Taking on Trump’s Agenda: Nine Tough Questions for SEC Chair Nominee Jay Clayton on the Eve of His Confirmation Hearings

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia and is currently 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.

Tomorrow, the Senate Committee on Banking, Housing, and Urban Affairs will conduct confirmation hearings on the nomination of Jay Clayton, partner at the white shoe law firm, Sullivan & Cromwell (S & C), to chair the Securities and Exchange Commission (SEC). The SEC is currently effectively stymied, as a consequence of having three of its five commissioner posts unfilled— a situation that predates Trump’s inauguration, and which I discussed in my previous post, Mary Jo White Leaves Behind a Weakened SEC for Trump to Weaken Further.

In my previous post discussing  Clayton’s nomination, Trump Selects Jay Clayton, S & C Partner, to Head SEC, I concluded that although he wouldn’t have been my first choice for SEC chairman, as a securities lawyer with more than two decades of experience practicing securities law at S & C, he was unlikely to dismantle the complex framework of securities law. Moreover, he’s  a much less problematic (and under-qualified) pick for this position than other Trump nominees were, in my opinion, for theirs. Others commentators disagreed, with Matt Taibbi, for instance, criticizing the appointment in Trump Nominee Jay Clayton Will Be the Most Conflicted SEC Chair Ever, due to his role as a longtime defender of big banks and other corporate interests, including Goldman Sachs, and his wife’s position as a wealth management adviser at that firm. (In the interest of limit of limiting the length of this post, I will spare readers more extensive citations to the commentary on the Clayton appointment, but will respond to demands for more on the topic, if comments on this piece reveal interest in seeing more links.)

Inane and By Design– Whether Or Not Deliberate– Call to Denounce Trump’s Visa Ban

Last Friday evening, Yves received an email in which ex-S & C associates sent an open letter to Clayon. I quote from that letter (which is reproduced completely below):

We write to ask you, as a leader of the firm, our profession and our community, to speak out against President Trump’s Executive Order 13769 of January 27, 2017 and subsequent Executive Order 13780 of March 6, 2017—both entitled “Protecting the Nation from Foreign Terrorist Entry into the United States”—and the actions of the current administration relating to the Executive Orders.

The New York Times covered the issue, in an article headlined, Ex-Workers at S.E.C. Nominee’s Firm Urge Him to Denounce Travel Ban. The combination of the utter pointlessness of this gesture, combined with its inside-baseball nature- which could equally well be headlined as Ex-Associates at White Shoe Law Firm Firm Ask Partner to Address Issue Over Which He’ll Have Zero Authority in His New Job If Confirmed by the Senate– is just the latest entry recording The Grey Lady’s sad decline, as she casts her net wider and wider in plumbing the depths of issues with which to tag, tar, or embarass the Trump administration.

This may seem to be the most recondite– and I concede, boring matter– to address here. Please, dear readers, stick with me a bit. This letter raises serious concerns, and has sparked my  modest response– which  well-credentialed elites, not to mention the Democratic party, might target if they hope to rein in some of the worst of the many awful Trump administration policies– and, incidentally, ensure he’s a one-term president.

I’ve made no secret of my former employment as an S & C associate, and possibly as a consequence of that fact, was mentioned by name in the cover letter to Yves– perhaps with the intention of getting me to sign onto the letter, or at least to comment on it.

My Riposte

Consider this post my riposte (admittedly, a rather prolix one).

First off, I should mention that I personally abhor Trump’s immigration executive orders,  in  whatever terms the policy is ostensibly cloaked.  I rely on many reasons for supporting my stance, including some legal, and for which I’m relying– perhaps naively and ultimately, will prove to be in vain–  on courts to address. Here, I’ll only mention more personal issue, one of great concern to many of my foreign friends, Muslim and non-Muslim alike. In the last couple of weeks in particular, I’ve been involved in many fraught discussions with textile artisans and owners of textile companies– many of whom I know well– about the new policy. I regularly wear fabric or clothes these people have made, have dined at their tables, stayed at their homes, and have hosted them as house or dinner guests at my NYC home. And even though none of them is a national of the targeted countries– and so at least in theory, is in no way directly subject to Trump’s policy — many of them I’ve spoken to are confused and worried just the same.

