Remarks by Chairman Clayton to the Economic Club of New York

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the Economic Club of New York. 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, John [Williams].

It is wonderful to be back with the Economic Club of New York. You are a sophisticated, experienced, outcome-oriented, tough and fair audience, interested in economic and wage growth and improving our society more generally. Just the way it should be.

As John noted, today’s program proceeds in two parts, (1) remarks from me on our regulatory activities over the past three-plus years (time flies) and—at the end of that part—a discussion of some of the areas that I believe need continued attention and (2) a Q&A session with market and policy experts Harold Ford, Barbara Novick, Gary Cohn and Glenn Hutchins.

As a focal point for today’s review and outlook, I will use my first speech as Chairman, which was before this very body in July 2017. [1] In that speech, I set forth the eight core principles that would guide my Chairmanship. [2] Before I report with specificity on implementing those principles in practice, I want to go beyond principles. I want to dig a bit deeper, and explain how the women and men of the SEC achieved historic results over the past three and a half years. [3] The short story is we designed and pursued a granular, yet flexible three year plan; and we were blessed with a talented, driven team of mutually supportive professionals. I will go into more detail.

Granular, Flexible Plan

This audience, an outcome-oriented group if ever there was one, knows that a set of clear principles, incorporated throughout the fabric of an organization, is a hallmark of an effective enterprise, be it a private sector company or a governmental body. [4] However, driving outcomes relies on, but requires more than, a strong culture and collective commitment. It requires clearly articulated, discrete objectives, and a path for achieving them that has buy-in from all stakeholders.

Early on, we set our objectives, and we set a tangible and reasonable path. And we wanted to make sure we were being transparent about those objectives and our plans for achieving them—both internally and externally. As a rallying point, we used an often-overlooked public transparency requirement—the Regulatory Flexibility Act agenda. By law, federal agencies must disclose on a semi-annual basis regulations under development or review in the near-term (within one year). In the post-Dodd-Frank era, the Commission’s near-term “Reg Flex” agenda did not consistently reflect the regulations that were under active consideration—typically, only about one-third of the rules in the short-term agenda were timely advanced in the next year. We decided to change that and use the short-term Reg Flex agenda to enhance transparency, promote cross-agency coordination and efficiency, and ensure both internal and public accountability.

As a result of this reset, over the past few years the short-term agenda has more closely tracked the Commission’s actual rulemaking initiatives. People would ask, “what are you working on?” I would often say, “there are no surprises. We are working on our Reg Flex agenda and intend to complete it.” The Commission advanced 88% of the 26 items on the 2018 short-term agenda by the end of 2018, and nearly 90% of the 39 items on the 2019 agenda by the end of that year. The Commission has had similar success with the 2020 short-term agenda, advancing to date 83% of the 43 items, in addition to a number of unanticipated emergency rulemakings and orders as a result of the COVID-19 pandemic and related market volatility. [5]

I believe this early focus on transparency and accountability was a driving factor in the effectiveness and historic productivity of the Commission’s rulemaking during my tenure. Across our divisions and offices, the priorities and timing expectations were clear, allowing resources to be efficiently allocated and objectives achieved. To date, the Commission has issued 67 final rules across our policy offices and divisions during my tenure (with more to come). And while quantitative metrics are not sufficient to measure the success of a rulemaking agenda, I am confident that our investor-focused, modernization efforts will have broad and positive effects for years to come.

Before I turn from planning to execution, I want to go back to a phrase I used a moment ago, “buy-in.” Principles may be articulated at the leadership level of an organization, but “buy-in” comes from the fabric. This means, in my words, if the plan is not the product of an organic process, “buy-in” can be elusive. Here, I must offer my profound thanks to our career staff. They gave us their best ideas and, when those ideas were incorporated in our agenda, continued their ownership of those ideas as we worked to put them into practice.

Talented, Driven Team; Overcoming Obstacles

Let’s turn from planning to execution. Some in Washington are fond of saying “personnel is policy,” and there certainly is truth in that expression. I am very thankful for Jay Powell, Steven Mnuchin, Randy Quarles, John Williams, Jelena McWilliams, Heath Tarbert and many others who, collectively, are steering us through the COVID-19 shock.

Today, I will add a twist to that quip—“personnel is productivity.” You cannot be productive without great personnel, in both the public and the private sector.

