEC deregulated Wall Street before the 2008 financial crash and failed to enforce the law afterwards. These issues need to be the focus of the Senate confirmation process.”
John Berlau, a senior fellow at the Competitive Enterprise Institute, has some advice for Clayton. “[He] and anyone else serving on the SEC must advance the interests of both Main Street investors and entrepreneurs trying to raise capital,” he says. “Congress has explicitly stated that both investor protection and facilitating capital formation form the dual mission of the SEC. The best way to achieve both objectives is to cut the red tape from both the Barack Obama and George W. Bush administrations that led to an unprecedented decline in IPOs and public company listings.”
Clayton and his fellow commissioners should also ease “the Sarbanes-Oxley rules requiring audits of broadly defined ‘internal controls’ and narrow Dodd-Frank rules requiring the documenting of items that have no relation to the accuracy of financial statements, such as a company’s use of ‘conflict minerals,’ ” Berlau says. “Such regulations are not only crushing the economy, but they are distracting the SEC from its main duty to protect investors from fraud.”
According to sources, the mood among SEC staffers is one of relief and cautious optimism. Unlike other nominations—Rick Perry, the former governor of Texas to the Department of Energy, Andrew Puzder, CEO of CKE Restaurants to the Department of Labor, and Betsy DeVos, a school choice/charter school advocate to the Department of Education—the SEC nomination is one that doesn’t appear to have a blatantly confrontational view of the very agency he will manage. Perry, for example, has repeatedly called for the Department of Energy to be abolished.
“Mr. Clayton is a highly regarded, respected, and accomplished securities lawyer, with a deep understanding of the complexities of modern securities transactions and regulations.”
Karen Barr, president and CEO, Investment Adviser Association
Despite politicos marching to their battle lines, Clayton’s personal views on many regulatory matters are not easily assessed. He rarely shows up as a quoted source in a search of news articles—a file photo was nowhere to be found in the depository of wire service images on the day of his nomination. Wikipedia? His entry was created on the same day the nomination was announced, offering only a generic, three-sentence bio. The few commentaries that bear his name often share a byline with other Sullivan & Cromwell attorneys, making it difficult to discern his specific, personal contributions.
Clayton’s lack of spotlight relates to his work as an M&A dealmaker, much of which was likely of a confidential, behind-the-scenes nature. Nevertheless, a review of what he has written with colleagues and other experts—often published in Knowledge@Wharton, the online business analysis journal of the Wharton School of the University of Pennsylvania—provides insight.
A 2013 article, “USA 10-K: Why America Needs an Annual Report,” proposes that the United States, as a country, should adopt a disclosure regime similar to what public companies face.
“Reports, including the Annual Report or 10-K, must be concise, in plain language and embody personal accountability,” Clayton and his fellow authors wrote. America’s 10-K “should borrow liberally from the template of reports issued by public companies large and small.” It should include information that “is essential to the country’s stakeholders,” including recent performance and prospects, a summary of financial condition, management discussion and analysis, future objectives, anticipated risks, related party-transactions, internal controls (including weaknesses and deficiencies), pension and off-balance sheet liabilities, litigation exposures, and the compensation, benefits and insider purchases and sales of senior officials.
Treat cyber-security like terrorism risk
Cyber-security appears frequently as a topic of interest for Clayton. “Recent hacking incidents highlight the need for public companies to review their director communication practices to ensure that they are current and that they appropriately balance security and efficiency,” he and his law firm colleagues wrote in one article.
Amid criticisms of Trump’s Twitter-based braggadocio, Hillary Clinton’s use of a private server for government business as Secretary of State, and revelations that Russian operatives may have breached Democratic National Committee computers in an attempt to influence the presidential election, one portion of the piece is particularly prescient.
“Recently, former Secretary of State Colin Powell and campaign strategist John Podesta became the victims of intrusions into their web-based email accounts through a deceptive e-mail that requested login credentials,” the article says. “The intrusions revealed politically and commercially sensitive information.” Among the takeaways for directors:
Placing director communications under the same information security framework that applies to employee e-mails.
Enhanced security measures such as multi-factor authentication.
Directors could receive regular IT training for safe practices in the use of a company’s communication systems.
In a jointly authored opinion piece with Frances Townsend—executive vice president of MacAndrews & Forbes, a diversified holding company, and a former homeland security adviser to President George W. Bush—Clayton suggests creating a task force on cyber-security that is comparable to one that followed the Sept. 11, 2001, attack on New York City.
The man behind the nomination
The following is from Jay Clayton’s biography on the Sullivan and Cromwell website.
Jay Clayton’s practice involves public and private mergers and acquisitions transactions, capital markets offerings, regulatory and enforcement proceedings, and other matters where multidisciplinary advice and experience is valued. Mr. Clayton also advises several high-net-worth families regarding their public and private investments.