Some of these people– particularly my Muslim friends– are reconsidering pending plans to visit the US for business reasons, over concerns that they’ll be at minimum delayed at the border, or worse, hassled or harassed, or even denied entry completely. Yet rather than clutching my pearls and inanely waving my hands, I’ve counselled them the best I can, and put them in touch with others whom I believe can counsel them better about whether to go and what they will and won’t be able to do if they’re detained at the border. Getting entry to the United States is more than an academic question for some of these business travellers, many of whom are artisans– aka, members of the working class, with basic but limited command of English. They’re not the sort of well-connected, credentialed people who cross international borders with ease.

I should in passing mention, however, that several of them are world-renowned practitioners of the textile arts, who have in many cases previously visited countries located in Asia, Australia, Europe, or North America as invited experts, to run seminars and workshops, or attend exhibitions and craft fairs. Many have even visited the US– not once but at least a couple of times. They’re worried about the uncertainty the ban creates, and the underlying animus they believe it expresses: Maybe they say, it’s better not to visit the US at all at this time? Of particular concern is the money and time they’re risking by taking  a US trip.  For some artisans or company owners, that also means assuming the considerable risk of producing products for craft fairs and exhibitions they’ll be unable to unable to sell, if they’re either denied visas for or entry to the US. World-renowned and well-travelled they might be, but these are not rich people– and the costs of air tickets they might forfeit or the unsold products they’d have to find a way to unload would impose real hardship on them, their workshops, their families, and even their small communities.

So, now that I’ve made my personal position on Trump’s policy perfectly clear, let me say: As a tactic for taking on Trump, this open letter to SEC chair nominee Jay Clayton– whatever the NYT thinks of it — is another lame, misguided, cackhanded response. It’s in the best tradition of the previous administration (and as I’ve written here, The Obamamometer’s Toxic Legacy: National Security, among other places), and performs the sleight-of-hand that so much elite opposition to Trump has taken: of substituting strongly-expressed, rhetoric for effective opposition.

What do these folks expect to achieve here? Even if Clayton were to respond, what impact would that have on Trump’s policy? Clayton has been nominated to head the SEC– not to direct the Department of Homeland Security, nor to serve as Attorney General, nor to take on any other position where his views on the immigration ban are relevant, e.g. in some other Department of Justice (DoJ) position where he might be charged with enforcing immigration laws, nor to assume a judgeship. So, I ask these ex-S & C attorneys: Why waste your time– and the platform this no-doubt well-intentioned gesture has shown you can command– in mounting at what’s at best an irrelevant sideshow at the Clayton confirmation hearings circus?

Try This Instead

How about instead putting Clayton on the spot on areas you know well, addressing issues where the Securities and Exchange Commission (SEC)  has sided with moneyed interests– TBTF banks, as just one example– rather than in defense of what you know in your hearts, dear ex-colleagues, to be the public interest? How about asking the nominee hard-hitting questions about ways to reform the agency that that it’s once again feared and respected on Wall Street — or more more widely, in corporate boardrooms? To this end, I propose nine alternative questions to ask the nominee.

1. Clayton’s Changed Role

Formerly, Mr. Clayton, you represented key players at heart of financial crisis: banks and underwriters (including Goldman Sachs), and played a key role in rescue operations that led to the bailout of these big banks.

Under the ethical rules by which lawyers are bound, you’re obliged to represent the interests of your clients zealously. Now, as head of the SEC, you’ll soon be bound to serving the interests of a broader constituency– the SEC’s mission, after all, is “to is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

Please describe your thinking on your new role (if confirmed), and outline for the committee your general approach to pursuing this new new agenda.

