By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.
President-elect Donald Trump has announced the selection of Jay Clayton, a general practice partner at the white shoe law firm Sullivan & Cromwell, to serve as chair of the Securities and Exchange Commission. Unlike his immediate predecessor, Mary Jo White, Clayton’s not a litigator, but a corporate law specialist, with a broad practice, who has worked on capital offerings (including the AliBaba IPO) and mergers and acquisitions (for clients including Ally Financial, Barclays Capital, Bear Stearns, Goldman Sachs). He has also represented clients on regulatory and enforcement matters matters before various agencies, including the Department of Justice (DOJ), the Department of Housing and Urban Development (HUD), and the Federal Housing Finance Agency (FHFA).
From the Trump press release announcing the nomination:
Clayton will play an important role in unleashing the job-creating power of our economy by encouraging investment in American companies while providing strong oversight of Wall Street and related industries. Robust accountability will be a hallmark of his tenure atop the SEC, and the financial security of the American people will be his top priority.
“Jay Clayton is a highly talented expert on many aspects of financial and regulatory law, and he will ensure our financial institutions can thrive and create jobs while playing by the rules at the same time,” said President-elect Trump. “We need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.”
“I want to thank President-elect Trump for the opportunity to serve as SEC Chairman,” said Jay Clayton. “If confirmed, we are going to work together with key stakeholders in the financial system to make sure we provide investors and our companies with the confidence to invest together in America. We will carefully monitor our financial sector, as we set policy that encourages American companies to do what they do best: create jobs.”
Mainstream White Shoe Pick
In making many of his previous Cabinet appointments, Trump has prized early loyalty above all else, and has appointed Republicans on the verges of the party. By contrast, Clayton is a surprisingly conventional pick to chair the SEC. S & C trains its lawyers to be generalists who practice within broad practice areas, and a partner from this firm has precisely the subject matter expertise necessary to head this agency. Clayton is only one of the most recent of a long line of Big Law partners to be nominated for such a role. Further, while Clayton’s campaign finance contributions suggest that he might lean Republican, he appears to be neither a doctrinaire Republican party nor Trump partisan. The New York Times Dealbook column reports he’s “donated to Mitt Romney and Mr. Obama in previous presidential elections and to Jeb Bush’s primary campaign in 2015, according to public records.”
Full disclosure: I was an associate at S & C, also in the general practice group — although I left the firm a couple of years before Clayton arrived. I neither know him personally nor by reputation– so, I’m afraid, I can’t offer up any anecdote or any apt sobriquet that reveals his character or provides any insight as to how he might behave if confirmed. As readers might well recognize, one often has a bit of a love-hate relationship with an ex-employer: guilty as charged. I freely confess to my ancient S & C connection– now more than two decades old– so that readers might be alive to any bias embedded herein– either pro-or anti.
Save for a post-law school clerkship with federal district court judge Marvin Katz, Clayton has been an S & C lifer, with no prior government experience. As a partner in what S & C calls “general practice”– and the rest of the world calls corporate law– his job has been to ensure the companies comply with the plethora of laws and regulations that apply to capital markets and mergers and acquisition activities, and to engage in negotiations with regulatory agencies that have launched investigations– including enforcement actions– into various activities of his clients.
I object– rather strenuously in fact– to the lazy claim much of the media is making that the appointment of non-litigator Clayton to be chairman of the SEC signals a willingness to go easy on enforcement and eschew rule-making, compared to the agency’s record under Mary Jo White. Reason: Any journalist that bothered to examine the record would see that despite the snake oil White herself peddled– including the ridiculous claim that the agency produced bold and unrelenting results during her tenure– her record was rather weak. Pathetic, actually. So pathetic, in fact, on both the rule-making and enforcement side, that Senator Elizabeth Warren called for her firing as SEC chair. In that position, White succeeded Mary Shapiro, who compiled a similarly lackluster record while presiding over the agency from 2009-2012. So suggesting that Clayton is going to weaken some fortress SEC is ludicrous.