Castleton Commodities in its acquisition of Morgan Stanley's global oil merchants business; and a consortium of investors in connection with the acquisition of Castleton from Louis Dreyfus and Highbridge
An ownership group for the Atlanta Hawks NBA franchise in connection with the purchase and later sale of the franchise
Ally Financial Inc. in the $4.2 billion sale of its operations in Europe and Latin America to General Motors (GM), as well as in the $4.1 billion sale of its Canadian auto finance business to the Royal Bank of Canada (RBC) and in the sale of its Mexican insurance business (ABA Seguros) to ACE Group
TeliaSonera in connection with various transactions involving Turkcell and Megafon, including arrangements with Altimo and various other acquisitions and dispositions of telecom-related assets
British Airways in its merger with Iberia and the formation of International Airlines Group and various other transactions
Barclays Capital in connection with its purchase of assets of Lehman Brothers out of bankruptcy
Goldman Sachs in connection with the investment of $5 billion by Berkshire Hathaway and the U.S. Treasury’s TARP Investment
Bear Stearns in connection with the sale of Bear Stearns to JPMorgan Chase and related matters
Goldman Sachs and affiliated funds in connection with various acquisitions and investments in companies involved in financial services, banking, telecom and other industries
Capital Maritime in connection with the combination of Crude Carriers Corporation and Capital Product Partners L.P. and the formation of a container carrier joint venture with a private equity firm
Michael Krasny (founder) in the $7.2 billion sale of CDW
Altor Equity Partners in connection with various acquisitions and financing transactions
Capital Markets/Leveraged Finance
Initial public offering of $25 billion by Alibaba Group Holding Limited
Initial public offering of $190 million by Moelis & Company
Initial public offering of $2.375 billion by Ally Financial and private placements of $3 billion and $1.3 billion of common stock in Ally Financial
Initial public offering of $230 million by Blackhawk Network Holdings
Initial public offering and multiple public and private offerings of equity, preferred and debt securities of Capital Product Partners L.P.
Initial public offering of $380 million by Oaktree Capital Group
Initial public offering of $150 million by Higher One
Initial public offering of $260 million by Crude Carriers Corporation
Initial public offering of $1.2 billion by Och-Ziff and follow-on offerings and refinancing
$1 billion 144A equity offering by Oaktree Capital (the first issuer to use the GSTrUE/Portal Alliance trading procedures)
Public offering of $6.0 billion of common stock and mandatory convertible preferred stock by Lehman Brothers
Public and private offerings of $1.5 billion in equity and equity-linked securities of AMBAC
Corporate Governance, Regulatory and Contested Matters
A large financial institution in connection with the settlement of mortgage related securities claims with the FHFA
A large financial institution in connection with the settlement of mortgage related claims with the DOJ, HUD and FHFA
A large financial institution in connection with a regulatory review of transactions in government securities
A hedge fund in connection with a regulatory review of various credit market transactions
A group of financial institutions in connection with their challenge to MBIA’s restructuring
Ally Financial in connection with the $25 billion mortgage origination and servicing settlement with the DOJ, HUD and state attorneys general
Eni and subsidiaries in connection with an FCPA investigation by the SEC and DOJ
A financial institution in connection with a civil investigation of its ECN currency facility by the Federal Reserve Bank of New York
The group of 100 general counsels of leading UK companies in connection with establishing audit protocols with the PCAOB
A financial institution in connection with various issues arising from its employees’ membership on the boards of public and private companies
Chambers Global: The World’s Leading Lawyers for Business (2008-2015)
Chambers USA: America’s Leading Lawyers for Business (2006-2015)
The Legal 500 United States (2009-2015)
New York Super Lawyers (2008-2015)
The Lawdragon 500: Leading Lawyers in America (2006-2010)
The Best Lawyers in America (2014-2017)
Source: Sullivan & Cromwell
“With recognition that any comparison to 9-11 must be undertaken cautiously and respectfully, we recently re-read the 9-11 Commission report,” the article says. “We did so because so many security experts believe that the world is at a similar inflection point with respect to our collective state of preparedness for digital exposures.”
A 9-11-type cyber-threat commission should, they wrote:
Convene the best minds and intents from all sectors and political parties—divorced from self-interest and outside influences—with sufficient power and authority to move quickly and effectively.
Recruit beyond national borders, reaching out to leading authorities from around the world.
Produce a report on the state of the digital union, including an assessment of the risks and a plan for addressing them in plain language that all can understand.
Follow the lead of the 9-11 Commission and communications experts in offering a narrative—not a typical government report—that all will want to read and follow.
Is the FCPA a bad thing?
Most controversial, perhaps, are Clayton’s critical views on the FCPA, as detailed in a jointly authored 2011 paper.
“The FCPA and its Impact on International Business Transactions: Should Anything Be Done to Minimize the Consequences of the U.S.’s Unique Position on Combating Offshore Corruption?” was written for the New York City Bar Association’s committee on international business transactions.
The article cites “the U.S. enforcement agencies’ expansive reading of the scope of the FCPA, both in terms of conduct and jurisdiction,” the “limited checks on FCPA enforcement, whether judicial or otherwise,” and “the massive size of the potential direct costs (fines, sanctions and defense, and compliance costs) and indirect costs (reputational effects and debarment).”