2. Conflicts Arising from Prior Relationship with the Vampire Squid

How do you propose to manage the perceived conflicts between your role as SEC chair (f confirmed), and your former representation of Goldman Sachs, as well as the numerous other firms that have been your clients fall under under the SEC’s jurisdiction?

Please confirm that your wife, Gretchen, intends to step down from the position if you are confirmed in the position of SEC commissioner.

Describe for the committee what role you will take to minimize conflicts of interest arising from  your new role as SEC chair, and your existing investment portfolio? (Whether this portfolio is held in a blind trust or not, you are surely aware of the potential impact of actions you might take on this portfolio.)

The committee is concerned that mere recusal from potential conflicts situations is an incomplete remedy since you– to put it familiarly– at the top of the SEC food chain, will, by your direct actions and otherwise, inevitably influence the issues taken up for investigation (and enforcement), by the SEC’s professional staff. Please tell us how you will address this concern.

3. In What Ways Does Current US Securities Law Fail to Promote C-Suite Accountability? 

Writing for The New York Times earlier this month in an article headlined, Preet Bharara: ‘Sheriff of Wall Street’ or Pragmatic Showman?, Andrew Ross Sorkin quoted recently-fired United States Attorney for the Southern District of New York Preet Bharara’s response to widespread criticism  his office’s failure  to pursue big banks or their executives for their activities that led  to the great financial crisis:

“If we’re not bringing a certain kind of case, it’s because the evidence is not there — pure and simple,” Mr. Bharara said in 2014 in a wide-ranging interview with Worth magazine about why he never prosecuted a bank C.E.O.

In that article — which is quite revealing and worth rereading — he offered some advice to the Greek chorus of politicians, pundits and others who suggested that he and other prosecutors had abdicated their responsibility by not pressing charges against the big banks or their top executives.

“I would suggest that some of these critics should go to law school and apply themselves and become prosecutors, and make the case that they think we should be making,” Mr. Bharara said. “Sometimes there’s frustration, because the things that have happened don’t rise to the level of criminal conduct. People are being jerks and stupid and greedy and negligent, but you can’t pin a criminal case on them.”

Bharara’s stance  has been criticized heavily, in numerous articles, including  this recent from ProPublica piece, When It Comes to Wall Street, Preet Bharara Is No Hero.

Mr. Clayton, Do you agree with Mr. Bharara’s stated position on the futility of making such cases? If you disagree, please point to avenues that you believe should have been used to prosecute alleged offenders. (The committee understands that you are not a litigator, but as a  a leading securities law practitioner who seeks confirmation as an SEC commissioner, we are nonetheless interested to hear your response.)

If you agree with Mr. Bharara, what specific changes would you propose to the securities laws framework to encourage greater C-suite accountability?  Which areas of the existing securities law framework come to mind as weak or deficient, and thus demand this committee’s immediate attention?

(Jerri-Lynn here: For readers interested in delving into this issue further, I examine it more thoroughly in this post, Trump Fires Preet Bharara and 45 Other US Attorneys, Media Hysteria Ensues.)

4. Sarbanes-Oxley Internal Control Provisions

While we’re on the topic of criminal and other forms of expanded legal liability, let’s roll back the clock for a moment and remember that Al Capone was successfully prosecuted for an income tax violation.

And in a similar but more recent vein, recall hat the internal control provisions of the Sarbanes-Oxley Act of 2002 (SOX) — as you’re no doubt well aware, Mr. Clayton– were specifically designed to make it impossible for senior corporate executives to disclaim knowledge of problematic activity to avoid legal liability. Instead, the legislation required companies to put effective internal control procedures in place, and for the CEO and CFO to certify personally the accuracy of financial statements and the adequacy of internal controls. Congress passed these these SOX that were signed into law by President George W. Bush.