The SEC didn’t pass many substantive rules during White’s tenure, couldn’t get unanimity on the rules it did pass and left the controversial regulations to other regulators.
White’s agency continued to implement Dodd Frank, of course, but missed plenty of deadlines before rules required by Congress were promulgated.
Its farthest-reaching initiative, the revisions to the oversight of money-market funds, was something forced upon the agency by other financial regulators, rather than something the SEC itself seemed interested in doing.
Imposing fiduciary obligations on financial advisers was a matter left to the Labor Department, after the SEC curiously elected to eschew doing something about an industry over which it had an excellent claim to regulate.
The agency has done nothing to oversee high-frequency trading and nothing on a potential — and much wished for by the left wing of the Democratic Party — rule on the disclosure of corporate contributions to political candidates.
As I then summarized the state of play:
Why does this matter? Well, Trump has promised to roll back Dodd-Frank. Some have questioned whether he can effectively do this: short answer, with the co-operation of a Congress in which Republicans hold majorities in both houses, he can. But his ability to unravel the entire multi-faceted Dodd-Frank regulatory program would be seriously complicated if the SEC had managed to complete rule-making procedures mandated previously by Congress, according to statutory deadlines, and had firm regulations now in place.
And in fact, it’s not out of the question that some if not many in the industry might prefer certainly, and not advocate scuttling of some regulations– particularly the more wishy-washy ones– rather than lining up wholeheartedly behind a program of wholesale regulatory rollback. In that case, the securities law regulatory framework would be in far better shape if White’s SEC had managed to meet its regulatory responsibilities, and had finished the rule-making procedures with which it had been charged, than is the current situation where serious tasks remain incomplete).
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. He has indeed recently appointed activist investor Carl Icahn to serve as a special adviser on regulatory reform. Icahn will advise in an individual capacity, so as to skirt federal conflicts of interest and disclosure requirements, and will not hold any official federal or special government position. I should point out– as the piece cited immediately above explores at greater length– Icahn himself is not reflexively or completely anti-regulatory in the securities law area, and unsurprisingly, favors expanding disclosure regulations that benefit his business model.
Based on what we know now, however, in selecting Clayton over Paul Atkins– a member of his transition team and a past SEC commissioner– Trump went with a more mainstream entity with no prior strong public views on the appropriate level of regulation. This stands in contrast to Atkins, who served as an SEC commissioner from 2002-2008, and was particularly outspoken, as reported by the Wall Street Journal, in denouncing what he described as large fines levied against companies, arguing that these punished shareholders rather than the companies. Atkins is serving as a member of Trump’s transition them and is reportedly in line to be put forward as vice chairman of the Federal Reserve.
It’s difficult to compare a relative unknown with someone who has a public service record that includes well-known public statements on securities law. Among the measures Atkins is currently reportedly promoting, according to a report in Fox Business, is a measure to neuter New York’s Martin Act, a 1921 state statute that predates the federal securities law framework and that crusading New York state attorneys general– such as Eliot Spitzer– have relied on to take on Wall Street abuses. State “Blue Sky” laws are also under scrutiny. Details on these discussions have been scant, but current New York state attorney general Eric Schneiderman has taken them seriously enough to describe such proposals as “deeply troubling”. The Atkins record is far more radical than anything I’ve seen Clayton has thus far proposed.
Goldman Connection: Cause for Concern
One point I do find more problematic is that Clayton is yet another Trump appointee with a strong Goldman Sachs connection. Despite making considerable political hay during the presidential campaign over Hillary Clinton’s Goldman Sachs connections and speeches, Trump has made unseemly haste in tapping alumni and affiliates of the Vampire Squid for White House and Cabinet appointments. These include: former Goldman executive Steven Mnuchin, Trump’s choice to lead the Treasury Department; Steve Bannon, a former Goldman investment banker named as a senior counselor to Trump; and former Goldman President Gary Cohn, who will run the National Economic Council (the economic analogue to the National Security Council in the West Wing, initiated under Richard Nixon, revived under Bill Clinton and headed by Robert Rubin, former co-chair of Goldman, who subsequently became Treasury Secretary);
For those who are unaware of the long and intertwined S & C-Golman connections, their embrace goes beyond Clayton’s representation of Goldman on some key legal matters– that link is so obvious that even Matt Yglesias noticed it in this article from yesterday.
