With Chairman Jay Clayton in place, the Securities and Exchange Commission is now controlled by Republican appointees. Former Chair White came from a litigation and prosecutor background. Chair Clayton comes from a deal-making and capital formation background. I think we can guess the direction of the SEC for the next few years.
Beyond the guessing, Chair Clayton gave a speech to the Economic Club of New York that offers some insight. He outlined eight principles that will guide his chairmanship:
- The SEC’s mission is our touchstone.
- Our analysis starts and ends with the long-term interests of the Main Street investor.
- The SEC’s historic approach to regulation is sound.
- Regulatory actions drive change, and change can have lasting effects.
- As markets evolve, so must the SEC.
- Effective rulemaking does not end with rule adoption.
- The costs of a rule now often include the cost of demonstrating compliance.
- Coordination is key.
Obviously, number 7 caught my attention.
“It is incumbent on the Commission to write rules so that those subject to them can ascertain how to comply and — now more than ever — how to demonstrate that compliance. Vaguely worded rules can too easily lead to subpar compliance solutions or an overinvestment in control systems. We must recognize practical costs that are sure to arise.”
He also pointed out the costs of compliance in number five on the evolution of the SEC:
As the SEC evolves alongside the markets, however, we must remember that implementing regulatory change has costs. Companies spend significant resources building systems of compliance, hiring personnel to operate those systems, seeking legal advice concerning the design and effectiveness of those systems, and adapting the systems as regulations change. Shareholders and customers bear these costs, which is something that should not be taken lightly, lest we lose our credibility as regulators.
The SEC uses cost-benefit analysis in its rule-making process. I expect we will see an emphasis on the compliance costs in those analyses.
I like the emphasis on “bright-line” rules in number 7. Fuzzy rules makes it hard to implement rules and hard to prove compliance with the rules, leaving you open to second-guessing by regulators.
The other news is that it is rumored that President Trump will nominate former Senate Republican aide and current Senior Research Fellow at the Mercatus Center, Hester Peirce, to fill one of the empty seats at the Securities and Exchange Commission. From her recent publications, it seems that she may have some big ideas for change at the SEC.
That leaves one empty seat that is supposed to go to a Democratic appointee. I would bet that this seat stays empty for a long time.
Sources:
- Remarks at the Economic Club of New York by SEC Chairman Jay Clayton
- SEC Chair Clayton Talks Compliance Costs by Matt Kelly in Radical Compliance