SOX provides an even stronger basis for prosecution than the Capone example previously  rather flippantly cited since the SOX internal control provisions were created to target exactly the sort of behavior that occurred: i.e., ostensibly responsible CEOs and CFOs who claimed ignorance of things happening on their watch and thereby escaping accountability (and associated legal liability).

The SEC and the DoJ have thus far failed completely to use this relatively newly-created SOX authority to pursue CEOs and CFOs for signing off on the adequacy of a company’s internal controls which were anything but.

What is your position on the use of these provisions? Do you believe that any further legislative action is necessary for the SOX internal control provisions to be an effective enforcement mechanism? Or do you believe, that enforcement of these SOX sections something the SEC’s new director of enforcement may more vigorously pursue under the existing statute?

(Jerri-Lynn here: For readers interested in delving into this issue further, Yves examines it more thoroughly in this post, Wall Street Journal Tallies DoJ and SEC’s Pathetic Record in Tackling Wall Street Crime, one of her many addressing this issue; I have also touched on this issue in this post, News Flash: Mary Jo White Claims SEC Produces “Bold and Unrelenting Results”).

5. Role for Securities Law Class Actions?

Mr. Clayton, as you no doubt are well aware, legislative changes and a decades-long series of business-friendly legal decisions limiting punitive damages awards have resulted in a slowing of class action lawsuits.

Further, these lawsuits– which incentive entrepreneurial plaintiffs’ law firms to bring cases to enforce laws not otherwise easily enforced– are at the moment the target of further legislation to restrict such actions, such as the Fairness in Class Action Litigation Act of 2017), passed by the House of Representatives on Monday.

Although the committee is well aware of concerns over the high fees plaintiffs’ law firms can, if successful, receive for bringing such cases, and that class members often receive little monetary benefit from such litigation. We nonetheless ask you to discuss your position on expanding rather than restricting securities class actions, primarily for their deterrent effect. Litigation brought by these private sector watchdogs costs the government nothing. Might making it easier, rather than more difficult, eto bring securities law class actions expand the de facto resources available for enforcement of securities laws? And might this be a goal worth pursuing, especially in light of limited federal resources available to devote to enforcement?

The committee notes just one class action settlement, for example– where minimal damages were levied, incidentally– in which Subway was forced to ensure in future that the 6- and 12-inch sandwiches it purports to sell are indeed the length that it claims.  Although this example may seem trivial, the costs to myriad consumers of paying for something they didn’t receive was not so, when all the sandwiches sold were considered. Despite the negligible damages, the class action has resulted in Subway changing its practices– with consumers now getting what they’ve paid for.

(Jerri-Lynn here: For readers interested in delving into this issue further, I examine the issue more thoroughly in this post, Business Groups Aim to Strong-Arm CFPB on Arbitration, while Pam Mars and Russ Martens discuss latest legislation in Republicans Plan a Coup Today in the House, Gutting Established Class Action Law. )

6. Correct Interpretation of Congressional Review Act and Regulatory Rollback

The administration has issued the following announcement,  H.J. Res. 38, H.J. Res. 36, H.J. Res. 41, H.J. Res. 40, H.J. Res. 37 – Statement of Administration Policy, which:

strongly supports the actions taken by the House to begin to nullify unnecessary regulations imposed on America’s businesses. The regulations that the House is voting to overturn under the Congressional Review Act have established burdensome compliance requirements that force jobs out of our communities and discourage doing business in the United States.

Kimberley Strassel outlined a novel interpretation of what the Congressional Review Act (CRA) permits in her article, A Regulatory Game Changer,  which could potentially be used to unwind Obama administration regulations going back as far as 2009. What is your position on this expansive interpretation of the CRA?

(Jerri-Lynn here: For readers interested in delving into this issue further, I examine the issue more thoroughly in this post, Republicans Deploy CRA Authority to Roll Back Regulations.)

