Trump SEC Fails to Pursue Aggressive Deregulatory Agenda (Albeit from Previous Pathetic Baseline)

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

The Wall Street Journal published a piece today, , gently chiding the SEC for not pursuing an aggressive deregulatory agenda during Trump’s first year in office.

Now, I can’t say that I’m wholly surprised by this state of affairs. As I wrote in a January 2017 post at the time Trump selected Jay Clayton, a partner at the white shoe law firm of Sullivan & Cromwell,to head the SEC–  in a section I headed Turkeys Don’t Vote for Thanksgiving):

I’m going to go out on a limb here (irony alert), and suggest that Clayton won’t smash the securities law framework or necessarily go especially slow on enforcement– especially compared to the existing White/Shapiro baseline– precisely because he’s come from S & C– one of the leading law firms in the country, with an unparalleled securities law practice. Such a firm wouldn’t want to see the securities framework dismantled or appreciably diminished. Why? Well, that’s how its lawyers make their money: by advising clients how to comply with the law. If any significant element of the securities law framework is dismantled– there goes a huge chunk of S & C’s raison d’être. For a former S & C partner to willy nilly trash securities laws would be akin to a turkey voting for Thanksgiving.

Crucially, how serious the SEC is about enforcement will depend on who is appointed to be director of enforcement, and how serious the DoJ is about targeting and investigating white collar and corporate offenses, and trying cases when evidence of wrongdoing is uncovered.

I should also point out here that although an SEC chair has great power to shape the agency’s agenda, many of the more far-reaching reforms Trump has hinted at would require legislation.

Now, Trump does appear to be dead serious about regulatory reform– in particular, rolling back Dodd-Frank– although like many aspects of Trump policy, exactly what he means by that is vague, often inconsistent, and not completely clear….

How do those predictions stand up, a year and a bit later?

The SEC ’s Record Over the Past Year

Let’s see what the WSJ has to say:

Jay Clayton, President Donald Trump’s pick to lead the U.S. Securities and Exchange Commission, can point to a series of small, targeted actions aimed at easing the regulatory burden for companies nearly 10 months into his tenure.

The SEC’s incremental progress stands in contrast to the early days of the Trump administration, which were punctuated by a swift succession of executive orders aimed squarely at deregulation. One order told regulators that any new rule would require the elimination of two old rules, while another called on the Treasury and Congress to roll back the Dodd-Frank financial overhaul law.

However, those early announcements have yielded modest impact in the realm of financial regulation. The most ambitious effort to revoke and replace the Dodd-Frank law— Rep. Jeb Hensarling’s (R., Texas) Financial Choice Act—passed the House in June but failed to clear the Senate.

The SEC has signaled more gradual action aimed at streamlining regulations for the coming year.

“Modernizing the rules without in any way taking away investor protection is the best thing that we can do,” Mr. Clayton told CFO Journal on the sidelines of the Practicing Law Institute’s “SEC Speaks” conference in Washington on Friday. The agency is looking at all rules to see what could be pruned back, the SEC chairman said.

In making changes, the SEC is limited by its mission to enforce securities law and protect investors, current and former SEC commissioners say.

Moreover, only Congress can revoke statutes such as Dodd-Frank and the Sarbanes-Oxley corporate governance law, which many business groups say raise the cost of compliance.

Regulatory Record

Now, I do take issue with the WSJ analysis, on at least a couple of points. First, the SEC’s record during the aftermath of the financial crisis was pretty bad, so if we measure the performance of the current SEC against such a baseline, the relative performance will look better than it actually is (for more on this point, please see my November 2016 post, Mary Jo White Leaves Behind a Weakened SEC for Trump to Weaken Further).

Specifically on the regulatory side, I think the record of the Clayton SEC is mixed. (Keep reading for my thoughts on enforcement, which follow below.) Let me discuss two points here.

On the one hand, the agency has been reluctant to allow a significant ramping up in selling bitcoin and cryptocurrency snake oil to retail investors (see my  earlier post from last month, SEC Stymies Plans to Offer Bitcoin Funds Anytime Soon, in which I discussed an that “put the kibosh on plans to offer exchange-traded funds (ETFs) or other products based on bitcoin or cryptocurrencies to retail investors anytime soon”. This is as we’d hope and expect a prudent regulator to act.

On the other hand, in July, the agency’s Division of Corporation Finance abruptly decided to “allow all companies to submit draft registration statements relating to initial public offerings (IPOs) for review on a nonpublic basis, according to this agency press release. This new policy extends a benefit previously available only to emerging growth companies (EGCs) under the Jumpstart Our Businesses Startup (JOBS) Act to all companies.” I discussed this policy change in Doubling Down on Deregulation: SEC Extends JOBS Act Benefit in Elusive Quest to Goose IPO Market. It is a misguided policy, and I believe it will only lead to more fraud and mischief in IPOs.

Yet this is an extension of previous policy rather than a significant departure. In my post, I elaborated on previous separate posts by each of Yves and Bill Black discussing the JOBS Act travesty (see Why You Should Hate the “Jumpstart Obama’s Bucket Shops” Act (Yves) and How the Jumpstart Obama’s Bucket Shops Act is Just Another in a Long Series of Fraud-Promoting Legislation) (Bill Black).