In the public sector, in Washington, you do not have to look far to find a reason, and sometimes a dozen reasons, not to do something. Productivity speed bumps are around every corner. Even if the proposal on the table is a clear step forward for all concerned, opposition is ever-present. One reason is “interest groups”—interest groups of all stripes—often have narrow priorities, including their own incentives to remain relevant; and solving broad problems can reduce, or even eliminate, the relevance of their articulated and unarticulated interests. Broad political interests also can produce speed bumps. We should accept these hurdles, as our Founders built them into our system for good reasons, but we must also work to overcome them, particularly the short-term variety.

Another factor affecting execution is unforeseen events and shocks. We have had a few of those. Several months after I arrived at the Commission, I learned that our EDGAR system had been hacked in 2016, and that nonpublic information taken in the breach. Worse, that information may have been used for illicit trading—talk about a gut punch. We faced this challenge head on. We investigated the breach, promptly disclosed it to the public and Congress and requested Inspector General oversight. Our Enforcement Division pursued the international hacking ring and brought charges against those responsible. We also designed, and are in the process of implementing, a multifaceted effort to bolster our cybersecurity posture. We (1) engaged cybersecurity experts, (2) created a new position for a Chief Risk Officer, and (3) enhanced the security of our systems, our employee screening and training, and our incident response and resiliency capabilities. These efforts set the tone for how to address future unexpected obstacles and challenges.

Just a few of the other unexpected shocks that we had to navigate included (1) a 35-day government shutdown, (2) a continued hiring freeze (which thankfully we were eventually able to lift with support from Congress), (3) multiple international developments, including Brexit and the transition away from LIBOR, (4) a number of Supreme Court cases significantly impacting our enforcement authority and practices (including with respect to the use of our administrative law judges, our ability to provide certain whistleblower protections, and our ability to collect disgorgement), and—of course—(5) the COVID-19 pandemic.

So, how do you overcome obstacles? The expected and unexpected? For me, it required two things: (1) an organization that is expert in its subject area—in our case knowing investors, disclosure principles, capital formation and market function—and (2) working proactively, with a focus on outcomes. In common words, “doing the right thing.” And, at the end of the day, that comes down to people. During my tenure, I was blessed with more than a dozen leaders who each knew more about their respective subject areas than just about anyone, and, individually and collectively, we each worked with greater purpose than we ever had before. [6] This approach was infectious, and their respective staffs, including some personnel new to the Commission and many with decades of service under their belts, put forth continuous effort—continuous “buy-in”—commensurate with the importance of our mission.

Collectively, they achieved the metrics I mentioned and so much more.

Principles in Practice

I will now touch on some specific achievements, using the eight principles I articulated here at the Economic Club in 2017 as a guide.

I will not spend valuable time providing background and context on each of the eight principles, but rather I will move directly to examples that illustrate how our people followed those principles and our granular, flexible plan in delivering significant gains for our markets and our Main Street investors. And while the examples are identified with specific principles, you will notice that the initiatives often interlink through numerous principles in their application.

Principle #1—The SEC’s mission is our touchstone

This principle—that our “home base” is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation—to do all three—would appear to be self-evident. But over the years, a premise has emerged that these three interrelated components of our mission have a necessary tension between them that puts them at odds with one another. Said another way, there is a misconception that to promote one part of the mission you must detract from another.

This is a false choice and inconsistent with dynamic, ever-changing markets and the SEC’s history. I am a firm believer that when we advance our mission, we should do just that—namely, advance all aspects of our mission. Of course we can simultaneously enhance investor protection and promote capital formation while also ensuring more fair, orderly and efficient markets. We have been doing that for over eighty years. The examples are too many to detail in this speech, but I will point to one—our recent work to holistically revamp the exempt offering framework with a keen eye on small and medium-sized businesses and their investors. [7] Here, harmonizing requirements across offering exemptions allows these businesses to more easily navigate our regulatory framework—and ensure they are complying with our rules, including the important investor protections embedded in each. Good for small businesses and good for investors.

Our mission also serves as the greatest source of our authority, expertise and, ultimately, our independence. The further we stray from it, the weaker each of those becomes. As I spoke about last year, there are often times when parties with specific, non-financial interests attempt to draw the SEC into engagements outside of our core mission or to thrust new responsibilities onto us. [8] To be sure, many of these interests are worthy of governmental time and attention. However, the SEC’s time and attention—and its regulation—may not be appropriate. The Commission may have neither the expertise nor the authority to act. Straying from our statutory mission and authority often brings risks—legal, political and execution risks—that may result in wasted resources or even the restriction of our authority going forward. Said another way, we should resist and be wary of calls to “stretch our authority” or “fill the space” in areas that are not our primary responsibility, particularly in areas where others have primary responsibilities, expertise and authority.