7. Defects in SEC’s Whistleblower Program: Do Expanded Qui Tam Provisions Provide a Remedy?

As Mr. Clayton is no doubt well aware, the Dodd-Frank Wall Street Reform and Consumer Protection Act created an SEC whistleblower’s program whose benefits that have thus far fallen well  short of expectations. That program provides for the SEC exclusively to sue on behalf of whistleblowers who report problems to the SEC.

Incentives in the US legal systems for private parties to spill the beans date back to the Civil War-era False Claims Act– extended in 1986– that includes “qui tam” provisions permitting individuals to sue on behalf of the government– and to receive a bounty if they prevail.

The SEC whistleblower system requires that the SEC itself bring whistleblower actions. If the agency declines to bring a suit, no further legal action is possible– in contrast to what occurs in other other qui tam situations, where if the government fails to bring an action, the whistleblower may independently proceed and file a lawsuit. Given that no less a legal luminary than Justice Antonin Scalia  has lauded qui tam provisions– pointing out their antecedents that date back to 1331 in England– what is your position on  amending the SEC’s whistleblower authority to allow whistleblowers themselves to bring qui tam suits in situations where the statutory reporting requirements are satisfied but the government elects not to pursue litigation? We note that such a change would allow private parties to sue to redress grievances, at no cost to the government, and would therefore be a means to increase de facto resources available for enforcement.

(Jerri-Lynn here: For readers interested in delving into this issue further, I examine the issue more throughly in this post, SEC Takes Victory Lap for Pathetic Performance of Whistleblower Program).

8. Protecting The Interests of Retail Investors

Over the last decades, the US has overwhelmingly moved away from a system of defined benefit retirement provisions (as compared to the previous system of defined benefits). In February, Trump issued a Presidential Memorandum on Fiduciary Duty Rule, directing the Department of Labor (DoL) to conduct an examination of the a new fiduciary rule, due to come into effect on April 10. As you are aware, Mr. Clayton,  this rule would impose a basic fiduciary duty standard on investment advisors, requiring them to act in a client’s best interest and would replace the previous suitability standard, which consumer advocates have charged motivates investment advisors to provide conflicted advice, motivated by fees.

What is your position on the fiduciary rule?  Whatever the DoL decides to do with respect to the fiduciary rule, what steps should the SEC take to promote a more level playing field for retail investors?

(Jerri-Lynn here: For readers interested in delving into this issue further, I examine it more thoroughly in this post,  Fourth Federal District Court Looks Likely to Uphold Fiduciary Rule.)

9.  Time to Rescind Rule NMS?

Regulation NMS has enabled the rise of high-frequency trading. Former SEC chair Arthur Levitt–  one-time head of the American Stock Exchange– promoted the rule, which arose from his belief that competition between stock exchanges was a goal  the SEC should pursue. The regulation has enabled firms to construct high-frequency trading networks and engage in high-frequency such trading, with the profits they earn coming at he expense of other investors, and which increases systemic risk.

What is your position on rescinding rule NMS, especially given the Trump administration’s desire to reduce regulatory burdens?

(Jerri-Lynn here: For readers interested in delving into this issue further, see this post by Craig Heimark, a recovering derivatives trader, and Yves Smith, The Real Problem with High Frequency Trading).

My Challenge to the Ex-S &C Attorneys: Risk Your Rice Bowls

So, how about it, S & C alumni? I’ve had my say in this post.  What are you doing to shore up the listing securities law framework, to ensure that it can best address existing and future challenges?

Many of these  questions target directly the optimal distribution of economic benefits–  between banks and corporations, which are incidentally overwhelmingly your clients– and investors especially retail investors, aka, the public at large.