Now,I don’t deny that the Clayton SEC is indeed responsible for extending this travesty– but it’s merely extension of legislation enacted during the reign of Trump’s predecessor. The JOBS Act passed in 2012 with the full support to the administration and Congress at that time. So this last folly has a bipartisan genesis (with “bipartisan” being a good tell for when Congresscritters and other elected officials are up to no good). Black wrote that the JOBS Act would promote rather than deter fraud. As would no doubt the latest extension. But it’s important to note the buck didn’t start here.

What Comes Next on Regulation?

Interestingly, going forward, Clayton appears to have no major plans to launch a deregulatory push– or at least said as much when speaking to the WSJ on Friday:

The SEC has signaled more gradual action aimed at streamlining regulations for the coming year.

“Modernizing the rules without in any way taking away investor protection is the best thing that we can do,” Mr. Clayton told CFO Journal on the sidelines of the Practicing Law Institute’s “SEC Speaks” conference in Washington on Friday. The agency is looking at all rules to see what could be pruned back, the SEC chairman said.

In making changes, the SEC is limited by its mission to enforce securities law and protect investors, current and former SEC commissioners say.

Moreover, only Congress can revoke statutes such as Dodd-Frank and the Sarbanes-Oxley corporate governance law, which many business groups say raise the cost of compliance.

Enforcement

And now, let me turn to enforcement– a topic addressed In a February crossposted piece in which Nomi Prins noted:

Clayton’s main accomplishment so far has been to significantly reduce oversight activities. SEC penalties, for instance, to $3.5 billion during the first year of the Trump administration.  The SEC also issued enforcement actions against only 62 public companies in 2017, a 33% decline from the previous year. Perhaps you won’t then be surprised to learn that its enforcement division has an estimated unfilled investigative and supervisory positions…

The Washington Post provides further scope and detail on this decline in this November 2017 article :

“Sagging numbers signal a chilling retreat from enforcement, which was already milquetoast following the financial crash,” said Bart Naylor, a financial policy advocate for the civic group Public Citizen. “By the enforcement division’s own accounting, they are receiving reports of suspicious activity many orders of magnitude greater than what results in a sanction. Wall Street has never been an Eagle Scout alumni association, but failure by the Clayton SEC to elevate enforcement and hold individuals to severe penalties will only attract more scams.”

To reinforce that point: this is a significant drop-off from the record logged by an SEC I called a paper enforcement tiger in my post on Mary Jo White I cited above. So, the current SEC appears not to be seeking to strike fear into the hearts of securities law malefactors either. Quelle surprise!

Today’s WSJ piece fails to mention the enforcement angle.

Keep Your Eyes Peeled 

There’s a potential new battlefield emerging, however, as reported today’s WSJ piece:

The SEC also could sidestep another issue: whether to allow companies to include a mandatory arbitration clause in their registration documents. The move would eliminate investor class-action lawsuits. “It’s not part of our agenda,” Mr. Clayton said when asked about the issue on a panel at the PLI conference.

However, the issue could still come up if, as part of its registration process, a company seeks the agency’s approval to include the clause.

Business lobbyists succeeded in overturning the Consumer Financial Protection Bureau’s (CFPB ban on mandatory arbitration clauses in consumer financial contracts (as I discussed in multiple posts, the most recent being, RIP, CFPB Mandatory Arbitration Ban). It looks like some part of the “legal reform” crew might be looking to extend this victory to try and require (at least some) investor disputes be settled via arbitration as well. How serious this effort might shape up to be is beyond the scope of the current post, but would be a troubling development– one that I will explore more carefully in a future post, once I’ve had more time to delve into the weeds.

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3 comments

  1. sgt_doom

    No offense intended, but any articles on the SEC are beyond arbitrary and superfluousness.

    Clayton is one of the global reigning Tax Haven Kings – – obviously.

    The first action which occurred when President Bill Clinton entered the White House at the beginning of his first term (the same Clinton who as presidential candidate accepted free office space and donations from the Blackstone Group) was over at the SEC: they immediately changed the rule requiring the names of the major investors investing through Wall Street investment firms, which effectively hid ownership from that point forward to the present!

  2. UserFriendly

    on that note, this is tangentially related.

    The White House on Friday quietly released its to Congress on the costs and benefits of regulations and the results show that major rulemakings over the past decade have yielded great benefits.

    The findings are at odds with an administration that’s pushing federal agencies to cut rules and ease excessive regulatory burdens it says were imposed by the previous administration.

    The Trump administration report says that from fiscal 2007 through 2016 the annual economic benefits of major rulemakings reviewed by the White House Office of Management and Budget (OMB) were estimated to be between $287 billion and $911 billion.

    The report found that from Oct. 1, 2006, to Sept. 30, 2016, the annual benefits of regulations outweighed the annual costs, which were estimated to be between $78 billion and $115 billion in 2015 dollars.

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