I am pleased to say that we have resisted these calls while reasserting ourselves as a pre-eminent voice on the functioning of our markets for the benefit of investors and investing for the future. From the Financial Stability Oversight Council (FSOC), to the International Organization of Securities Commissions (IOSCO), to the Financial Stability Board (FSB), to the President’s Working Group on Financial Markets (PWG), the work of the SEC is held in high regard and is a sought after commodity on issues within our bailiwick. I see the culmination of this work as the recently released report on the interconnectedness in our credit markets, led by our Chief Economist, S.P. Kothari. [9] It is a fantastic example of interdivisional collaboration bringing to bear, and distilling in a well-organized report, the Commission’s significant market expertise and insight.

We are best able to advance our mission when we have good people, and our people are the SEC’s most important asset. Their level of dedication, expertise and commitment to our mission is unmatched in my professional lifetime. To continue to remain true to our mission and provide the service investors expect, it is incumbent upon the agency to keep pace with our ever-changing markets, including through targeted hiring of people with expertise in key areas, including equity and fixed income markets, enforcement and examinations, asset management, and information technology and cybersecurity. Fortunately, Congress over the last several years has been supportive of this vision for improving our workforce and has enabled the SEC to both lift a hiring freeze and bring in over 100 new staff in these critical areas. The investing public gets considerable value out of these investments, which also provides the agency with the ability to tackle challenges as they arise.

In this vein, refreshing our expertise necessarily means bringing in women and men with hands-on experience in markets, litigation and other financial matters. In the past, this practice has led to a criticism of a so-called “revolving door” at the SEC. At the individual level, such blanket statements not only are devoid of any practical evidence of negative effects but denigrate the impressive public service of these incredibly qualified, dedicated individuals. We should not make status-based judgments about the motivations of individuals. Take, for example, our Director of Trading and Markets, Brett Redfearn, his electronic trading and market expertise was essential to our ability to move our markets—including exchanges—to a mandatory telework environment with minimal disruption at the onset of the COVID-19 pandemic. More broadly, in order to regulate our increasingly complex markets, it is particularly valuable to have a wide array of current, practical experience. I see the quality of individuals the SEC has been able to attract in the past few years as an overwhelming strength—it speaks to both the reputation of the SEC as a workplace as well as the character of individuals wanting to serve the investing public.

Another area in which we have made significant strides in advancing our tripartite mission over the past several years is improving our commitment to diversity, inclusion and opportunity. I firmly believe that enhancing each of those components within an organization strengthens both the “fabric” of the organization as well as its overall performance. We released our first Diversity and Inclusion Strategic Plan in the spring, led by our Office of Minority and Women Inclusion under the direction of Pam Gibbs and developed with input from the entire agency. [10] We have begun implementing a number of its near-term action items. Two of today’s questioners—Harold Ford and Glenn Hutchins—have been particularly helpful in our efforts, and I thank them on behalf of all of us. I am proud of the work the SEC has done here, but there is still much that needs to be done. Said another way, these actions are just the next step on our collective journey to improve diversity, inclusion and opportunity—a journey that I believe will continue productively for years to come.

Principle #2—Our analysis starts and ends with the interests of long-term Main Street investors

If you have heard me speak over the last three and a half years, you may wonder why this principle isn’t first. I should have provided a caveat in my 2017 speech that while all of the principles are integral to our success, this principle is of particular import to me. So, why is this so important?

First, consider who we are talking about when we discuss the long-term Main Street investor. These are the more than 52% of U.S. households that participate in the capital markets. They must have confidence that the capital markets are fundamentally fair and honest and that we, the regulator, will take meaningful action to address fraud and abuse. Investors are willing to take risks but they—rightfully—expect protection from bad actors.

In 2017, I discussed how I was confident that the Commission staff shared this perspective. Let me say that was an understatement. They embody that perspective each and every day. SEC staff understand the sacred trust that the architects of the securities laws extended to them. Discussions at the Commission on any topic effortlessly flow to the welfare of our Main Street investors. And we are better for it. So while I could go through many of our actions and how they positively impact investors, I will highlight just a few.