In particular, how should securities and other relevant laws be reformed, so as to reduce fraud and ensure the guilty are punished? What securities laws must change to convince the large coterie of Trump voters and disillusioned non-voters that the US justice system– including the part the SEC is responsible for– isn’t a sham that enshrines elite impunity despite the real and considerable economic pain many  have endured? I ask these ex-S & C attorneys to abandon their enabling rhetoric and activities, and put their own rice bowls at risk, by demanding answers to tough questions on the future shape and structure of this important, albeit complex and recondite, area of legal practice. The details may appear to be obtuse– no doubt deliberately so, so that non-initiates have no understanding of what’s at stake: no less than how the legal structure determines who wins, and who loses, when essential issues are contested.

Will you join in fighting these crucial battles? Or, will you continue to exhort meaningless pearl-clutching gestures?

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  1. steelhead23

    Great post Jerri-Lynn. I hope you provided a copy of your questions to Senator Elizabeth Warren who sits on the committee. BTW – this brings to mind the importance, or should I say imperative, that folks like you find your way into Congressional staff. Politicians tend to be great at politics, but need guidance from folks experienced in the law, regulations, systems, and kinds of oversight that make things work.

    1. Carla

      Ahem. Politicians take all of their guidance from those who write them checks. The bigger the check, the more instructive the guidance. Congressional staff certainly know how to aid and abet the check-writers. If not, they’re quickly out of a job.

      1. Jerri-Lynn Scofield Post author

        Carla, your point is well-taken, but I figured I could do my part by putting this piece out there, and making at least some people more aware of some points not widely covered elsewhere. The alternative is to stick my head in the sand and leave coverage to the MSM– which, doesn’t exactly dig very well into what’s at stake here (for reasons that I and much of the NC community– and especially the commentariat — are certainly all too well-aware of). The Grey Lady thought after all that the S & C alumni letter was a newsworthy item– and substantively so. (I realize I’ve also given that letter wider circulation, but my aim was to bury it, not to praise same.)

  2. Vatch

    Good questions; thank you. It amazes me that relatively prosperous people who have a 401(k), stocks, or mutual fund shares, are so unwilling to demand that the government strictly enforce securities laws. It’s usually not lower income people who are directly robbed by Wall Street; rather, it’s upper middle class and genuinely rich people who are taken to the cleaners by the financial sharks. Why don’t they demand action from their Senators?

    Yes, I know that lower income people are indirectly robbed by Wall Street in many ways, and that private equity gangs have stolen pensions from such people. But it’s the rich and the upper middle class people who have stock brokers and financial advisors, so they ought to be at the forefront of demands for reform of Wall Street.

    1. Arizona Slim

      And the really sad news is this: Financial advisors aren’t much better at providing advice than, say, the average Joe and Jane. What are they good at? Salesmanship. They get a lot of training in this area.

      What should we do instead of trusting these people? Educate ourselves. It’s not that hard, and doesn’t require anything more than a library card. Here’s a reading list that you can start with:


  3. Larry

    Great call out against the S&C letter writers. Jerri-Lynn clearly knows the cowardly white shoe type who doesn’t Like Trump, but also doesn’t want to tip over the gravy boat just to make a point.

  4. Dimitri Lascaris

    For the record, I am one of the signatories to the letter that Jerri-Lynn has critiqued. Jerri-Lynn’s critique seems to assume that her approach to Clayton’s appointment and our call for Clayton to denounce the travel ban are mutually exclusive. There is however no reason why one cannot be a signatory to our letter and also ask the tough questions that Jerri-Lynn asks. Personally, I think that Jerry-Lynn’s questions are excellent ones and I certainly agree that those questions ought to be put to Clayton.

  5. robnume

    Excellent post, Jerri-Lynn. You are, as ever, most instructive. The questions you posed were absolutely the questions which need to be answered in order for the public and for investors to know just what type of ship he’s going to run. I hope it’s a return to practicing public policy that actually benefits the public. I haven’t seen that one for a long, long time.
    btw, I love, love, love legal reading. Keep up the good work.

  6. TheCatSaid

    Outstanding questions. Reading them is an education in itself.

    These are the kinds of questions that Clayton must be asked. It will be revealing to see if any of them are asked, and by whom.

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