On January 4, 2017, President-Elect Donald Trump nominated Jay Clayton, a private sector Wall Street lawyer, to serve as the next Chairman of the SEC. While the nomination hearings will tell us a lot about Mr. Clayton’s background, qualifications, and leanings, I can’t wait that long and preview here what the SEC’s agenda may look like in his tenure.
Who is Jay Clayton?
Jay Clayton is a well-respected and veteran Wall Street lawyer, who’s a partner at the white shoe firm Sullivan & Cromwell LLP. His areas of expertise are M&A and capital markets. Some highlights from his deal sheet include representing Barclays in its purchase of assets of Lehman Brothers out of bankruptcy, and working on the Alibaba IPO, the largest IPO of all time. He has represented a slew of banks, hedge funds, and other financial institutions in transactions and before regulators, which I’m sure will receive scrutiny during his confirmation hearings (cough — Sen. Warren — cough).
The Deal Maker and the Prosecutor
I think we’ll see the SEC diverge rather sharply from the course it has taken under outgoing Chair Mary Jo White. Under Chair White, the SEC emphasized enforcement and investor protection, fining and penalizing wrong-doers in record amounts. To be sure, the SEC agenda under Chair White was also informed by the political climate at the time, where Wall Street was vilified and absorbed a lot of the blame for the Great Recession. Additionally, a change in direction at the SEC is informed by the tendencies of the leaders making the nominations, with President-Elect Trump decidedly more laissez-faire than President Obama when it comes to regulation.
Peering under the hood further, Jay Clayton is a deal lawyer through and through. He’s worked at one of the top Wall Street law firms since graduating law school in 1993 and is regarded as a preeminent deal maker. Chair White, by contrast, has a background in litigation and prosecution. Chair White was the U.S. Attorney for the Southern District of New York (which many in the legal community regard as the most desirable prosecutorial position in the country), where she notably led the prosecutions of John Gotti and the terrorists responsible for the 1993 World Trade Center bombing. Following her run as a U.S. Attorney, she was the chair of the litigation department at Debevoise & Plimpton, another venerable Wall Street law firm.
A Lighter Touch
That Mr. Clayton is a deal maker rather than a prosecutor is a strong signal that the SEC’s agenda will lean more towards facilitating capital formation and further away from enforcement. For the fintech and startup communities, there are a few specific ramifications I’ll highlight.
The SEC will likely soften the stance enunciated by Chair White in her “Silicon Valley Initiative” speech on March 31, 2016. In that speech, she put the Valley on notice that the SEC was paying attention to what was going on there, given the “eye-popping” valuations, greater breadth of investor participation, and sheer amounts of capital being deployed. It’s reasonable to think that Mr. Clayton would not focus as much on possible securities fraud in the Valley, and be more deferential to a world where investors are sophisticated and can fend for themselves. I think we’ll also see a slowdown in the momentum of SEC investigations of startups. The SEC is reportedly investigating Theranos and Hampton Creek, for false or misleading statements in their pitch decks and other offering documents related to their fundraising. These types of investigations by the SEC will more likely slow down under Mr. Clayton’s regime.
We’ll probably see an acceleration of rulemakings that ease capital formation. One initiative, currently percolating in the halls of Congress, is the Fix Crowdfunding Act (“FCA”), which is meant to improve upon the JOBS Act. The FCA seeks to, among other things, increase the cap on what an issuer can raise in a crowdfunded transaction from $1 million to $5 million, ease investor caps, and reduce liability to crowdfunding portals. The SEC may throw its weight behind this bill, and if passed, could act swiftly to implement it via rulemaking. I wouldn’t be surprised if there were further initiatives that expand upon the premise of the JOBS Act.
We may also see rules revisiting who qualifies as an accredited investor, an issue which has been debated at the SEC for a few years now. A revised definition of accredited investor may be could broaden its scope, by for example, allowing those with certain financial credentials (e.g., CFA) to qualify as an accredited investor, regardless of income level or net worth.