Our examination and enforcement programs often come to mind when people think of the SEC’s connection with investors. I will say early 2017 reports of the untimely demise of both programs—many of which were written before the time I even walked in the door—were, to channel Mark Twain, greatly exaggerated. While my predecessor, Mary Jo White, and her team set a high bar, the work of our Division of Enforcement, led by Stephanie Avakian and Steve Peikin, and our Office of Compliance Inspections and Examinations (OCIE), led by Pete Driscoll, have been exemplary, both on a qualitative and quantitative basis, including as compared against any other time in the Commission’s history. [11]

While there are many ways our Enforcement program serves investors, an area that we have placed a premium on, in terms of resource allocation and improvement, is returning money to harmed investors. For many investors, the Commission is their best chance to recoup funds from which they were defrauded—a fact that is often underappreciated.

While the securities laws do contemplate private rights in certain instances, most of the frauds—Ponzi schemes, affinity frauds and the like—are of such size, scope and nature that the plaintiffs’ bar does not provide a meaningful remedy to most. As such, the Commission’s work to return money to defrauded investors has outsized importance to many of our fellow citizens. This focus since 2017, despite significant headwinds from the Kokesh decision, has yielded orders of over $14 billion in financial remedies and approximately $3.5 billion returned to investors. [12] By the way, we set records for amounts of financial remedies ordered in 2019 and 2020, and the approximately $3.5 billion we returned to harmed investors since 2017 substantially outpaces the amount returned during the prior three-year period. A great credit goes to my colleagues in Enforcement who reallocated resources to do so and found additional efficiencies that greatly benefitted investors.

I also want to highlight the efforts of the Retail Strategy Task Force, including our Teachers and Military Service Members Initiatives, and our Share Class Selection Disclosure Initiative. [13] Time and again, the teams in OCIE and Enforcement have worked hard to save investors from paying fees that they did not know about and should not have been charged. For example, our Share Class Selection Disclosure Initiative alone will result in nearly $140 million going back to investors, and it can be expected to save investors that amount many times over going forward. [14]

On the regulatory side, this principle drove the enactment and implementation of Regulation Best Interest—the culmination of a decades-long project to substantially enhance the standard of conduct for broker-dealers when making recommendations to a retail customer. [15] For the first time, broker-dealers are now required to act in the best interest of their retail customers and not place their interests ahead of the customer’s. As part of this initiative, the Commission also adopted Form CRS, which provides a short, plain language form to Main Street investors with clear, concise information about their financial professional, and also reaffirmed and, in some cases, clarified investment advisers’ fiduciary duty.

The totality was a package of rules and interpretations that will enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers. There is a reason that this project had been talked about for years but never accomplished—it was an incredibly difficult undertaking, involving many entrenched interests. But from the start, the Commission and staff were clear-eyed on the need to meet investor expectations, and the collaboration was first rate, particularly between the Division of Trading and Markets, led by Brett Redfearn, and the Division of Investment Management, under the direction of Dalia Blass.

One of our key responsibilities as regulators is to strive to ensure that as technology changes, our regulations continue to drive efficiency, integrity and resilience. As technology and business practices evolve, so must our regulatory framework. This is irrefutably true for the regulation of our U.S. equity markets, which have undergone an almost unimaginable transformation in the last decade, largely driven by the deployment of a vast array of advanced communications and data analytics technologies.

To that end, another focus of the Commission is examining and improving our equity market structure. [16] While equity market structure probably doesn’t come top of mind when thinking of policies important to the interests of long-term Main Street investors, driving competition and transparency into these markets provides significant benefits to them—from the prices they pay for trade execution to the information available to make better informed investment decisions.

Another Main Street investor-focused initiative focused on the over-the-counter (“OTC”) market. Generally, information about companies in the OTC market is less available than it is for issuers that are listed on a national securities exchange. Yet, OTC securities, which include securities referred to as “penny stocks,” are primarily owned by retail investors and can appear quite similar to exchange-listed securities. There are thousands of issuers of quoted OTC securities that currently are dark, meaning that they do not disclose current information publicly. The Commission expends substantial resources in addressing fraud related to the securities of OTC issuers, particularly issuers that do not make public disclosures on a regular basis. These cases have involved substantial harm to investors—particularly retail investors.

To address issues raised by our Enforcement Division, the Commission updated our key investor protection rules which require broker-dealers, as gatekeepers, to obtain and review certain information about OTC issuers before publishing quotations for their securities. [17] These amendments are long overdue and, in combination with the recent staff bulletin on risks associated with omnibus trading accounts in low-priced securities, [18] will substantially enhance investor protection by providing greater transparency and helping prevent fraudulent and manipulative activity in the OTC market.

