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Regulation and Compliance > Federal Regulation > SEC

SEC to Help Investors With Background Checks; Clayton Eying Choice Act Progress

By Melanie Waddell

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Securities and Exchange Commission Chairman Jay Clayton said Thursday that he’s working with SEC staffers on initiatives to educate investors — including the elderly — on how they can prevent themselves from becoming victims of fraud, with the SEC having “a number of efforts underway to simplify and enhance the tools available to help investors conduct background searches on their investment professionals and make informed decisions.”

Clayton also said that he’s following carefully the progress of the Financial Choice Act, the bill to derail the Dodd-Frank Act and the Labor Department’s fiduciary rule — which passed the House on June 8 and is awaiting Senate action — as a number of the bill’s provisions are “relevant” to the Commission’s activities.

“You can expect to hear more from me, our investor advocate Rick Fleming, our co-director of enforcement Stephanie Avakian, and others at the commission on this [initiative to educate investors] in the coming weeks and months,” Clayton said during comments at the agency’s Investor Advisory Committee meeting, held at SEC headquarters in Washington.

“Detecting and punishing fraud — particularly against retail investors — is a high priority for me,” Clayton said, noting his previous comments that “there is simply no room for bad actors in our capital markets.”

Fraud, he continued, “hurts innocent investors and undermines confidence in our markets, and we will continue to vigorously pursue those that seek to do harm.”

Clayton also noted that under his direction and the direction of Bill Hinman, the SEC’s director of the Division of Corporation Finance, SEC staffers are “actively exploring ways in which we can improve the attractiveness of listing on our public markets, while maintaining important investor protections.”

Fleming said at the meeting that his office has been busy preparing its biannual report to Congress, and told ThinkAdvisor in separate comments that he plans to send the report to the Hill on June 30.

As to the Financial Choice Act, John Coates, professor of Law and Economics at Harvard Law School and a member of the committee, stated that the Choice Act “is a gigantic buffet, not a focused meal,” and listed the various ways the bill would affect the SEC.

Under the bill, “all” SEC commissioners would be allowed to attend meetings of the Financial Stability Oversight Council, not just the chair, while the legislation also abolishes the Office of Financial Research and “most of what FSOC does,” Coates said.

The bill also would put FSOC meetings under the Sunshine Act, which would require meetings to be made public, a move that Coates argued would make the meetings “less interesting.”

John Coffee, the Adolf A. Berle Professor of Law and director of the Center on Corporate Governance at Columbia Law School, discussed at the meeting the provision of the Choice Act that allows any defendant sued in an administrative proceeding “to opt out, to demand instead that the SEC sue them in court.”

Said Coffee: “My judgment is the vast majority of defendants will exercise that option. By doing that, they will slow the process down, give more time for leverage and negotiation, get additional discovery, a right to a jury trial and most of all they have a perception that [the administrative law judges who preside over administrative proceedings] are biased toward the agency.

“This is going to be a popular provision,” Coffee opined. “I think the SEC has to organize and state its case clearly … the SEC is very resource constrained, and if it has to sue in most cases in federal court, the costs are going to go up, the number of cases it can bring will go down, and even in the big case it may be compelled to settle more quickly and more equivocally.”

In fiscal 2016, the SEC initiated 868 enforcement actions; of these, 692, or 80%, were administrative proceedings, Coffee said. “There is a perception out there that administrative actions are smaller, lesser action involving little things like late filings. That could have been true to some extent 10 years ago; that’s not true today. Eighty percent is a very big block of cases.”

Under the Choice Act’s “appointments clause,” Coffee continued, the SEC “is facing split decisions in the circuit and an en banc pending decision dealing with how it appoints its ALJs. There is an easy way to solve this problem, but it has to be exercised by commission action. The easy way is for the commission to act on its own and reappoint all its ALJs,” he said.

“This is a low-cost remedy. The SEC should do it. I’m afraid this advice will fall on deaf ears because they expect that the Supreme Court will save them. Odds are it won’t.”

— Check out Treasury Pushes Congress to Rein In Dodd-Frank, Consolidate Regulators on ThinkAdvisor.

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