From the February 2017 issue of Investment Advisor • Subscribe!

Sizing Up the New SEC Chair's Agenda

Capital formation will likely play a big role in Jay Clayton's SEC — but what does that mean, exactly?

The new SEC chair will likely prioritize capital formation. The new SEC chair will likely prioritize capital formation.

Sullivan and Cromwell Partner Jay Clayton, President Donald Trump's nominee to head the Securities and Exchange Commission, is being hailed as an accomplished securities lawyer who will likely champion a capital formation agenda. While some industry officials are applauding such a focus, others warn that an easing of the reins around capital formation must also include proper investor protections.

During her term, former SEC Chairwoman Mary Jo White focused heavily on another part of the SEC's charter: protecting investors.

Clayton's agenda will likely include pushing rules that “streamline” the capital formation process, said Steve Crimmins, a partner with the law firm Murphy & McGonigle in Washington, to make that process “quicker and cheaper and more accessible for small- and medium-size businesses.” Crimmins, who served for eight years as the SEC's deputy chief litigation counsel, said Clayton would likely accomplish that goal through the use of better technology “to deliver documents related to capital formation and overall to streamline the approval process.”

While capital formation “is critically important, you want to make sure that as part of that process you build in the investor protections to keep fraudsters away from Main Street investors,” Crimmins added. “Exactly what those protections are will be something that will require a lot of creativity and thought.”

(Related: Will Trump Choice for SEC Chief Stand Up for Investors?)

Clayton's bio touts his participation in an array of M&A and capital markets transactions involving financial institutions, telecommunications, airlines and other international companies, including the initial public offering of Alibaba and the acquisition of Lehman Brothers by Barclays Capital. He also counseled Goldman Sachs in connection with the investment of $5 billion by Berkshire Hathaway and the U.S. Treasury's Troubled Asset Relief Program (TARP), and was involved with the sale of Bear Stearns to JPMorgan Chase.

The SEC and Crowdfunding

Clayton's SEC will likely focus on ways to promote crowdfunding.

“This administration is going to be very good for crowdfunding because the general consensus in the industry is that it has been over-regulated,” said Richard Swart, chief strategy officer at NextGen Crowdfunding, in a mid-January interview.

The “general consensus” among those in the crowdfunding industry is that the amount of regulation applied to Regulation Crowdfunding was “excessive,” Swart continued, because of the “very small amounts of investment per investor, and the relatively high cost and ongoing compliance burden on small companies that use” the rule.

(Related: FINRA Expels First Crowdfunding Portal)

Reg CF, or Title III, crowdfunding rules allowed startups to raise capital from non-accredited investors via crowdfunding and became effective last May. Members of the Obama administration, Swart added, as well as many officials at the SEC, now feel that their concerns over potential fraud in equity crowdfunding were “exaggerated,” Swart said, noting the strong growth in Reg CF, “doubling quarter over quarter.”

Swart sees the new Congress acting swiftly to increase the amount companies can raise under Reg CF. Rep. Patrick McHenry's Fix Crowdfunding Act, which passed the House Financial Services Committee last June, “has been stalled,” Swart reported, but he thinks that with Republicans in control of the House and Senate, “it is likely Congress will act quickly” on that bill.

The SEC on Dodd-Frank, RIA Exams

A large part of the SEC's agenda may also include reversing the Dodd-Frank Act rulemakings. “After six years, the SEC has almost completed the rules mandated by Dodd-Frank,” noted Duane Thompson, senior policy advisor at fi360. “Will a GOP Congress roll back the law and require [Clayton] to do the opposite of the last two SEC chairs and play clean up?”

As to boosting advisor exams, Chairwoman White moved exam staff from broker-dealers to RIAs during her term to keep up with asset growth and an influx of advisor registrations; to aid in more exams, Clayton can push ahead with advisor third-party exams “or watch the RIA cycle slip from 11 years because Congress is unlikely to increase the SEC's budget absent another [Bernie] Madoff debacle,” Thompson said.

The SEC's exam priorities for this year include ramping up exams of never-before-examined advisory firms (see sidebar). However, achieving much headway could be challenging unless the exam division diverts examiners from “higher-risk firms,” Thompson added.

The SEC on Accredited Investors

Attorney Nicolas Morgan, a partner in Paul Hastings’ Los Angeles office, argues that a capital formation agenda may also include “speeding up” changes to the accredited investor definition.

“For decades, paternalistic SEC regulations have kept people of modest financial means out of private securities offerings by restricting the number of ‘accredited investors’ who can be offered such securities without triggering expensive registration requirements,” Morgan said.

Under White's tenure, SEC staff studied replacing income and net worth requirements with other measures of financial sophistication such as permitting individuals with certain professional credentials or experience in investing to qualify as “accredited investors.”

Morgan also wondered in a recent blog post for ThinkAdvisor.com whether White’s policy of pursuing minor, “broken windows” type violations will be scaled back during Clayton’s term. 

Crimmins of Murphy & McGonigle noted that “for years we’ve said that the advisory business was one of the cleanest parts of the securities industry, but apparently there have been some things that needed attention.”

Focusing on the advisors “was something that was a sound decision” for White, Crimmins added, but “it's a question of degree,” and such cases are pursued on a case-by-case basis. “Has it gone too far? That's a choice that the new chair, Clayton, is going to have to make.”

Thompson also sees the agency staying engaged in “much broader market risk issues,” like developing the consolidated audit trail (CAT), to help assess flash crashes, fine tune its current circuit breakers and look more closely at order routing practices.

--- Read SEC Chair White Speaks on ThinkAdvisor.

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