Principle #3—SEC’s historic approach to regulation is sound

The genius of the framework of our federal securities laws has stood the test of time for over 85 years and has succeeded in creating the largest, deepest and most dynamic capital markets in the world. This historical framework has allowed the capital markets to fuel our nation’s economic strength to where a country with roughly 4.3% of the world’s population has 58 of the world’s 100 largest public companies. This in turn serves as an incredible wealth generation mechanism for over 52% of American households saving for their futures in the capital markets.

At the SEC, we are the stewards of this framework. Being stewards of a historic approach does not mean it is unable to adapt to changing circumstances. It is our job to make sure that our framework keeps pace with market developments while remaining true to its principles. Over the past three years, the Commission has tackled a number of novel and complex issues using these principles as appropriate guideposts.

One key tenet of the historic approach is to foster the disclosure of timely, accurate, material and complete information to investors. Our principles-based approach to public company disclosures has done so, but over time, our disclosure requirements have not kept pace with our markets or economy more generally. This has led the Commission, with work by the Division of Corporation Finance led by Bill Hinman, to modernize a number of these rules to reflect the broader changes in our markets and how companies are addressing them.

For color, there are two examples where I believe the Commission has significantly improved within our principles-based framework: human capital and cybersecurity.

In modernizing our disclosure requirements, our goal was to ensure that they embraced the significant changes that have taken place in our economy in the last thirty years, including that, in certain industries, intangible assets, and in particular human capital, often are a significant driver of long-term value in today’s global economy. [19] As such, investors benefit from understanding the various ways registrants monitor and enhance their human capital. The updates to our disclosure rules in this area are designed to elicit disclosure tailored to each company’s particular industry and business model, while being flexible enough to continue to allow for fulsome disclosure as businesses evolve in the future. Under the principles-based approach, I expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.

By 2017, cybersecurity could hardly be called an emerging threat. Yet we were still not seeing the robustness of disclosure you would expect from seasoned public companies about their cyber risk management practices. Once again, Corporation Finance led the charge to update prior guidance in order to promote clearer and more robust disclosure by companies about cybersecurity risks and incidents. [20] The guidance also contained a strong message about the importance of good corporate hygiene, particularly concerning the sales of securities by insiders once a company is aware of an important cyber event (I will come back to the theme of corporate hygiene later). We have seen the bar raised for public company cybersecurity disclosures that provide investors with better, timelier information on this important topic and for internal controls and procedures.

Principle #4—Regulatory actions drive change, and change can have lasting effects

In 2017, I noted how we were to the point where the number of public reporting companies had decreased by 50% from the high water mark. We charted a course early on to increase the attractiveness of the public offering model. Encouraging capital formation in our public markets has the benefit of providing a broader and more attractive set of investment opportunities to Main Street investors, who benefit from public company stock prices that reflect not only publicly reported information but also the views of professional investors. Additionally, it is my experience that companies that go through the SEC’s public registration and offering process often come out as better companies, providing meaningful benefits to the company, investors and our capital markets.

This mindset led us to pursue initiatives to increase the attractiveness of the public markets while maintaining—and in many cases, enhancing—investor protections (as I said, we can do both). We did so in several ways. Notably, building on the principles of the bipartisan JOBS Act, the Commission expanded the use of scaled disclosures for small and medium-sized companies. Recognizing that one size does not fit all for the regulation of public companies, the Commission adopted amendments to more appropriately tailor the “accelerated filer” and “large accelerated filer” definitions [21] as well as the definition of “smaller reporting companies,” [22] which allow for more tailored disclosures. We also expanded the ability of issuers to “test the waters” prior to a public offering [23] and to benefit from non-public staff review of their registration statements. [24] The Commission also took a number of actions to simplify and update disclosure requirements in an effort to enhance the quality of information available to investors and reduce costs for registrants. [25] And while not every company will be of the size, scope and sophistication to tap the public markets, I believe these efforts have moved the needle for those issuers that have the option to do so.

Principle #5—As markets evolve, so must the SEC

At times, markets move faster than regulators. It’s in their nature, and we usually are doing our best to keep up. At times, these evolutions can hit with both speed and significance. This occurred with the explosion of initial coin offerings, or ICOs, in 2017 and 2018. In a short time, the cryptocurrency and ICO markets grew rapidly, gained greater prominence in the public conscience and attracted significant capital from retail investors. This provided the Commission with a difficult problem. Taking a step back, I am optimistic that developments in financial technology will help facilitate capital formation, providing promising investment opportunities for institutional and Main Street investors alike. From a financial regulatory perspective, these developments may enable us to better monitor transactions, holdings and obligations (including credit exposures) and other activities and characteristics of our markets, thereby facilitating our regulatory mission, including, importantly, investor protection.

