Remarks to the SEC Investor Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the SEC Investor Advisory Committee, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Anne (Sheehan). Good morning everyone. I would like to thank the Committee members and the panelists for taking the time to engage on the topics on today’s [December 13, 2018] agenda.

I understand that the planned discussion regarding disclosures on human capital will be postponed to a later date. I believe that the strength of many of our public companies is due, often in large part, to their human capital, and I therefore appreciate that the Committee is focusing on these disclosures. I look forward to a discussion on this topic in the future.

In lieu of this discussion, the Committee has asked that we use this time to discuss the Commission’s rulemaking and regulatory efforts in 2018 and my agenda for 2019. I am pleased to lead this discussion and answer questions that Committee members may have.

Before we move into that discussion, I would like to say a few words about the other scheduled topics that will be discussed today—(1) disclosures on sustainability and environmental, social, and governance (ESG) topics, and (2) unpaid arbitration awards. These are issues that I have been thinking about as I focus on ensuring that the Commission carries out its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Before going into my remarks, I note that my thoughts are my own and do not necessarily reflect the views of my fellow Commissioners or the SEC staff.

Disclosures on Sustainability and Environmental, Social, and Governance (ESG) Topics

Disclosure is at the heart of our country’s and the SEC’s approach to both capital formation and secondary liquidity. As stewards of this powerful, far reaching, dynamic and ever evolving system, a key responsibility of the SEC is to ensure that the mix of information companies provide to investors facilitates well-informed decision making. The concepts of materiality, comparability, flexibility, efficiency and responsibility (i.e., liability) are the linchpins of our approach. This group knows these concepts well, knows that they are interrelated, and knows that, when we consider changes to our approach to disclosure, these concepts should be front of mind.

Turning to “ESG”, a broad term, we are increasingly seeing disclosure of ESG information by issuers in the marketplace and requests for ESG information by investors. I am also aware of efforts by third parties to develop disclosure frameworks relating to ESG topics as well as calls by some market participants for issuers to follow third-party disclosure frameworks relating to ESG topics.

Although third-party standards relating to ESG topics may allow for comparability across companies, that does not mean that issuers should be required to follow these frameworks in order to comply with SEC rules. Each company, and each sector, has its own circumstances, which may or may not fit within a standard framework. That does not mean the standards do not have value. They do, in some cases, in much the same way that appropriately presented non-GAAP financial measures and key performance indicators (KPIs) add value to the mix of information.

As third-party standards have evolved and been discussed by market participants, I have seen investor-company dialogue around certain issues and in certain sectors improve. That said, I think it is important to remember two principles: first, in complying with our disclosure rules, companies should focus on providing material disclosure that a reasonable investor needs to make informed investment and voting decisions based on each company’s particular facts and circumstances; and, second, investors—and here I’m thinking about asset managers who are required to vote in the best interest of their clients—should also focus on each company’s particular facts and circumstances. Here, I would like to underscore that investment advisers have a fiduciary duty to act in the best interest of their clients. Advisers cannot put their own interests ahead of the interests of their clients—whether those interests relate to the adviser’s compensation, corporate matters (including, as examples, board composition, purchase, merger and sale decisions, or ESG matters) or otherwise.

Staying with the issues presented by the asset manager client relationship for a moment, I am also aware of various efforts to encourage asset managers to integrate ESG factors into their investment strategies. It is important to note that, although we do regulate disclosure and oversee registered investment advisers, we do not regulate the merits of any particular investment strategy. The success of a particular investment strategy depends upon a multitude of factors, which may or may not include the extent to which the asset manager incorporates ESG factors. From my perspective, what is important is that investors have full and fair disclosure of the material facts about the investment strategy their fiduciary is following so that they are in a position to make informed investment choices.

Unpaid Arbitration Awards

Let me now turn to the topic of this afternoon’s panel—unpaid arbitration awards. This is an issue that is important to me given its potential impact on Main Street investors.

As you know, we have a number of initiatives focused on protecting our Main Street investors, including (1) a rulemaking package regarding standards of conduct for investment professionals, which is a key priority for me for 2019, (2) the development of resources designed to educate retail investors and assist them in making informed investment decisions and avoiding financial fraud, (3) the Retail Strategy Task Force designed to develop proactive, targeted initiatives to identify and deter misconduct affecting our retail investors—and the list goes on. [1] In fiscal year 2018, our Enforcement Division returned $794million to harmed investors. [2]

Of course, Main Street investors will not assess our work by the number of rules and initiatives we have in place, but rather will be looking at what our efforts substantively do for them. From the perspective of an investor who has been harmed, the ability to collect monetary damages, as promptly as practicable, from the wrongdoer is just as important as the standard of conduct that our rules and regulations impose.

I look forward to hearing the panelists’ views regarding the extent of unpaid arbitration awards and whether there is a feasible way to improve recovery rates for our Main Street investors.

Thank you. I look forward to a productive meeting.


1See Chairman Jay Clayton, Remarks to the SEC Investor Advisory Committee, June 14, 2018 (discussing a number of recent Commission actions to improve our markets for Main Street investors), available at back)

2See Securities and Exchange Commission, Division of Enforcement, 2018 Annual Report, available at: back)

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