The expansive reading of the FCPA might not present an issue if enforcement activities were “appropriately tailored through prosecutorial discretion, judicial oversight or other means,” the article says. Based on the public record, however, “the exercise of discretion appears to have been very limited.”
Another criticism of the current regime is that “it encourages substantial “over-compliance” by forcing corporations to adopt oversight and compliance standards that border on the extreme.” The authors add, “companies that invest substantial resources in compliance receive no assurance that, in the event of an alleged violation, even one that could not reasonably have been detected or prevented, those efforts will be meaningfully rewarded.”
Clayton, at least for purposes of the article, courts controversy by suggesting, “there is a realistic possibility that the FCPA may be exacerbating the problem of corruption.”
“It is logical that restricting U.S.-regulated firms from entering jurisdictions in which making improper payments to government officials is or may become more prevalent allows other companies—some of which operate under business principles and government regulations less transparent and public-regarding than the principles and regulations under which U.S. firms operate—to dominate those jurisdictions,” the article says.
Referencing research by a Fulbright Scholar based in India to study the FCPA, it adds: “Because FCPA enforcement lacks transparency and predictability, operating in a seeming due process and checks-and-balances vacuum, we too often scare companies away from certain transactions, or sectors, or even from certain countries. In doing so, we leave developing nations to be ravaged by companies that are not similarly restrained by human rights and anti-corruption laws.” Looking at the issue from the perspective of global compliance “it is difficult to identify evidence supporting that U.S. FCPA enforcement efforts have resulted in a significant reduction in foreign corruption.”
The authors emphasize that they are not advocating a “lighter touch” on bribery. More accurately, their position is that: the competitive nature of the global economy warrants the reevaluation of the U.S. strategy in fighting foreign corruption; the current anti-bribery regime is causing lasting harm to the competitiveness of U.S.-regulated companies and the U.S. capital markets; and “the continued unilateral and zealous enforcement of the FCPA by the United States may not be the most effective means to combat corruption globally” and, in some circumstances, “it may exacerbate the problem of overseas corruption.”
Filling the ranks
Further insight into the future of the SEC under Clayton’s watch will come with other appointments. The five-member Commission currently has two seats unfilled. Influential positions, including the director of the Division of Corporation Finance and director of the enforcement division, must also be filled.
“SEC Enforcement priorities are largely driven by the Director of Enforcement, which is likely to be one of the first staff selections made once the new chair is confirmed,” says Ian Roffman, a partner with law firm Nutter McClennen & Fish, formerly senior trial counsel in the Commission’s Boston office. “We may see a significant change in the SEC’s culture on the regulatory side, but there’s no reason to expect SEC enforcement will be any less aggressive than it has been.”
“One open question is whether the new chair will toss out the current ‘broken-windows’ approach to SEC enforcement—to over-prosecute small violations based on the belief that doing so deters or prevents larger ones,” he added.
Expect capital formation, especially for smaller companies, to be a priority, says Mike Hermsen, a partner with law firm Mayer Brown and former assistant director of the Division of Corporation Finance.
“That’s where he does have some experience and I would suspect he knows what works and what doesn’t in the process,” he says. “He has worked with the SEC for some of his deals and would know what’s good, what’s bad, and what could be changed to help companies.”
Don’t expect much disruption during the transition if Clayton is confirmed. “From a staff perspective, they are going to want to know what the priorities of the new chair are,” Hermsen says. “The day-to-day stuff will continue. That’s not going to change. Once he gets in, up to speed, and more of the team is in place, then some of his bigger priorities will develop and people will have a better understanding of where the commission is going to go.”
An important development for the SEC may emerge from the new Congress if Republicans stick to pledges to purge the books of many regulations related to the Dodd-Frank Act.
“Obviously some people on the Hill have been saying to just repeal the whole thing, but a lot of people have invested lot of time and money getting everything up to speed,” Hermsen says. Even if there are changes, or a revocation, current business practices may not change.
The SEC’s conflict minerals rule illustrates the scenario. “That’s obviously a big thing that certain people want to try to get repealed, but all over the world other countries are adopting conflict minerals requirements,” he says. “If it gets repealed, there may still be pressure on U.S. companies that don’t otherwise subject themselves to some of these foreign requirements. They may end up having to do it just because it is the expectation of the third parties they deal with.”
Jay Knight, a member of law firm Bass Berry & Sims and co-editor of the firm’s Securities Law Exchange blog, is encouraged by the nomination. “This is somebody who is very familiar with the SEC’s mission,” he says, adding that Clayton’s skill set fits well with the Commission’s capital formation and investor protection efforts.
The nominee’s experience in M&A deals is of particular interest to Knight, who served five years in the SEC's Division of Corporation Finance. Counsel in these deals often serves as a “quarterback” and is counted on to spot potential issues.
“That same skillset could be applied as chairman by being able to understand marketplace issues,” he says of Clayton’s transactional-based practice.
Knight doesn’t expect that one of the hallmarks of Mary Jo White’s tenure, an ongoing review of disclosure effectiveness, will be knocked off track.