Chairman Clayton Looks Back on 2018 and at the Road Ahead

December 14, 2018

On December 6, 2018, Securities and Exchange Commission (“SEC”) Chairman Jay Clayton gave a speech reviewing SEC rulemaking in 2018, rulemaking to come, and challenges posed by Brexit and the transition away from LIBOR.1 This alert summarizes Chairman Clayton’s remarks.

Regulatory Agenda

  • The 2018 regulatory agenda was more focused than in past years. This, in part, led to the SEC advancing 23 of the 26 (or 88%) rules on its near-term agenda.
  • Regarding the proposed Regulation Best Interest and the proposed interpretation of the investment adviser standard of conduct, Chairman Clayton said, “Using plain language, [the SEC is] bringing the regulation of conduct and communications in line with the reasonable expectations of our Main Street investors.”
  • The SEC’s Fixed Income Market Structure Advisory Committee (“FIMSAC”), made up of industry experts, held four public meetings during 2018. According to Chairman Clayton, FIMSAC has provided the SEC “with five thoughtful recommendations on ways to improve our fixed income markets.”
  • The SEC’s Division of Trading and Markets held three roundtables during 2018 to explore (i) the market structure for securities of smaller, more-thinly traded companies; (ii) regulatory approaches to combating retail fraud; and (iii) access to markets and market data.
  • The “Reg Flex” agenda, posted this summer, includes near-term agenda items such as (i) the modernization of investment company disclosures, (ii) the exchange-traded funds rule, (iii) and amendments to the marketing rules under the Investment Advisers Act of 1940.2

Proxy Process

  • The SEC held a roundtable focused on proxies in November 2018. The roundtable discussed (i) the proxy solicitation and voting process, (ii) shareholder engagement through the shareholder proposal process, and (iii) the role of proxy advisory firms. In discussing the roundtable, Chairman Clayton stated, “There was consensus among the panelists that the proxy ‘plumbing’ needs a major overhaul.”
  • Chairman Clayton stated that a review of the ownership and resubmission thresholds of shareholder proposals is warranted, noting that “the current $2,000 ownership threshold was adopted 20 years ago, and the resubmission thresholds have been in place since 1954.”
  • Regarding proxy advisory firms, Chairman Clayton said that “there should be greater clarity regarding the division of labor, responsibility, and authority between proxy advisors and the investment advisers they serve.” Chairman Clayton also stated that “there were other issues raised at the roundtable that we should consider, including (1) the framework for addressing conflicts of interests at proxy advisory firms and (2) ensuring that investors have effective access to issuer responses to information in certain reports from proxy advisory firms.” The SEC staff has been asked to review these and other issues and to prepare recommendations for the SEC’s consideration.

Private Offerings

  • Chairman Clayton stated that the SEC’s Division of Corporation Finance is looking at the private offering framework. He noted that the staff is working on a concept release to solicit input on key topics, including whether the accredited investor definition is appropriately tailored to address investment opportunities and investor protection concerns.

Brexit

  • Chairman Clayton presented five personal3 concerns over the effects of Brexit on U.S. investors and securities markets and on global financial markets more broadly. For instance, one stated concern was that “the potential adverse effects of Brexit are not well understood and, in the areas where they are understood, are underestimated.”
  • Chairman Clayton has directed the SEC staff to focus, in part, on the disclosures companies make about Brexit.

LIBOR

  • Chairman Clayton raised a concern over the transition away from LIBOR as a benchmark reference for short-term interest rates after 2021. While this change is a few years off, Chairman Clayton made this observation: “A significant risk for many market participants—whether public companies who have floating rate obligations tied to LIBOR, or broker-dealers, investment companies or investment advisers that have exposure to LIBOR—is how to manage the transition from LIBOR to a new rate such as [Secured Overnight Financing Rate or SOFR], particularly with respect to those existing contracts that will still be outstanding at the end of 2021. Accordingly, although this is a risk that we are monitoring with [the SEC’s] colleagues at the Federal Reserve, Treasury Department, and other financial regulators, it is important that market participants plan and act appropriately.”
  • Chairman Clayton covered many areas during his remarks from a high-level perspective. His remarks should be reviewed and noted as they may shape the focus and agenda of the SEC and its staff. Firms should remain abreast of these highlighted areas to assess any potential impact they may have on current operations, compliance, and/or disclosures.
 

[2] See Reg Flex agenda for 2019 rulemaking, Federal Register, August 7, 2018.

[3] Chairman Clayton stated, “To be clear, these are my personal views, but it is appropriate to share them as they are reflective of the SEC’s approach to Brexit.”