President Trump has nominated Wall Street lawyer Walter “Jay” Clayton to be the next chairman of the SEC. While Clayton has no experience as a prosecutor or a regulator, he does have a wealth of experience with corporate mergers and acquisitions and a deep understanding of the capital markets. As of this writing, Clayton has yet to face Senate hearings, during which he is sure to be asked tough questions concerning his ties to Goldman Sachs and other large Wall Street firms. Of particular interest, of course, will be his official position regarding regulation and enforcement. Even at this early date, however, it seems clear that Clayton was tapped by President Trump because he shares the President’s views that regulations stifle rather than promote investment in and by U.S. businesses. In a September 2015 video released by Sullivan & Cromwell, of which Clayton is a partner, he expressed his disfavor of government attempts to impose cyber-security mandates on individual companies. Clayton compared such mandates to the Dodd-Frank and Sarbanes-Oxley Acts, both of which he characterized as faulty and lacking focus, particularly as they affect the banking industry (http://bit.ly/2jmx5XP).
One of President Trump’s principal campaign promises was that he will lighten the regulatory burden on U.S. companies, which the Republican Congress has also sought to accomplish in recent years. Thus, it is quite likely that Clayton will be an enthusiastic supporter of efforts to roll back specific provisions of Dodd-Frank. And, because the SEC now stands at only two commissioners, President Trump will also have the opportunity to nominate two additional commissioners (to bring the commission to its full complement of five), another one of whom, a Republican, will no doubt also share the President’s anti-regulation stance.
Possible Withdrawal of Certain Dodd-Frank Provisions
Clearly an area of initial emphasis will be Dodd-Frank, at least to the extent that SEC implementation rules have not yet been finalized or are not yet effective. In one of his first moves in that regard, President Trump—on the day of his inauguration, as past administrations have done—froze all new or pending regulations (i.e., those that have not yet been sent to the Federal Register for publication). In addition, regulations that have been published in the Federal Register but that have not yet reached their compliance dates have been delayed for 60 days to allow time for further review. Although it is not possible to predict with certainty which pending provisions of Dodd-Frank (i.e., those for which rules have not been finalized) will be withdrawn, the following are proposed SEC rules that would implement various provisions of Dodd-Frank and that could be applicable to many U.S. public companies remain outstanding:
- Re-proposed rules prohibiting incentive-based compensation practices at covered financial institutions that the SEC, jointly with other agencies, determines 1) encourage inappropriate risk-taking by providing excessive compensation or 2) could lead to material financial loss.
- Proposed rules requiring disclosure of the relationship between executive compensation actually paid by the company and the company’s financial performance.
- Proposed rules requiring issuers to disclose in proxy materials whether any employee or member of the board of directors is permitted to purchase financial instruments designed to hedge or offset any decrease in the market value of equity securities either 1) granted as compensation to employees or directors by the issuer or 2) held directly or indirectly by employees or directors.
- Proposed rules directing the national securities exchanges to prohibit the listing of any security of an issuer that does not comply with 1) disclosure of the issuer’s policy on incentive-based compensation and 2) recovery of such compensation, in excess of what would have been received under a restatement of previously issued financial statements to correct a material error.
Also potentially subject to withdrawal are final SEC Dodd-Frank implementation rules that require disclosure of the ratio of the median of the annual total compensation of all the company’s employees to the annual total compensation of the CEO (i.e., the so-called pay ratio). Although the rules are final, compliance is initially required in a company’s first full fiscal year beginning on or after January 1, 2017, and thus the information will not have to be disclosed until Forms 10-K and proxy statements are filed in 2018.
A number of other controversial rules remain in the proposal stage or have not advanced at all, including those relating to mutual fund stress tests, short sale reforms, and increased transparency of information available to brokers and investors about the borrowing of securities. It seems likely that such rules will never see the light of day.
Partial Repeal of Final Dodd-Frank Rules
A full repeal of Dodd-Frank would require Congressional action that could be costly and time-consuming both for the SEC and Congress. It is thus more likely that President Trump and his team will focus on a partial repeal, which would include canceling, among other provisions, the Volcker Rule, which restricts banks from making speculative investments, and the authority of the Financial Stability Oversight Council to designate non-banks as “systemically important.” Other final Dodd-Frank final rules the Trump administration is likely to repeal include conflict minerals reporting, mine safety disclosure, disclosure of payments by resource extraction issuers, and disclosure of an issuer’s leadership structure (i.e., whether a company has combined the CEO and chairman position and the reasons for doing so).
In a related matter, industry observers believe that President Trump will seek to remove some of what are considered to be the more onerous restrictions for use of the crowdfunding exemption (which was mandated by the JOBS Act) in an effort to enable more smaller companies to take advantage of it.
Rulemaking versus Enforcement
Outgoing SEC Chair Mary Jo White inherited a mountain of legislation under Dodd-Frank, compounded by subsequent passage of the JOBS Act, for all of which rules had to be written. During her tenure, the SEC adopted or proposed the overwhelming majority of Dodd-Frank rules and adopted all rules required by the JOBS Act. In addition, during her time as chair, the SEC issued 30 reports or studies that were mandated by Congress. While all this was largely a staff effort (which had actually begun prior to her tenure), White has been lauded for having advanced the process; nevertheless, she has also been criticized for her emphasis on enforcement at the expense of rulemaking, other than that mandated by the Dodd-Frank and JOBS Acts. Others have criticized her for undertaking small enforcement issues to beef up the SEC’s statistics. Specifically, they question the wisdom of her “broken window” strategy of pursuing even the smallest of violations on the notion that doing so will prevent “bad actors” from becoming worse ones. Critics claim that there is no evidence that the policy has been successful (see Brian Miller, “The Legacy of Mary Jo White,” The Hill, Dec. 28, 2016, http://bit.ly/2jmqs7O).
What to Expect from the SEC under Its New Chairman
Given President Trump’s penchant for less rather than more regulation (and, indeed, for deregulation) and Jay Clayton’s background in corporate finance rather than as a prosecutor (with a prosecutor’s mindset), it seems probable that the SEC, under Clayton’s leadership, will echo President Trump’s position and focus much more of its attention on capital formation and much less on enforcement. Specifically, this could mean a greater emphasis on further easing the path for smaller companies to raise capital that promotes growth and jobs.
Keep in mind, though, that if Dodd-Frank is repealed in its entirety or many of its provisions are withdrawn or significantly revised, a good deal of the SEC’s time will be spent unwinding existing rules. While SEC enforcement is expected to continue, though perhaps at a more moderate pace, Clayton’s attitude about one current enforcement priority—the Foreign Corrupt Practices Act—may provide an indication of the SEC’s future direction. Clayton has written that aggressive enforcement of the FCPA has resulted in foreign companies becoming hesitant of deals that would bring them under the act’s jurisdiction, including a listing on a U.S. exchange through a public offering or acquiring a U.S. company in a stock-for-stock exchange (“The FCPA and its Impact on International Business Transactions,” New York Bar Association, December 2011, http://bit.ly/2knLJ2M).
If Clayton is confirmed as the SEC chairman, which many observers expect will be the case, it appears that, in the short-and intermediate-term, the nation can reasonably expect greater emphasis on rulemaking that will stimulate capital formation among all companies, but especially smaller ones, and a lighter hand on enforcement matters.