Former SEC Chair Jay Clayton: Regulators Can't Bow to Tech

Financial market regulators must allow room for the creation of innovative and novel technologies that have the potential to greatly benefit investors and the economy, but they also have a duty to ensure they are not bending to the will of unscrupulous or reckless actors who are willing, maliciously or not, to overlook the fair treatment of their clients and investors.

So argued Jay Clayton, the former chair of the U.S. Securities and Exchange Commission, during a keynote address given Wednesday to more than 2,000 of BNY Mellon Pershing’s wealth management clients gathered for the firm’s Insite conference in Orlando.

During a “fireside chat” hosted by Bloomberg’s Carol Massar, Clayton, who is currently the non-executive chair of Apollo Global Management, also discussed the importance of capital markets and private markets to the national and global economy — and the need to provide ordinary investors with better access to the opportunities afforded by private market investing.

Throughout the wide-ranging discussion with Massar, Clayton spoke about the challenges facing financial regulators at a time when the emergence of novel technologies, from cryptocurrencies and nonfungible tokens to generative artificial intelligence, seems to be constantly accelerating and evolving.

Reflecting on his time at the helm of the SEC, Clayton said the job isn’t an easy one. It never was, and it’s only increasing in complexity as time goes on. What is less challenging, Clayton said, is maintaining the desire to go after bad actors and those attempting to manipulate investors and the markets.

Crypto Lessons

Clayton said a lot can be learned by studying the evolution of cryptocurrencies over the past five or so years.

On the one hand, Clayton said, “crypto” is simply one use case of a new and evolving type of technology that could very well prove to be fundamentally important to global markets in the long-term — i.e., distributed blockchain ledger technology.

On the other hand, “crypto” is also a lens that clearly demonstrates the risks that come along with rapidly developing technologies that can foster effectively unregulated trading activity, much of which ends up harming investors.

“Ultimately, blockchain technology has manifested itself in a number of financial products, some of which have been adopted by a subset of investors with what I would call almost a religious zeal,” Clayton said. “Some actors believed that this new tech is so powerful that regulation would simply have to bend to the technology. That can’t happen, in my view. We’ve built too strong of an investor protection framework.”

As Clayton pointed out, cryptocurrencies are touted as replacements for traditional currencies but lack many of their important characteristics, including sovereign backing and responsibility. They are thus now being promoted more as investment opportunities than efficient mediums for exchange, and the problems with this fact are apparent.

“If you’re a regulator, you don’t want to see something that is holding itself out to be like a security but which trades like tickets to a Taylor Swift concert,” Clayton said. “I think the ‘Swifties’ out there who got burned buying tickets will agree with me.”

Improving Access to Private Markets

Clayton spent significant time discussing the need to “democratize” access to private equity investments. This is one of Apollo Global Management’s biggest goals, he noted.

Clayton also took pains to differentiate the SEC’s approach to market regulation during his tenure from that of current SEC Chair Gary Gensler, suggesting it is “pretty clear that we are in a very [unconstructive] business-skeptical and commercial-skeptical regulatory environment.”

As to why he thinks more investors should be able to access private equity-type investment opportunities, he said the reason is straightforward.

“Capital formation now largely comes from outside the public markets and the average investor is barred from those private markets in many cases,” Clayton said. “All investors should have access to a portfolio that looks like a well-managed pension fund, because so much of the growth and return comes from the private markets.”

Lowering the hurdles to accessing alternative investments, he argued, will require the participation of regulators, but it will also require additional efforts on the part of investment management firms to create appropriately structured products that are suited for a broader universe of investors.

Clayton took particular issue with the current accredited investor rules, which haven’t been changed in 40 years, though there is legislation in Congress to do so.

“They simply don’t match the current reality of individual investors being responsible for their own retirement income, in particular,” Clayton said.

Pictured: Former SEC Chairman Jay Clayton. (Photo: Bloomberg)