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News July 17, 2017 Issue

Capital Formation, Enforcement, Exams Rank High as Clayton Urges Budget Approval

SEC chairman Jay Clayton has begun the process of putting his mark on the SEC, its activities, and the perceptions of those it regulates. In addition to his "principles" speech in New York City on July 12 (see related story, this issue), he recently appeared before Congress to justify the agency’s $1.6 billion budget request for fiscal year 2018.

Clayton testified before a Senate Appropriations Committee panel that the funds were essential to, among other things, develop new rules that would aid capital formation, continue a "robust" enforcement program, and deliver a 5 percent increase in the number of investment adviser examinations.

The $1.602 billion budget request, described by Clayton as "essentially the same" as the agency’s fiscal year 2017 appropriation, is actually about $59 million lower from the $1.662 billion approved by Congress for the SEC that year, according to the agency’s Congressional Budget Justification Annual Performance Plan for fiscal year 2018.

"Clayton’s first budget request could be described as ‘adequate but austere,’" said Ropes & Gray counsel David Tittsworth, noting that former SEC chair Mary Jo White "consistently requested relatively large increases from Capitol Hill, primarily to hire more OCIE examiners to enhance the investment adviser examination program."

Clayton’s decision to seek a slight decrease in the SEC’s appropriation for the coming fiscal year "is a politically savvy move," he said. "It will allow the agency to continue with its current programs without getting into a fight about additional resources with a Republican Congress. It will give Clayton a year to review all of the SEC’s programs and activities before formulating a budget for fiscal year 2019. And while the projected increase in investment adviser examinations is only 5 percent, at least it’s moving in the right direction."

"As in past years, it seems reasonable to expect that the amount ultimately appropriated by Congress will be less than the amount requested," said Sidley Austin senior counsel Jonathan Miller. "The SEC generally is maintaining an agency-wide hiring freeze and trying to meet goals through cost-cutting and reallocation of resources. The budget appears to contemplate modest personnel reductions for fiscal year 2018 pretty much across the board, including in the Division of Enforcement, the Division of Investment Management, and the Office of Compliance Inspections and Examinations."

"The proposed reductions do not appear to be drastic, and so do not seem to me to represent a major pull-back from the SEC’s mission, but it does seem that any expansion of enforcement and examination activities may be challenging in light of limited resources," he said.

Capital formation

The budget proposal testimony does something more than simply fund the SEC’s operations. It, like his speech before the Economic Club of New York, offers some insight into the new chairman’s thinking in terms of agency priorities. While both Clayton and White stressed how the money will be used for enforcement, examinations, technology and more, Clayton appeared to place more stress on capital formation – perhaps no surprise given his background in Wall Street dealmaking.

He suggested that new rules may be promulgated in pursuit of this goal. "U.S. capital markets remain the envy of the world, but fewer companies are choosing to enter public capital markets than in the past, and, as a result, investment opportunities for Main Street investors are more limited. Your support for our fiscal year 2018 budget request will enable the staff to develop and present to the Commission rulemaking initiatives aimed at promoting firms’ access to capital markets to generate economic growth while fostering important investor protections."

Among the uses that fiscal year 2018 money will be put to, Clayton said, will be devoting resources to the Office of the Advocate for Small Business Capital Formation, an office created by Congress as part of the Small Business Advocate Act of 2016. The SEC will recruit and hire a small business capital formulation advocate to head the office.

Enforcement and examinations

There has been speculation in the asset management industry that Clayton would put less emphasis on enforcement than did White, who has a prosecutorial background. Clayton, in his testimony, sought to put that speculation to rest, noting that the budget request "will enable the SEC to continue the Division of Enforcement’s vigorous efforts to investigate and bring civil charges against violators of the federal securities laws." The budget will fund a "robust program to monitor, investigate and enforce compliance, " with "more than 50 percent of the requested resources . . . invested in the agency’s enforcement and examination programs," he said.

As far as exams conducted by OCIE, Clayton said that the agency’s examination arm "anticipates being able to deliver a further 5 percent increase in the number of investment adviser exams" beyond the 20 percent increase he said that the agency is on track to meeting in the current fiscal year as a result of the SEC reassigning approximately 100 exam staff to adviser examinations. Most had previously examined broker-dealers.


The SEC’s investments in technology are not going to stop, if what Clayton said in his testimony is true. The budget request will help the agency "stay on top of" technological advancements in the capital markets, he said, including the way that companies solicit investors and sell their securities to the public, the channel through which individuals receive investment advice, and the manner in which institutional and retail investors transact in the markets.

He also noted that, when compared to what some financial institutions in the private sector are spending on technology, the $240 million that the SEC plans to spend in fiscal year 2018 "is quite modest." As examples, he noted that in 2016, one large financial institution spent more than $9.5 billion on technology firm-wide, of which $3 billion was dedicated to new initiatives. The technology initiatives that the agency plans to fund in fiscal year 2018 include:

  • Expanding data analytics tools "to integrate and analyze the large and ever-increasing volume of financial data we receive, enabling us to detect potential fraud or suspicious behavior earlier and allocate resources more effectively;"
  • Improving the examination program "through risk assessment and surveillance tools that help identify high-risk areas for further examination;"
  • Increasing investment in cybersecurity, including "strengthening our capabilities for monitoring and avoiding advanced persistent threats;" and
  • Enhancing additional systems that support the enforcement program, including "applying sophisticated algorithms that foster the detection of potential insider trading and manipulation."

Headquarters and leasing

Clayton briefly discussed the $245 million included in the budget request, but separate from the $1.062 billion request for agency operations. That money is intended to fund work on a possible new agency headquarters. Given that the leases on the SEC’s current Washington, DC headquarters expire in the new few years, he said, the money is required by the General Services Administration "in order to commence a competitive procurement for a successor headquarters lease."

"None of these funds would be used for SEC operations," Clayton said. "Rather, these funds represent potential expenses for build-out costs, IT infrastructure, security equipment and fees if the outcome of the GSA’s competitive acquisition process should require the SEC to relocate."