SEC must stay on focus

With his nomination of Jay Clayton as chairman of the Securities and Exchange Commission, President-elect Donald Trump must ensure he is living up to his populist-inspired ideals in naming a new leader.

The SEC's mission is to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. The Senate, which must confirm Mr. Clayton, a New York-based partner with the Sullivan and Cromwell LLP law firm, has to make certain that investor protection and fair markets are priorities. Promoting capital formation at the expense of the other priorities could encourage an expansion only in the short term, until investors pull back from increasing risk and lack of confidence in markets.

The Senate should make sure the president-elect has cast as wide a net as possible in the search for candidates to fill the chair. That effort could face challenges from the SEC's misaligned compensation structure, and Mr. Trump's own conflict-of-interest proposal for high-level appointees.

For institutional investors, the SEC chair — who would shape markets and investment management through regulatory proposals and enforcement efforts — is one of the most important appointments Mr. Trump will make.

Mr. Trump plans to curtail the sweeping regulations, many mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, implemented under the current chair, Mary Jo White, who has announced her intention to step down at the end of the Obama administration.

Rolling back regulations doesn't mean reopening the financial frontier to animal spirits. A new chair must focus on streamlining rules to emphasize smart regulations, while eliminating regulations that don't withstand cost-benefit analysis. On investment management in particular, the new administration should encourage the SEC to re-evaluate the scale of regulations that have become cost-prohibitive barriers to entry for new firms, often the source of investment innovation, without jeopardizing investor protections. 

As part of his streamlining of regulations, Mr. Trump and the Senate should address the SEC's pay structure, not only for the chair but also other top positions, to make the commission more attractive to prospective candidates. 

At the Financial Industry Regulatory Authority Inc., Richard G. Ketchum, chairman and CEO, received $2.13 million in total compensation in 2015, according to FINRA's 2015 annual report. Seven other executives received more than $1 million in total pay.

At the Municipal Securities Rulemaking Board, Lynette Kelly, executive director, was paid $1.014 million in 2014, according to the 2014 MSRB 990 filing, its latest. The total pay of 10 other MSRB executives ranged from $212,782 to $511,359.

In contrast, Ms. White's pay was $163,500, while other SEC pay scales generally rise to about $250,000.

The SEC oversees FINRA and the MSRB, both self-regulatory organizations responsible for overseeing brokers and brokerage firms in their respective securities industries and markets.

Asset owners and other institutional investors that consider the structure of pay policies the centerpiece of management incentives and corporate performance should call on the Trump administration and Congress to help develop a better framework for a pay structure at the SEC.

How well the SEC functions depends on its leadership.

In deciding whether to confirm Mr. Clayton, the Senate must be satisfied that he would give priority to all parts of the SEC's mission, while making sure the SEC's compensation structure is aligned to enable a search to attract the best candidates.

This article originally appeared in the January 9, 2017 print issue as, "SEC must stay on focus".