As the Wall Street Journal notes, “Sullivan & Cromwell is a key outside legal adviser to Goldman and is more closely associated with Wall Street than perhaps any other law firm, though Mr. Clayton’s focus has largely been around capital markets.” The Goldman-Sullivan special relationship is longstanding and well-known to most on Wall Street, including the legions of S & C and Goldman alumni.
The same Journal piece also recognizes, “Unlike some of its competitors, Sullivan & Cromwell doesn’t have a reputation for feeding the SEC’s revolving door. More of its alumni land in corporate roles than in top government jobs.” Part of the reason most S & C partners stay put is that virtually no other law firm would compensate them as lavishly. In those rare instances when a partner jumps ship, it’s for a corporate position– which sometimes in-house positions at guess where? IIRC, former partner Robert Katz was the first ever S & C partner to leave the firm for another legal job– but he didn’t stray far, walking up Broad Street S & C’s offices at number 125 to a position as Goldman Sachs’ general counsel at what were then Goldman’s old offices at number 85. Later, partner Gregory Palm made the same journey, to the same job, as subsequently did partner Esta Stecher, with a prior detour to head Goldman’s tax practice. Both Palm and Stecher currently serve on Goldman’s management committee.
Just a few final points. First, Clayton seems to be such a surprise pick to head the SEC that the first press accounts are stretching to come up with criticisms. One such criticism stems from a 2011 article he co-authored on the Foreign Corrupt Practices Act (FCPA) entitled, “The FCPA and its Impact on International Business Transactions – Should Anything be Done to Minimize the Consequences of the U.S.’s Unique Position on Combating Offshore Corruption?” But, to put this in context, Clayton chaired a drafting committee comprised of members of the Committee on International Business Transactions of the New York City Bar Association– suggesting that this perspective was not exactly a minority or offbeat project. I’m also not sure that the committee’s conclusion is particularly recherché or controversial:
While accepting and fully embracing the ultimate policy goal of the FCPA—the prevention of corruption worldwide—the purpose of this article is to call for an assessment of (1) the ability of the United States to achieve that goal unilaterally and (2) the direct and indirect costs of continuing such an effort. This paper has identified several factors, including the incentives of the various participants and the decrease in the relative importance of the U.S.-regulated companies in the international marketplace, that strongly and clearly suggest that the United States cannot continue to do it alone. The costs of pursuing such an approach are substantial and, in certain cases, irreversible and, consequently, a realignment of the U.S. position in the global anti-bribery enforcement regime is necessary (p. 26).
And also, I should also point out that many commentators– including yours truly, a writer not known for being a corporate stooge (or at least I so hope) — have criticised the DoJ’s focus on FCPA violations, at the expense of more serious systemic abuses closer to home. See my November post on this issue, in which I quote from a speech by assistant attorney general Leslie R. Caldwell:
This is why the fight against international corruption has been, and continues to be, a core priority of the Department of Justice. It has been a core priority for the Criminal Division, and our commitment to the fight against foreign bribery is reflected in our robust enforcement record in this area, which includes charges against corporations and individuals alike from all over the world. Since 2009, the Criminal Division’s Fraud Section has convicted more than 65 individuals in [FCPA] and FCPA-related cases, and resolved criminal cases against more than 65 companies with penalties and forfeiture of approximately $4.5 billion.
Allow me to quote from that November post at length, beginning with the section that discusses the Caldwell quotation immediately above:
Sounds reasonable, right? I mean, after all, no one would come right out in favor of more international corruption?