At the same time, regardless of the promise of this technology, those who invest their hard-earned money in opportunities that fall within the scope of the federal securities laws deserve the full protections afforded under those laws. This ever-present need comes into focus when enthusiasm for obtaining a profitable piece of a new technology “before it’s too late” is strong and broad. And, especially in 2017-2018, fraudsters and other bad actors were seeking to prey on this enthusiasm.

The Commission moved swiftly to address these issues, including through timely enforcement actions in addition to the creation of the Cyber Unit. [26] Our policy divisions issued guidance and other helpful frameworks to provide clarity to the market about the securities laws’ implications for new technologies. [27] This approach worked, and we have seen the rampant speculation of those days give way to more productive engagement and dialogue around the technologies’ beneficial traits. [28]

Another area where the SEC needed to evolve—as the market had far overtaken our regulatory framework—was the proxy process. The Commission worked to narrow the gap between our regulations and market practices, particularly relating to proxy voting advice. Over the last several decades, we have seen a seismic shift in how small and midsize investors invest—from investing directly through individual holdings to investing indirectly through institutional holdings, particularly through mutual funds, ETFs and other fund structures. These funds, which hold retail investments valued in the tens of trillions of dollars, are managed by market professionals—investment advisers who have a fiduciary duty to make investment and voting decisions in the best interests of the fund. Yet when funds are invested in hundreds or even thousands of different companies, determining whether and how to cast each vote can be costly. This—and fundamental economic factors such as economies of scale and network effects—led to the rise of proxy voting advice businesses and market concentration. During this evolution, these firms benefited from longstanding, significant and clearly dated exemptions to our proxy solicitation rules. In the past decade, these firms have come to have de facto dispositive or substantial influence over many matters brought to votes of shareholders.

This year, the SEC updated our solicitation exemptions in a principles-based manner that requires disclosure of conflicts of interest and will result in investors receiving an improved mix of information before they vote. [29] These amendments will generate a more transparent proxy voting system, where the information provided will both better inform voting decisions and facilitate compliance by market professionals with their fiduciary obligations. We also reminded investment advisers that their voting obligations are not dismissed when they use third party providers, including proxy voting advice businesses. Most important, the rules and guidance will better align the interests of ordinary investors with the obligations of those who vote on their behalf, a fundamental purpose of market regulation.

Beyond our regulatory actions, we also evolved through investing heavily in updating our information technology systems, increasing the use of data analytics, and enhancing our cybersecurity risk profile. With regard to cybersecurity, recognizing the twin realities that electronic data systems are essential to our mission and that no system can ever be entirely safe from a cyber intrusion, we devoted substantial resources and attention to cybersecurity, including the protection of personally identifiable information. We also have been focused on a number of areas for improvement, including with respect to information technology governance and oversight, security controls, risk awareness related to sensitive data, incident response and reliance on legacy systems. A key principle as a part of our review of our cybersecurity and enterprise risk profiles is to evaluate the data we take in, assess our regulatory and enforcement responsibilities, and limit the scope of that information to what is necessary to achieve those responsibilities. While our budgets for personnel and technology will always be dwarfed by the firms we regulate, these investments should pay dividends for the Commission for years to come.

Principle #6—Effective rulemaking does not end with rule adoption

As you have probably noticed, modernization and retrospective review have been key components of our overall rulemaking agenda. As you look across the scope of the initiatives we’ve undertaken in the last several years, you’ll see that in many instances, it had been years if not decades since the Commission last substantively addressed these issues. The examples here are too many to describe in detail, but I will give you a flavor. Some procedural requirements of our shareholder proposal rules, which we recently modernized, had not been meaningfully updated in over 65 years. [30] The definition of who qualifies as an accredited investor: over 35 years. Our public company disclosure requirements in Regulation S-K relating to the description of business, legal proceedings and risk factors had not undergone significant revisions in over 30 years. Our standards of conduct enhancements for broker-dealers were more than 40 years overdue.

To be clear, engaging in a retrospective review and modernization effort around a rule set does not prejudge the need for a complete overhaul. Often, existing frameworks are sound, but a review can reveal market-based adjustments that can be made to improve it. Again, I point to our principles-based disclosure framework for public companies, in which we are able to keep the essential materiality-based framework but make improvements to discrete areas, such as human capital disclosure.

