SEC Nominee on FCPA, Compliance Costs, More

The Senate Banking Committee held its confirmation hearing today for Jay Clayton, the Trump Administration’s nominee to chair the Securities and Exchange Commission. We have a few nuggets of detail worth an ethics & compliance officer’s attention, although the hearing mostly unfolded along predictable lines.

On one side were Clayton and Republican members of the committee, who talked at length about how to loosen regulations so more companies can go public at an earlier stage of life. On the other were Democrats, who pushed hard about Clayton’s potential conflicts of interest (which are many) and how vigorously he would enforce SEC rules and protect retail investors.

And on many specific issues, Clayton just dodged the questions—sometimes skillfully, sometimes less so; but a dodge is still a dodge, leaving ethics and compliance officers without much intel.

The largest question—the one likely to dominate political grandstanding in Congress as lawmakers squabble over the SEC—is how much time and energy Clayton will devote to repealing, revising, or issuing new rules; versus time and energy spent on enforcement. Enforcement is the single largest part of SEC operations; it’s where most corporate compliance officers, who generally work at companies that have already gone public, encounter the agency.

Jay Clayton

Clayton didn’t answer that question. His most comprehensive answers, however, were all about how SEC rules should be modified so more companies can go public. Once Democrats got rolling with questions about enforcement issues or possible reform to Dodd-Frank, the dodging and evading came out in full force.

The plain truth is that barring some unforeseen disaster, the Senate will confirm Clayton as SEC chair soon. Compliance professionals wondering what the future may bring should start looking ahead, to whomever Clayton might name to run the Divisions of Enforcement and Corporation Finance, and the Office of the Chief Accountant. Those three people will have much more direct consequence on your daily lives than Clayton.

Still, Clayton did drop a few interesting statements and clues in his testimony, so let’s get to them.

Points to Ponder

He didn’t discard the FCPA. The compliance commentariat has paid a considerable amount of attention to a paper Clayton co-authored in 2011, where he panned enforcement of the Foreign Corrupt Practices Act. He said overzealous enforcement discouraged companies from expanding into emerging markets or acquiring merger targets with weak anti-bribery programs; and put the United States at a disadvantage relative to other countries.

Clayton didn’t say that today. Answering a question from Sen. Sherrod Brown, the committee’s ranking Democrat, Clayton said that if he had a client considering business in countries with high corruption risk, “You need to tell the client to think long and hard whether he wants that potential exposure” to the FCPA and oversight from other OECD-member countries.

In a roundabout way, then, Clayton was admitting that anti-bribery enforcement has increased around the world since the time of his 2011 paper. What had once been a playing field tilted against the United States is now much more level.

At another point, Clayton said he agreed with disgorgement of ill-gotten profits, if those profits clearly came from corporate malfeasance. That’s in the neighborhood as what acting SEC chairman Michael Piwowar said recently: that sometimes corporate penalties are warranted in FCPA cases. Hmmm.

He talked about cybersecurity risk and disclosure. On numerous occasions, Clayton talked about the burden of SEC disclosure rules, and how they’re a needless cost if the disclosure is immaterial or irrelevant to investors. Cybersecurity risk was the only issue where he did not toe that standard Republican line.

ClaytonRather, he said, “I question whether that disclosure is where it should be,” even if the investing public doesn’t understand the importance of this issue. Exactly what that disclosure should be, Clayton didn’t elaborate. But it was the only issue where he said more disclosure is important.

Which brings us to…

He didn’t talk about much else. Time and again, Clayton punted on specific issues that have consumed the SEC and the investor community so much. No examples of what reforms he might want to see for the Dodd-Frank Act. No discussion of the Sarbanes-Oxley Act and exempting more companies from the audit of internal control over financial reporting. He had no comment on the CEO Pay Ratio Rule, nor on Piwowar’s recent move to curb the subpoena power of SEC enforcement lawyers.

On disclosure of climate change risk, Clayton only said, “Public companies should be very mindful of [SEC] guidance when they’re crafting their disclosure.” That’s another punt; the SEC published vague climate change guidance in 2010 and has said hardly a peep on the subject since.

Clayton also had little to say about strict corporate liability and the standard of mens rea for senior executives. Could that standard be changed, some senators asked, to hold more executives accountable for misconduct simply because they were reckless about oversight? “I’m not sure about that,” said Clayton, despite a long and lucrative career of advising senior executives on issues like that.

He avoided questions of how he would run the agency. Committee Democrats pushed Clayton several times on his potential conflicts of interest at the SEC—and given his career at the law firm Sullivan & Cromwell, counseling all manner of Wall Street firms, those conflicts will be many.

How often might Clayton recuse himself? What will be the standard for recusal? Will Clayton disclose cases where has stepped aside? Will he have so many conflicts that SEC enforcement or rulemaking might suffer, with the other commissioners split evenly along partisan lines?

Those are all fair questions. Clayton didn’t answer them, except to give pat answers (“I will show no favoritism to anyone”) that he would recuse himself where necessary. That’s good, and nobody seriously expects Clayton has a secret agenda where he won’t recuse himself. But the man has a lot of conflicts. A visible, easily understood policy to navigate those conflicts would help to assuage his skeptics. He didn’t articulate one today.

Likewise, Clayton didn’t say much about what a proper budget for the SEC should be. He lurched through questions about enforcement policy. He didn’t elaborate too much on the cost-benefit analyses of all those SEC rules he’ll inevitably want to revisit.

To end on one possibly bright note: Clayton did say he is not a Republican, and he does not want to force through a Republican agenda along partisan lines. We saw lots of partisan splits under his predecessors in the Obama Administration, and that did contribute to the acrimony so many Republicans have against the agency today.

Clayton said he wants to get more consensus, and he has experience with that as a dealmaker at Sullivan & Cromwell: “People don’t do transactions unless they agree to do transactions.”

Nice sentiment. Is it true? We don’t know, and most confirmation hearings involve lots of theatrics and scripted lines. Compliance officers will discover the truth soon enough, and we should wish Clayton well in the meantime.



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