Calling All Financial Regulatory Fortune Tellers: What Would Jay Clayton’s Policy Be?

President- elect Trump announced Jan. 4 that he will nominate Jay Clayton, currently a law partner at Sullivan & Cromwell LLP, to head the Securities and Exchange Commission. He will replace Mary Jo White who announced her intention to step down in January.

"Jay Clayton is a highly talented expert on many aspects of financial and regulatory law, and he will ensure our financial institutions can thrive and create jobs while playing by the rules at the same time,” President-elect Trump’s transition team said.

"We need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers," President- elect Trump said.

Process Over Politics.

Larry Shover—chief investment officer at Solution Funds Group and a member of the Public Company Accounting Oversight Board’s Investor Advisory Group—responded to an e-mail from Bloomberg BNA Jan. 4.

Shover described Clayton as a “good man that would favor process over politics.” He said that Clayton is “someone with a very broad background who would definitely use balance and discretion to keep the financial system working in an equitable manner.”

Shover wrote that he was familiar with and admired Clayton’s work as one of the lawyers representing Ally Financial. The case involved a $25 billion settlement in 2012 between banks and 49 states and the federal government over fraudulent mortgage servicing.

Kurt Schacht, Managing Director of Standards & Advocacy at CFA Institute and Chair of the Investor Advisory Committee of the SEC, wrote “The investment management profession looks forward to having someone in the SEC Chair role who will be a strong advocate for investor interests while also supporting capital formation. We look forward to working with the incoming Chair and any new Commissioners on achieving these goals,” in an e-mail response to Bloomberg BNA. 

Executive director of the Center for Audit Quality Cindy Fornelli responded by e-mail that “The CAQ looks forward to working with Jay Clayton, pending his Senate confirmation, toward the shared mission of the SEC and CAQ to serve investors and our capital markets.”

Questions for the Delphic Oracle.

This is where the need for a modern day Delphic oracle comes in to answer whether Clayton will favor the Wall Street giants that he used to represent and assist in dismantling the Dodd–Frank Wall Street Reform and Consumer Protection Act—signed into federal law by President Barack Obama in 2010—to address problems underlying the 2008-2009 financial crisis.

"I am aware some have suggested amending Dodd-Frank, but no one has specifically proposed repealing the provisions that authorize the PCAOB to oversee auditors of broker-dealers," Public Company Accounting Oversight Board Chairman James Doty, wrote in a Dec. 2016 e-mail response to Bloomberg BNA in Dec. 2016 about  threats to dismantle the Dodd–Frank

Will Clayton Strike a Balance Between Oversight and Job Creation?

Clayton thanked President-elect Trump for the opportunity to serve as SEC Chairman and said “If confirmed, we are going to work together with key stakeholders in the financial system to make sure we provide investors and our companies with the confidence to invest together in America. We will carefully monitor our financial sector, as we set policy that encourages American companies to do what they do best: create jobs.” 

Some fear that Clayton will embrace the guidance of The Financial Choice Act, a bill sponsored by House Financial Services Committee Chairman Jeb Hensarling (R-Texas)—that advanced in September after a 30-26 vote.

Hensarling is a vocal proponent of free-market economic principles and an equally vocal proponent of discarding many of the restrictions of Dodd- Frank.

Supporters of the Financial Choice Act argue that it gives the SEC greater authority to penalize big banks while changing regulations to allow community banks to foster economic growth.

Future of the Financial Choice Act Fluid. 

At this point the Financial Choice Act’s future is still fluid and it is safe to predict much more scrutiny of its provisions before a new era of financial regulation is unleashed.

Jeffrey Mahoney, General Counsel at the Council of Institutional Investors told Bloomberg BNA in an e-mail that CII had serious concerns about some of the provisions in the Act and hoped that those provisions would be removed from the next version.

Mahoney included a copy of the CII’s letter to Hersarling in his e-mail response.

CII objects to relaxing requirements for public companies to have an external, independent auditor attest to and report on management’s assessment of internal controls over financial reporting)—an auditing high risk area where Public Company Accounting Board Inspections staff continually find “deficiencies’ or failures.

Narrowing the scope of clawbacks—recovery of erroneous bonus and incentive awards to current or former executive that may have been caused by company fraud—is another provision of the Act that CII opposes.

Clayton’s biography is available on the Sullivan & Cromwell LLP website. His practice is described as including public and private mergers and acquisitions transactions, capital markets offerings, regulatory and enforcement proceedings. His clients have included Goldman Sachs, Bear Stearns, Barclays Capital, British Airways, and an ownership group for the Atlanta Hawks NBA franchise, according to the biography.

Clayton has a B.S. in engineering from the University of Pennsylvania, a B.A. in Economics from the University of Cambridge, and a J.D. from the University of Pennsylvania Law School.  Until 2015 he was an adjunct professor of law at the University of Pennsylvania.


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