Another area where the Commission and markets benefitted from the staff’s retrospective review of a more recent initiative is the Consolidated Audit Trail (CAT). The CAT, first proposed in 2012 and mandated by the Commission pursuant to an NMS Plan in 2016, is intended to enhance regulatory oversight of our securities markets by facilitating cross-market oversight and analysis, thereby improving investor protection and market integrity. But for those following the CAT’s progress, it has been much slower than initially anticipated due to a number of factors.

This required the Commission to take a new approach in order to move it forward. First and foremost, this meant bringing in someone with substantial technology implementation experience to coordinate the Commission’s efforts to monitor the self-regulatory organizations’ (SROs) development of the CAT. Manisha Kimmel’s leadership has been invaluable in putting CAT on track to going from concept to reality. Once we had the personnel in place, there were a number of issues that the Commission needed to reconsider, most notably grappling with complicated topics relating to the scope of data ingested and stored in CAT, its data security protections, operational issues, and even basic project management transparency and accountability measures with verifiable milestones. [31] We were able to advance each of these in a period of 22 months, and I can say that without these course corrections in project management and scope of the Commission’s initial rules, we would not be where we are today. [32]

Principle #7—Costs of a rule now often include the cost of demonstrating compliance

After rule adoption, regulators and market participants alike move forward with implementation. Here, the work of our OCIE staff can help inform their policy counterparts in our other divisions and offices to review and, as necessary, revise our regulations. OCIE also provides clarity to market participants, with beneficial effects for investors, through the issuance of risk alerts.

An area where our own experience in examining for compliance led to rationalizing of our rule sets was the Volcker Rule. [33] Enacted following the financial crisis, the Volcker Rule was intended to restrict high-risk, speculative trading activity by banking entities, while preserving their ability to engage in important customer-oriented financial services, such as underwriting, market making and asset management services. That mandate is straightforward in concept, yet in our highly interconnected financial markets, it is challenging to design a rule that effectively and efficiently implements this statutory mandate. As the primary regulator of U.S. securities markets, it is our job to work with our fellow regulatory agencies to help ensure that jointly issued regulations effectively implement statutory mandates without imposing undue burdens on participants in our markets, including imposing unnecessary costs or reducing access to capital and liquidity.

Our experience with the application of the Volcker Rule proved that initial implementing regulations could be improved. This allowed the SEC, in coordination with our U.S. financial regulatory counterparts, to draw on the Volcker Rule agencies’ collective experience in implementing the rule and overseeing compliance in our complex marketplace over a number of years. The result were a revised regulations implementing the Volcker Rule that remained consistent with the purposes of the statute but designed to eliminate cost and complexity that added little value.

Another area where understanding compliance and implementation challenges yielded results were our auditor independence rules. [34] High quality, reliable financial statements are the bedrock of our disclosure-based regulatory ecosystem, and audit quality, which is enhanced by our auditor independence framework, is a key driver of high quality financial disclosure. Our auditor independence rules are far-reaching and restrictive. They should be, as even the appearance of inappropriate influence can undermine confidence. As markets evolve, however, rules that are too far-reaching or restrictive can have unintended, negative consequences. In this case, the reach of our rules, particularly in the cases of a broad, diversified investment portfolio and certain consumer finance transactions (such as student loans), were operating to limit auditor choice which, in turn, could adversely affect the important arms-length nature of the issuer-auditor relationship. These organic improvements to the rule—driven by the Office of the Chief Accountant, led by Sagar Teotia—were modest and tailored to reduce or eliminate those adverse effects on auditor choice without detracting from the independence obligations of auditors and issuers.

Principle #8—Coordination is key

The scope of the SEC’s professional relationships is impressive—more than 15 U.S. federal regulatory bodies, over 50 state and territory securities regulators, the Department of Justice, state attorneys general, SROs, and non-SRO standard setting entities. This system of entities with distinct yet sometimes overlapping jurisdictions has been called fragmented by many, but regardless of critiques of its structure, it is the system we have to work within. With that many domestic counterparts—not to mention our international counterparts—effective coordination and collaboration is more than a professional courtesy.

Domestically, we have engaged directly with the administrative and regulatory agencies as well as through various interagency groups. For example, within the FSOC, the agencies worked together to address emerging issues and rationalize our focus on activities-based systemic risks. The Department of the Treasury resurrected the PWG, which led to valuable movement on issues from cybersecurity to investor protections in emerging markets.

Each of these engagements, which occurred throughout our tenures, built strong relationships amongst the principals and staff at the various agencies. It allowed us to work together seamlessly on complex matters as they arose. Importantly, this constant dialogue established muscle memory we relied upon extensively when we needed it most, including during the market shocks of March and April resulting from COVID-19. I do not need to rehash that period, but the professional and personal relationships established over the prior three years led to a more decisive, more unified, and ultimately more impactful response to the economic effects of COVID-19.

