SEC nominee Clayton vows ‘zero tolerance’ for bad actors
March 28, 2017 by Kenneth Corbin
The nominee to chair the SEC is pledging to take a “zero-tolerance” stand against bad actors in the financial services sector, though at Jay Clayton’s confirmation hearing some senators questioned whether he will make good on those assurances given his deep ties with Wall Street.
“There is zero room for bad actors in our capital markets,” Clayton told members of the Senate Banking Committee on Thursday. “I am 100% committed to rooting out any fraud and shady practices in our financial systems. I recognize that bad actors undermine the hard-earned confidence that is essential to the efficient operation of our capital markets.”
Some of the toughest questioning came from Sen. Elizabeth Warren (D-Mass.), who pressed Clayton on how conflicts of interest might prevent him from executing a rigorous enforcement program.
“A big part of the job of the chairman of the SEC is enforcement — a cop on the beat on Wall Street — and you’ve said in your testimony today that you intend to enforce the law strictly, and I very much agree with that goal, but I’m concerned that you won’t be able to achieve it,” Warren said.
She cited President Trump’s recent ethics order, which would require Clayton to recuse himself from enforcement actions involving any of the clients he represented as a Wall Street attorney for the first two years of his chairmanship, a group that includes major financial players such as Goldman Sachs, Deutsche Bank and UBS.
POSSIBLE DEADLOCK
Warren argued that with the chairman recused, many enforcement cases could end up deadlocked with the voting commissioners split along partisan lines. She further warned that Clayton would similarly have to recuse himself from any cases where a party enlisted his law firm, Sullivan & Cromwell.
“[I]f the chair can’t vote and the remaining SEC commissioners split along party lines, then major enforcement actions don’t go forward and serious wrongdoing may go unpunished,” Warren said. “So it’s important to think about how often the SEC could be caught in such a deadlock.”
Clayton, who identified himself as an independent rather than a Republican, pushed back on that scenario, saying that he would work to overcome partisanship at the commission and build consensus among commissioners of both parties.
Ahead of Thursday’s hearing, many observers, Warren included, had been skeptical about how Clayton would approach enforcement at the commission, given that he has spent his career defending financial firms in regulatory proceedings, navigating complex corporate transactions and other work on behalf of private-sector firms.
A SHARP CONTRAST
By résumé, Clayton is a sharp contrast from Mary Jo White, who stepped down as chair of the commission in January.
When White was named to head the commission in 2013, she brought with her a long track record as a federal prosecutor with extensive experience representing the government in complex financial cases. White also professed a “broken windows” philosophy of enforcement, which held that no infraction is too small to garner the SEC’s attention.
Clayton insisted that he was not simply paying lip service to the notion of the SEC as a “cop on the beat” at his confirmation hearing.
“I have zero tolerance for bad actors,” he said. “I’m not only saying that here. I will say it to the enforcement staff at the SEC. I will say it to my fellow commissioners.”
Apart from stressing the importance of a strong enforcement program, Clayton gave no indication of how he would handle oversight of investment advisers, who have been the subject of increasing attention at the commission in recent years. Members of the Banking Committee did not ask Clayton about whether he would pursue a universal fiduciary standard for brokers and advisers, or how he would approach the challenge of expanding examinations of RIA firms.
If confirmed, Clayton will join a SEC where senior staffers have been ramping up efforts to examine and, in some cases, bring enforcement actions against RIAs.
The Dodd-Frank Act addressed both the issue of a uniform fiduciary standard and the shortfall in adviser exams, authorizing the SEC to advance a rulemaking on the former and requiring it to undertake studies of both.
SHIFTING PRIORITIES
To address the exam issue, the SEC has been shifting resources internally, hiring additional staff and fine tuning its industry surveillance in an attempt to send examiners to the firms that pose the greatest risk.
White had staff developing a proposal for a uniform standard, but many observers expect that to be a dead letter at Clayton’s SEC.
Sen. Brian Schatz (D-Hawaii) asked Clayton about how he would handle the rulemakings that are still lingering from Dodd-Frank. Clayton avoided making a commitment to advance any specific initiative if confirmed but offered Schatz a general assurance.
“Rulemakings should go forward with respect to rules required under a statute,” he said.
However, he obliquely acknowledged that the Dodd-Frank law is an unpopular statute in an administration that has made deregulation a centerpiece of its early work.
“I have no specific plans for attacking a particular provision of Dodd-Frank,” he said. “As a general matter, the question of whether Dodd-Frank has been effective is a question that’s on the minds of people in the administration.”