But when we unpack it, we butt up against a few problems. First, to quote my contact the white collar defense specialist again. The lack of an effective DoJ deterrent has enormously complicated his practice and his ability to get his clients to understand and act on prudent legal advice. “What I’ve seen happening more and more in the last couple of years is the chairs of audit committees of major companies openly mocking the DoJ’s enforcement capability.” This leads the companies to pursue courses of action that they wouldn’t dare to undertake if they worried that the DoJ would aggressively pursue securities law violations.
Where does this leave their lawyers? Well, it often means that they must either moderate their advice, or risk losing their clients. Clients who want to do something will resist their impulses and continue to listen to what they hear as their lawyers crying wolf only for so long. Eventually, the less scrupulous among them are going to ignore the contrary advice, or get another lawyer. The lack of effective enforcement at the DoJ hinders the efforts of the best, most prudent, and most ethical members of the legal profession to practice law as we would want them to.
So, what happens instead? Well, the most scrupulous of them will continue to give what they regard as sound legal advice (even if what some privately call the Department of Jokes does not enforce the law in a way that lends credence to that approach). But that means they often have to develop new areas of expertise when their clients beat a path away from their doors. “We have to act sometimes as shoe salesmen, flogging competence in FCPA violations, that occur in subsidiaries or with foreign suppliers,” says my white collar defense specialist contact. “This work leads us to countries and legal systems we don’t know well, to uncover chickenshit violations that occur far from home.” Far better, he believes, would be for the DoJ to focus on law-breaking that occurs in the United States, as that could be effectively deterred by the agency refocusing its enforcement priorities. Now that would be a legacy we could all believe in.
So, given what I just wrote about the FCPA a couple of months ago, it would be rather unseemly to call for the tarring and feathering of Clayton merely for co-authoring an article about FCPA deficiencies.
Finally, I also noticed that Clayton has an interest in cybersecurity issues. In reading ‘Ten Commandments’ of Cyber Security Can Enhance Safety yesterday– an articIe he coauthored with a half dozen other co-authors — I couldn’t help but think how the 2016 presidential election might have turned out differently if Hillary Clinton and members of her staff had followed some its recommendations (and perhaps if some of those staffers had challenged their fearless leader to do the same), especially the bulleted points under commandment one, Develop and Practice Strong Cyber Hygiene:
- Conduct full background checks of personnel to mitigate “insider” threats.
- Implement robust passwords or other advanced means of multi-factor authentication.
- Ensure security of computing and communication devices, especially when traveling abroad.
- Train employees on email etiquette and “spear-phishing” schemes.
- Keep personnel up-to-date as to relevant incidents, causes and consequences.
- Increase and demonstrate cybersecurity common sense as part of performance reviews.
- Utilize surveillance and malware detection and “detonation” software.
- Assess the security needs for encrypted phones, laptops and smart devices.
Jay Clayton would probably not be my first choice to fill one of the three vacant spots as SEC commissioner– especially the crucial chair’s position. Nor would he, I suspect be Senator Elizabeth Warren’s top pick, either. But he’s a well-qualified, perfectly respectable pick for a Republican SEC commissioner. And although I have by no means conducted thorough and systematic research in the short time since his nomination was announced, at least based on his public record, he seems to hold the sort of considered, cautious, middle-of-the-road positions that cause one to be relied on as a trusted legal adviser to the country’s largest companies and financial firms. In other words, William O. Douglas he aint.
Trump considered– and rejected, at least so far– candidates I would have found to be far worse. He’ll have the opportunity to propose some of these candidates to the two unfilled commissioner positions– but not to the crucial chair position (if Clayton gets confirmed).
Meanwhile, the President-elect has put forward other Cabinet nominees– Steven Mnuchin (Treasury), Scott Pruitt (EPA), and Jeff Sessions (DoJ), who pose much more serious threats. I suggest congressional Democrats should get their act together and focus their attentions on defeating these more problematic appointments.