Veteran corporate lawyer Jay Clayton was sworn in as chairman of the U.S. Securities and Exchange Commission earlier this month after his nomination was approved by the Senate in a 61-37 vote, where several Democrats voted alongside Republican lawmakers to support his confirmation (http://dtn.fm/Bsx5n).
Widely expected to enact the current administration’s views on easing regulatory burdens and restricting some of the SEC’s regulatory powers in order to allow businesses more freedom, Clayton will have to work hard to disprove suspicions of being merely a Wall Street tool, given his close ties to various major corporations he represented over the years. This was, in fact, one of the main issues debated during his hearings in the Senate Banking Committee before the vote, with several Democrats on the panel voicing concern that his ties to Wall Street will create too many conflicts and lead to weaker oversight. “Over 20 years at a Wall Street law firm makes you think a certain way. And that way usually doesn’t involve focusing on families saving for retirement,” said Sherrod Brown, the Banking Committee’s senior Democrat, quoted by the Financial Times.
As a partner at Sullivan & Cromwell, a leading law firm representing investment firms and large banks, Clayton has worked with several Wall Street giants over the years, including Goldman Sachs (NYSE: GS-PC), Deutsche Bank (NYSE: DB), Volkswagen (OTC: VLKAF), Alibaba Group Holding Company (NYSE: BABA), Valeant Pharmaceuticals International (NYSE: VRX) and more. His wife also worked at Goldman Sachs and was expected to step down after Clayton won the nomination.
According to SEC regulations, during the next couple of years Clayton will have to recuse himself from enforcement actions that involve former clients of his or any companies represented by his law firm. Critics contend that this situation may leave the remaining four commissioners of the SEC deadlocked, making it harder to decide on enforcement actions. However, according to the New York Times (http://dtn.fm/Tp8ZY), the recusal is unlikely to have a major effect on the SEC’s enforcement proceedings, since most of the matters that come before the commissioners are not at all controversial or divisive. Clayton’s predecessor, Mary Jo White, faced the exact same problem when she was sworn in, given her former activity as a corporate lawyer that included working with organizations such as JPMorgan Chase and UBS.
The main question, NY Times notes, is what Clayton’s approach to corporate penalties and enforcement will be and how aggressively the SEC will be allowed to pursue cases involving major Wall Street institutions under his rule. Clayton comes into the job with the promise that he will have zero tolerance for “bad actors in our capital markets,” but it should be noted that he is also in favor of lighter regulations and reducing corporate penalties on account of the strain these penalties put on shareholders. The same view is shared by many Republicans and is at the forefront of the party’s Financial Choice Act proposal in the House of Representatives, which aims at overturning a significant part of current financial legislation, including by limiting some of the SEC’s regulatory powers, with the purpose of promoting economic growth by granting more financial freedom to small businesses.
Instead of massive corporate penalties, Clayton believes greater deterrence would be possible by pursuing individuals involved in securities law violations. Although this does sound like a more effective policy in theory, it is unlikely to produce significant results because individuals are more likely to fight such charges and it would also be more difficult to assess responsibility and prove guilt in cases of corporate wrongdoing. Additionally, such an approach dubbed with a reduction in corporate penalties risks sending out the wrong message: that the SEC is all bark and no bite when it comes to taking action against major corporations and Wall Street over potential violations of securities law.
