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News November 13, 2017 Issue

Clayton Seeks Shorter Agenda with Greater Transparency

The new SEC is gradually taking shape as key executives at the agency make their views known. One recently called for less of a focus on minor infractions, another for a greater focus on retail enforcement and cybersecurity (ACA Insight, 11/6/17). Now SEC chairman Jay Clayton is perhaps tying it all together with a big ribbon that calls for a shorter agency agenda and greater transparency.

Clayton, who spoke November 8 at the Practising Law Institute’s 49th Annual Institute on Securities Regulation in New York City, gave some insight into his thinking about what he called a "shorter near-term agenda" and the agency’s approach toward its upcoming five-year strategic plan and long-term priorities. He also spoke about "deterring, mitigating and eliminating misconduct through transparency and other measures."

The SEC is itself governed by rules, he said, and one of those is the Regulatory Flexibility Act. "The goal of the RFA is to fit regulatory and informational requirements to the scale of businesses. That objective – in two words, regulatory proportionality –rings true with me."

Under the RFA, he continued, federal agencies are required to prepare an agenda of all regulations under development or review. "The agenda then distinguishes between rulemakings to be accomplished in the near-term – one year – and the long-term – more than a year."

The current situation, he said, is that the agency’s near-term agenda "has swelled over the years. The Commission has limited resources, and rulemaking is, by its very nature, time- and resource-intensive. As a result, if all, or substantially all, of the rulemakings listed on previous near-term agendas were to evolve through to adoption, the process would take years." He also noted that over the past 10 years, the SEC has completed, on average, "only a third of the rules listed on the near-term agenda."

While Clayton said that the next near-term agenda – his first as the chairman of the agency – "will be shorter than in the recent past," his words should not be taken as criticism of his predecessors as SEC chair, specifically naming Mary Schapiro, Elisse Walter, Mary Jo White and former acting chairman Michael Piwowar.

"I was struck that Clayton reiterated his plan to make the SEC’s regulatory flexibility agenda more transparent and accurate," said Ropes & Gray counsel David Tittsworth. "Frankly, for those of us who have followed these agendas over the years, they have been pretty meaningless. They contain items that clearly are not SEC priorities and exclude high-priority items. Clayton clearly wants to change that approach."

"Commission chairs are always reluctant to take things off the RFA because its send a signal that they do not care about those items, so often stuff just sits there," said Proskauer partner and former SEC Division of Investment Management deputy director Robert Plaze. Of Clayton’s plan to shorten the RFA, he said that "it may just be housekeeping, just cutting it back. On the other hand, he may view this as a chance to sweep things off that may have been a priority for the previous chairman. Watch what they do, not what they say."

Governance and the agenda

Clayton said that the next near-term agenda will be published in coming months as part of the federal government’s unified agenda. Its expected shorter length "is rooted in a commitment to increase transparency and accountability." It will include the rules the SEC plans to pursue and have a "reasonable expectation of completing during the coming year."

Nor does a shorter agenda mean that the SEC is "slowing down," Clayton said. He noted that, already, the agency has done a number of things since early October, when he submitted the agenda to the Office of Management and Budget. Among the items completed in that time, he said, have been two rulemakings, interpretive guidance to assist companies with efforts to comply with the Pay Ratio Rule, and three related no-action letters to provide market participants with greater certainty about the application of U.S. regulation as they engage in efforts to comply with the European Union’s Markets in Financial Instruments Directive (MiFID II) in advance of the January 2018 compliance date (ACA Insight, 10/30/17).

As for the SEC’s next multi-year strategic plan, expected to be created in early 2018, he noted that it will be considerably shorter than the current plan, developed in 2014, that contains, he said, 66 strategic initiatives and 58 performance goals and indicators.

"When we complete the new strategic plan, I expect those numbers will be noticeably smaller and will reflect, on a Commission-wide basis, 1) the key challenges and trends facing our markets and regulatory programs, 2) the agency’s most important strategic priorities, and 3) the initiatives we are pursuing to help us attain those goals," Clayton said. "The plan will reflect what we need to do, what we should do, and [emphasis Clayton] what we believe we can do."

Transparency and enforcement

A theme that seemed to run through parts of Clayton’s speech was that greater transparency would result in less need for enforcement.

"As we carry out the Commission’s mandate, a question we should be continuously asking is: Are there opportunities to deter, mitigate or eliminate wrongdoing before [emphasis Clayton] an enforcement action becomes necessary?"he asked. "Looking back at enforcement actions, a common theme emerges – where opacity exists, bad behavior tends to follow."

He then touched on a number of topics that he said "have proven time over time to be fertile ground for fraud on investors." These included:

  • Fee disclosure. "I expect that our Enforcement Division will continue to be active in pursuing cases where hidden or inappropriate fees are at issue, but we also are exploring whether more can be done to clarify fee disclosures made to retail investors and, thereby, deter and reduce the opportunities for misbehavior," Clayton said. The SEC’s inspection and enforcement programs show that "complex, obscure or hidden fees and expenses can harm investors. As examples, he noted that some firms may invest client money in a mutual fund that charges a 12b-1 fee when a lower-cost share class of the same fund is available, or advisers may improperly choose to use fund assets to pay expenses that should be paid by the advisory firm.
  • Investor education. "We . . . can and should arm investors with information that makes it more difficult for them to be defrauded," Clayton said. "We think this will be particularly valuable when bad actors have shifted from the registered space from investment advisers and broker-dealers to the unregistered space." He noted that to address this situation, the SEC has created a web site that will contain a searchable database of individuals who have been barred or suspended as a result of federal securities law violations.