Five Questions for SEC Nominee Jay Clayton

Let’s start with the obvious about Jay Clayton, the Trump Administration’s nominee to chair the Securities & Exchange Commission: barring some bombshell news, he’s going to be confirmed. The Senate Banking Committee will schedule a hearing for him soon, Democrats will posture, and then Republicans will push him through to run the SEC.

So far compliance officers don’t know much about what that might mean for them. Yes, we have that paper Clayton wrote years ago arguing that FCPA compliance needed reform—one of his few public statements about issues important to you. Beyond that, we know that Clayton has had a lucrative career as a deal-maker at Sullivan & Cromwell, and that he’s willing to work for an anti-regulation president like Donald Trump.

Below, then, is my wish list of questions for Clayton to answer about issues important to compliance officers. We could add many more; Clayton will have influence over an enormous range of subjects. But at the end of the day, Clayton’s answers to these five questions would tell compliance officers a lot about what to expect from him.

What would you like to see for reform of corporate disclosure?

Every SEC chairman says he or she wants to reform bloated corporate disclosure, and every SEC chairman barely makes a dent in the problem. Mary Jo White did more than most; she had the agency hold a forum in 2016 about disclosure reform, and SEC staff issued a concept release about reforming Regulation S-K. Then, like all good SEC chairs, White left office before she could push reform any further.

Clayton may have a more difficult tightrope to walk here. Yes, he’ll have a Republican’s natural inclination to cut required disclosure wherever possible—and at the same time, corporations are facing more risks, and investors want to know about them.

Would Clayton try to argue that some risks (liquidity, cybersecurity, climate change) aren’t worth the SEC’s attention? Or will he encourage a new approach to Regulation S-K disclosure that some how lets companies be more concise even as they discuss more issues? Or will he do nothing about disclosure reform at all?

If you endorse a disclosure-based FCPA compliance regime, how would you ensure companies don’t lapse into the bad habit of paper compliance programs?

In his 2011 paper complaining about over-zealous FCPA enforcement, Clayton praised another idea: adopting a “Regulation FCPA” that would specify what companies must disclose about their FCPA compliance programs. Any company that met those disclosures would be deemed to have an effective FCPA compliance program, and be eligible for safe-harbor protections when violations occurred.

Sounds great, except that a disclosure approach to FCPA compliance raises the specter of paper compliance programs—programs that look solid in an SEC filing, but nobody takes seriously with the company. That is not an attitude corporate compliance officers should want to see at your organization.

The solution to that risk is vigorous enforcement that keeps CEOs, boards, and compliance officers on their anti-corruption toes. So how would Clayton maintain the perception that FCPA compliance is a serious issue?

How would you handle cost-benefit analyses of SEC rules?

Compliance officers will hear a lot more about cost-benefit analyses in 2017. Republicans in Congress want to use them as a club to bludgeon any SEC regulation they don’t like. The House has already approved the SEC Regulatory Accountability Act, to thwart the agency’s rule-making ability by piling on cost-benefit analysis requirements. Michael Piwowar, acting chairman of the SEC until Clayton arrives, just reopened comment on the Conflict Minerals Rule on grounds that the cost of compliance isn’t worth the benefit.

ClaytonFirst, Clayton needs to tell the compliance community how much he agrees with Congress’ plans, because those plans could neuter the SEC’s ability to adopt new rules. As much as we all like to gripe about SEC regulation, the truth is that Corporate America does better with effective regulators that can act on what they see and address problems as they emerge—not weak regulators, hapless to respond to emerging conditions.

Second, institutional investors (you know, those funds that always get on your board’s case during proxy season) need to know how Clayton views regulatory costs and benefits overall. The financial crisis, for example, cost U.S. homeowners $9.1 trillion. Avoiding that debacle would have been a mighty nice benefit to the public, if regulators in the 2000s had imposed derivatives regulation on financial firms. Which would not have cost anywhere near $9.1 trillion.

So how does Clayton define regulatory costs and benefits? Given his history as a corporate lawyer, one presumes he defines the former broadly and the latter narrowly—but investors don’t necessarily agree.

What are your views on the SEC’s in-house administrative proceedings?

Administrative proceedings (“APs”) are the in-house courts that the SEC uses to adjudicate routine enforcement matters. Last year a federal appeals court in Washington ruled that the SEC’s hiring process for those administrative law judges is constitutional, and another in Denver ruled that it isn’t.

Split appellate rulings are a big problem for regulatory agencies trying to fulfill their enforcement mission; Clayton should say how he would like to see it solved. Already Republicans in Congress want to adopt legislation giving defendants the right to a court trial. The SEC could also change its hiring process to satisfy the Denver court’s criticisms. Perhaps Clayton has other ideas.

More broadly, corporate defense lawyers (read: people like Clayton) dislike administrative proceedings on principle because they tilt toward favoring the SEC. In 2015 the SEC amended some of its AP processes to give defendants more ability to mount a defense. In Clayton’s view, were those changes enough? Or would he want to see even more changes to this common tool of SEC enforcement?

What do you think of the Public Company Accounting Oversight Board?

The chairman of the SEC has considerable influence over the PCAOB. The PCAOB, in turn, has considerable influence over audit firms—which have considerable influence over the audit fees that drive your CFO nuts, and the annual audit that drives you nuts.

So what does Clayton think of the PCAOB’s work in recent years, and how might he want the PCAOB to operate in the future?

For example, one of Clayton’s first decisions will be to name a new chairman of the PCAOB. Jim Doty has done a respectable job leading the PCAOB since 2011, as the agency adopted more auditing standards and built up its enforcement division. But Doty has served only as interim chairman since 2015, and it’s unlikely that he’ll continue under a Republican administration.

Changes in PCAOB priorities, especially around internal control and Sarbanes-Oxley compliance, could have large implications for compliance programs trying to keep business processes and technology investments current. This issue is a bit removed from the sexier SEC issues that will confront Clayton, but watch it closely.

Those are the questions at the top of my mind as we ponder the SEC under Clayton. What are yours? Leave comments below or email me your thoughts privately at [email protected].


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  3. […] the Practising Law Institute. Yes, Piwowar is only acting chairman, until the Senate gets around to confirming Jay Clayton as the Trump Administration’s choice for permanent chair. But all Piwowar’s actions so far have been in political step with what Team Trump and […]

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