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What Clayton’s Departure From SEC Would Mean for Reg BI

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After an unusual weekend for SEC Chairman Jay Clayton, a big question emerged: Will he stay or will he go? Clayton was thrown into a political firestorm this past weekend over President Donald Trump’s surprise nomination of him to take over as the U.S. Attorney for the Southern District of New York, replacing Geoffrey Berman, who was fired.

So will Clayton stay on as Wall Street’s regulator until his term expires in 2021 or will he take the helm of the court that cracks down on Wall Street despite a lack of experience as a prosecutor?

The issue at the SEC surrounding Clayton if he were to depart, is that the agency’s Regulation Best Interest takes effect on June 30, and enforcement of the rule takes center stage.

“What a mess,” Bob Plaze, former co-director of the SEC’s Division of Investment Management who’s now a partner at Proskauer Rose in Washington, told Human Capital in a Monday email message. “Whatever you think about the regulatory policies the SEC has pursued under Chairman Clayton, everyone I know believes that he has led the SEC ably and with a great deal of integrity. I know the staff thinks highly of him. It’s a shame that he has gotten caught up in this debacle.”

Phyllis Borzi, the former assistant secretary of the Labor Department’s Employee Benefits Security Administration during the Obama administration, told Human Capital in a separate interview Monday that she was “just as surprised as anyone else” about Trump’s nomination of Clayton to head the Manhattan court and Clayton’s “interest” in taking on such a roll.

As to what Clayton’s potential departure means for enforcing Reg BI, Borzi said, “It matters in the sense that this [Reg BI] was his baby, he was determined to push it through; I give him great credit, even though I disagree with a number of things they did in Reg BI and the rest of the reg package. I know, I have the scars on my back to show it, how hard it is to get anything through in this area.”

The “effectiveness” of Reg BI, Borzi said, “will rise and fall on how well it’s enforced because the rule itself leaves a lot of ambiguity, so it will be critical how it’s implemented.”

The key to enforcing Reg BI, Borzi said during a Thursday Zoom meeting, is that the “SEC needs to ramp up its efforts to understand and regulate revenue sharing conflicts.” (Listen to ThinkAdvisor’s Human Capital podcast on Friday as Borzi details more on this enforcement approach and the pending Labor fiduciary rule reboot to align with Reg BI).

Former SEC Chairman Harvey Pitt told Human Capital in a late Monday email message that in preparation for Reg BI, “most firms have developed significant guidance on how their financial advisors are to treat the rule, and satisfy its requirements.” Pitt agreed, however, that “enforcement will be difficult, especially while SEC exams are still being handled remotely.”

“I was surprised with only five months to go in the administration at least to hear the reports that Clayton wanted to move on,” Borzi said. “I would have thought that he would have wanted to stay, at least for a while, to make sure it [Reg BI] got off to a good start and kept on track.”

Two aspects of Clayton’s nomination to head the U.S. District court are being examined: Clayton’s reported interest in taking over the U.S. Attorney for the Southern District of New York position, and the motivations of U.S. Attorney General William Barr and President Donald Trump to oust Berman.

Clayton ”is very smart, thoughtful and creative. He’s well organized and has been a gifted and productive SEC chairman,” Pitt said. “I’m confident that when the opportunity was presented to Jay, he was unaware of the contretemps that would arise around the departure of the current US Attorney. I certainly don’t think his nomination was a bad idea, or that it was a bad idea for him to agree to take the position.”

Clayton already faces a tough Senate confirmation if he doesn’t bow out of taking the U.S. Attorney post.

Critics argue Clayton isn’t qualified to take over as head of the Southern District because he lacks experience as a litigator.

However, former SEC Chairwoman Mary Jo White, who was appointed by former President Barack Obama, faced similar criticism but for reverse circumstances. Before taking the helm at the SEC, White was a former litigator/prosecutor who also served as U.S. Attorney for the Southern District of New York but lacked regulatory experience.

Borzi notes the “interesting way that the revolving door revolves.”

When White was nominated to head the SEC “there was a lot of surprise and criticism because she did come from a litigation/prosecutorial background,” Borzi said. “I personally think that it’s easier to go from a prosecutorial/litigation background to a regulatory background, because what it does is makes you sensitive to the fact that you can have the best constructed regulatory scheme, and unless it’s enforced, you can forget it.”