Clayton’s Exit at SEC Opens Door to Protect Investors


As a presidential candidate and now as president-elect, Joe Biden hasn’t said much about his plans for regulating U.S. financial institutions. But in setting up his transition team, he sent an unmistakable signal about his intentions. He put Gary Gensler in charge of his financial policy transition team.

During the Obama administration, Gensler was a fearsome — and fearless — regulator. A Goldman Sachs alum — and a Treasury official during Bill Clinton’s presidency — Gensler was put in charge of the Commodity Futures Trading Commission, a small agency that Congress had just handed enormous new responsibilities. It was responsible for regulating the derivatives market, those “financial weapons of mass destruction”  that had come so close to bringing down the world’s financial system during the 2008 crisis.

The industry pushed back hard against the CFTC’s tough new rules, but Gensler held firm and won. During his tenure, the agency also broke the Libor scandal. When he left the post in 2013, I wrote that he may have been Obama’s single best appointment.

President Donald Trump, of course, has spent the last four years upending Obama’s policies wherever possible, and that includes the financial industry regulations that were adopted in 2010 with the passage of the Dodd-Frank Act.  The Consumer Financial Protection Bureau, which Dodd-Frank created, was defanged. Regulations were eased on all but the largest banks. Regulators watered down the Volcker Rule, which had outlawed proprietary trading by the big banks. And so on.

And then there’s the Securities and Exchange Commission, which has been led by Jay Clayton, a former lawyer with the white shoe firm of Sullivan & Cromwell, for almost the entirety of the Trump presidency. Earlier this week, Clayton announced that he would step down at the end of the year and issued a statement that included a long list of what he described as the agency’s accomplishment on his watch.

According to Clayton, during his tenure the SEC fined wrongdoers some $14 billion, a record amount. It “modernized and improved [regulations] that had not been reviewed and updated in decades” while also “modernizing the shareholder engagement process.” And it improved “the standard of conduct required for broker-dealers when dealing with retail customers.”

In truth, almost everything Clayton’s SEC did was aimed at making life easier for companies and harder for shareholders and investors. Consider, for instance, Clayton’s claim to have modernized the shareholder engagement process. What the SEC actually did was pass a rule, set to take effect after January 2022, making it much more expensive for stockholders to offer a proposal for a shareholder vote during the annual proxy period.

Previously, an investor had to own $2,000 worth of stock for a year to be able to offer a shareholder resolution. That will become $25,000. If the stock has been held for two years, then the shareholder can offer a resolution while holding $15,000 worth of stock; only after holding stock for three years can a shareholder offer a proposal with $2,000 worth of stock. Moreover, the agency also made it tougher to resubmit failed proposals. Previously, they needed to receive 3 percent of support to be put on the ballot again, and then 6 percent and 10 percent in following years. The new hurdles will be 5 percent, 15 percent and 25 percent.

The final vote on the rule, which took place just two months ago, was 3 to 2. One SEC commissioner, Allison Herren Lee, wrote a dissent in which she said, “these actions collectively put a thumb on the scale for management in the balance of power between companies and their owners.”

Many investor groups were equally angered, arguing that the new rules hurt the ability of shareholders to put forth resolutions regarding environmental, social and governance issues. “It will definitely make it harder to get traction on ESG issues on proxies,” said Heather Slavkin Corzo, the director of capital markets policy at the AFL-CIO.

Again and again, that’s how the Clayton SEC acted: rule-making took on an Orwellian quality, passing nice-sounding regulations that reduced transparency or put investor interest behind that of Wall Street or companies. The SEC approved a rule that broker-dealers had to look out for the best interest of their customers — after backing away from a tougher “fiduciary standard.” (“Does this rule require customers’ interest to come first?” asked a dissenting commissioner, Robert Jackson. “No, it doesn’t.”)

Earlier this month, it passed rules making it easier for companies to raise money without registering with the SEC. And there’s plenty more. The agency “has deregulated across the entire range of agency responsibilities, including investor protection, rules for raising capital, shareholder rights, corporate disclosures, derivatives regulation, regulation of securities dealers, and more,” Marcus Stanley, the policy director for Americans for Financial Reform, wrote in a recent letter to Congress.

Most of these new rules will not be easy to overturn; they will require the full gamut of regulatory proceedings, including long comment periods and, no doubt, court battles. But Clayton’s decision to resign at the end of the year — he could have stayed through the end of June 2021 — makes things a little easier. A Democratic chairman will shift the balance of power at the SEC right from the start of the incoming Biden administration.

The problem is that reforming the SEC will require much more than overturning some Trump-era rules. Remember: This is the government agency that missed the Bernie Madoff Ponzi scheme. It has consistently let companies off with meaningless fines, allowing them to neither admit nor deny their culpability. It is understaffed, and its lawyers are underpaid relative to what they could make in the private sector.

All of which Gary Gensler understands. He and his team will need to recommend that the incoming president pick an SEC chairman who is savvy about how to use the levers of power in government; who is intimately familiar with the country’s financial regulatory apparatus; who is open to new ideas, like regulating cryptocurrency; who will take no prisoners when it comes to enforcing the law; and who will take seriously the SEC’s mission to protect investors.

I can think of one obvious candidate: Gary Gensler.

That’s Warren Buffett’s phrase, of course.

Its full title is the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."

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