New US SEC chairman previews governing principles; stresses commitment to working with US CFTC


By Gary DeWaal

In July, Jay Clayton, newly appointed Chairman of the Securities and Exchange Commission, enumerated eight “guiding principles” that he says will govern his leadership. Among these are that regulatory actions cause change and can have long-term effects. Some may be positive, such as the US public company disclosure and trading system which, he said, “is an incredibly powerful, efficient, and reliable means of making investment opportunities available to the general public.” However, he questioned whether this system is also causing a decline in the total number of US listed public companies in the last decade. He noted that, during this period, “the median word-count for SEC filings has more than doubled, yet readability of those documents is at an all-time low.” Mr. Clayton also said that coordination with other regulators is paramount. The SEC’s new chairman committed to working with the Commodity Futures Trading Commission to find ways where the agencies can harmonize rules enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act related to over-the-counter swaps, and to “reduce unnecessary complexity as well as costs to both regulators and market participants.” Other key principles articulated by Mr. Clayton include (1) that each part of the SEC’s three-part mission – to protect investors, to maintain fair, orderly and efficient capital markets, and to facilitate capital markets – is critical; (2) the SEC must protect the long-term interests of Main Street investors; (3) the SEC’s historic approach to regulation “is sound;” and (4) as markets evolve so must rules and operations of the SEC. Mr. Clayton enumerated his principles in an inaugural-type speech before the Economic Club of New York on July 12.

My View: Just as in 2000 when the SEC and CFTC voluntarily proposed a rationalization of the then contentious regulation of futures on individual stocks and narrow-based stock indices – known as the “Johnson-Shad Accord” (click here for background) – that was subsequently enacted into law, there is opportunity now for the SEC and CFTC to rationalize the regulation of security-based swaps and investment management regulation. In general, deference should be given to the CFTC in connection with all trading rules related to transactions in derivatives of any kind, including security-based swaps. This is because of the Commission’s expertise and long-time experience in protecting the public and market participants from fraud, manipulation and abusive practices related to derivatives on all commodities (except onions and motion picture box office receipts), including financial instruments. Contrariwise, deference should be given to the SEC when it comes to the registration of commodity pool operators of private commodity pools for CPOs that are registered as investment advisers with the SEC or affiliated with SEC-registered IAs. Prior to 2012, the CFTC maintained a rule that was then rescinded that exempted such CPOs from CFTC registration. (Click here for background on former CFTC Rule 4.13(a)(4) in the February 14, 2012 advisory entitled “CFTC Adopts Significant Changes to CPO and CTA Registration and Compliance Requirements” by Katten Muchin Rosenman LLP.) No compelling rationale was provided at the time for such action. Accordingly, that rule rescindment should now be reversed. (Click here for advocacy of this position in a letter by the Managed Futures Association to CFTC Acting Chairman J. Christopher Giancarlo, dated June 6, 2017.) Of course, I still wonder about the efficacy of maintaining multiple regulatory agencies to oversee US markets’ regulation in the first place. (Click here to access the section My View to the article “US Department of Treasury Recommends Modifications to Volcker and Bank Capital Rules, and Rationalization of Financial Regulation” in the June 18, 2017 edition of Bridging the Week.)