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SEC expected to come out of gate slowly

No rush of business seen from likely chief

Jay Clayton
Politics is mostly missing from Jay Clayton’s resume.

The sizable learning curve of the likely next chairman of the Securities and Exchange Commission plus vacancies on the commission and in several key agency divisions should add up to an extended quiet period, veteran SEC watchers say.

“This is a good opportunity for folks to go back to the core compliance functions that they should be focusing on,” said Karen Barr, president and CEO of the Investment Adviser Association in Washington. “They can hope for a respite from the onslaught of new regulation.”

President Donald Trump selected Jay Clayton, a partner at law firm Sullivan & Cromwell LLP in New York, to be SEC chairman, his transition team said, to help create jobs “by encouraging investment in American companies, while at the same time holding regulated firms to “robust accountability.”

Mr. Clayton's expertise includes advising on public and private mergers and acquisitions transactions, and capital markets offerings. His biography shows that he has less experience dealing with the political side of regulation and enforcement.

The agency is hamstrung by three of the five commissioner slots being vacant with the departure of chairwoman Mary Jo White. There has been no movement by the Senate Banking, Housing and Urban Affairs Committee to approve the 2015 nominations of Hester Peirce and Lisa Fairfax by President Barack Obama, although Ms. Peirce is still considered in the running. Ms. Peirce is a senior research fellow and director of the Financial Markets Working Group at the Mercatus Center at George Mason University in Arlington, Va., and a former counsel for the banking committee and to former SEC Commissioner Paul Atkins.

In the meantime, current commissioners Michael Piwowar and Kara Stein are seen as canceling each other's votes on any controversial issues that might arise. Republican appointee Mr. Piwowar is considered an advocate for facilitating capital formation while Ms. Stein, a Democratic appointee, often advocates for stronger investor protections.

No hearing date

Mr. Clayton's confirmation hearing has yet to be scheduled by the banking committee, which has nearly two dozen other appointments to consider. It took four months for Ms. White, who was nominated in Mr. Obama's second term, to win confirmation. If and when Mr. Clayton is installed, he will have several top division head vacancies to fill, including trading and markets, corporate finance and enforcement.

The next enforcement chief is seen as a key signal of where the SEC might head. Ms. White, a former federal prosecutor, made enforcement a clear priority, as evidenced by that division's record statistics in recent years. In fiscal year 2016, the SEC set a single-year high of 868 enforcement actions, including a record 160 cases involving investment advisers or investment companies. That happened, Ms. White said in an Oct. 11 enforcement release, because the agency “changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions.”

Until Mr. Clayton's thoughts are known, former SEC officials say, the career staffers will keep doing what they are doing, from exams to enforcement cases. “There are lots of things that many on the staff do that are unaffected by a change of administration,” said a former enforcement official who declined to be identified. “Until there's a clear sense of direction, people will continue to do that. Most of what the staff does is really not political.

“People are going to continue working on enforcement cases. The question is: What happens when those cases are ripe enough to take to the commission?

“There is probably going to be a more pro-business environment, but that doesn't mean there is not going to be enforcement.”

Mr. Clayton's industry experience is encouraging, said Todd Cipperman, CEO of Cipperman Compliance Services LLC, Wayne, Pa. “The SEC, in its overemphasis on enforcement, has gotten away from regulating securities markets. Someone like (Mr. Clayton) is in a good position to protect investors.

“The issue that our clients are really struggling with is change. That's why regulation by enforcement is not good. Certainty is what they want,” said Mr. Cipperman.

A new tone at FSOC?

Industry officials are cautiously optimistic that Mr. Trump's pledges to combat what he considers excessive regulation also could change how the Financial Stability Oversight Council, whose voting members represent all financial regulators, including the SEC chief, views asset managers.

Mr. Clayton “represents a tremendous opportunity to the asset management industry,” said a former SEC official now in the asset management industry. “We've spent the last five years as the target of FSOC,” particularly as its members widened the scope of systemically important institutions to include money managers.

Short of outright repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act or the provision that created the FSOC, critics say one possible tactic could be taking away the FSOC's power to designate asset management firms as systemically important.

Ms. White, the outgoing SEC chairwoman, “did a superb job of reasserting the SEC's expertise” among the other regulators, said David Blass, general counsel of the Investment Company Institute in Washington, who hopes FSOC members will continue to respect Ms. White's successor as the industry's primary regulator.

This article originally appeared in the January 23, 2017 print issue as, "SEC expected to come out of gate slowly".