Another integral domestic stakeholder is Congress. I have often expressed that Congress, and in particular our oversight and appropriations committees, serves as the SEC’s board of directors. They exert appropriate, rigorous oversight of our day-to-day activities, agenda and budget. As such, it is imperative for the Commission to engage proactively and constantly with Congress. Whether assisting members of Congress in ensuring their preferred policies will function as intended or keeping them abreast of key market developments, this consistent engagement builds a strong rapport between Congress and our agency. Over time, the benefits are clear, both in terms of the support the SEC receives as well as the ability to provide insight on critical aspects of the policymaking process, such as the CARES Act.

Internationally, we have worked closely on a number of matters with our foreign counterparts and international prudential banking authorities on a bilateral and multilateral basis. In particular, our Office of International Affairs, led by Raquel Fox, has been critical to strengthening the SEC’s collaboration with our counterparts and ensuring the SEC plays an

active role in various international multilateral organizations, including by assisting with the development of and contributing to work streams organized by the FSB and IOSCO. [35]

Areas for Further Commission Attention

Areas in Need of Imminent Improvements

I will start with money market funds. I will not spend time today rehashing how the short-term funding stresses caused by the COVID-19 economic shock created significant difficulties for money market funds that required quick action from the Federal Reserve and others. If you are looking for that level of detail, I again will put in a plug for our staff’s tremendous work on the Interconnectedness Report. I strongly suggest you read it (although I know at least Barbara, Gary and Glenn already have).

But now that the dust has settled, what comes next? Let me be clear: there is no doubt that we need to re-examine the Commission’s prior reforms as well as the performance of money market funds over the recent period. Dalia Blass, our director of the Division of Investment Management, recently highlighted her thoughts on the staff’s review, including critical questions such as: (1) did the potential for the imposition of redemption gates drive market behavior and (2) did our money fund rule’s risk limitations provide funds with the necessary liquidity to meet heightened redemptions. [36] This review will also include forward-looking assessments to ensure, as best we can, that the policy decisions and modernizations implemented can address issues that have ultimately led the federal government to backstop some of these products twice within 12 years.

Another area where our regulations have not functioned as intended is with regard to securitizations. Regulation AB II was issued in 2014 and included new rules for registered asset-backed securities offerings of certain asset classes, including residential mortgage backed securities (RMBS). These new RMBS rules require issuers to disclose a wide array of data on each asset (i.e., each mortgage) in the underlying pool at the time of an offering and on an ongoing basis. Since the Commission revised its ABS rules in 2014, no SEC-registered RMBS offerings have taken place. By contrast, in the five years ended June 30, 2019, Fannie Mae and Freddie Mac issued an aggregate of approximately $4.47 trillion in face amount of RMBS.

Again, it is clear to me that these rules are in need of an overhaul. We have received thoughtful comments and suggestions to my request for more information about ways in which the Commission can improve these rules for investors and market participants. [37] Staff continues to work on my request to review our RMBS asset-level disclosure requirements, including through discussions with our counterparts at the Federal Housing Finance Agency, with an eye toward facilitating SEC-registered offerings.

I also hope the Commission will continue work around modernizing our proxy system and in particular exploring ways to modernize our rules on shareholder communications so that issuers can engage with their shareholders more directly and efficiently. For example, the OBO-NOBO (Objecting Beneficial Owner/Non-Objecting Beneficial Owner) rules are overdue for reexamination—it can be difficult and costly for companies to identify and communicate with their shareholders on important corporate governance issues. This has arisen in other contexts as well, including our recent proposal to update Form 13F where public comments have made clear that issuers and other market participants are using 13F data in an attempt to address, in part, our proxy rules’ shortcomings. We should update our “proxy plumbing” system to support and ensure there are efficient communication channels between corporations and their shareholders.

Good Corporate Hygiene

Another area that I have discussed recently is what I call “good corporate hygiene.” [38] The importance of good corporate hygiene cannot be overstated, nor can the importance of related controls designed to prevent not only insider trading but also the appearance of impropriety or misalignment of interests. Particularly in times of heightened market volatility and uncertainty, the potential for executives to possess material non-public information increases, as we have witnessed during this time of COVID-19-induced economic and market stress. While I believe many of our public companies as a general matter have discharged their responsibilities in the related areas of public disclosure and corporate controls well, there are some specific measures that would improve compliance, market integrity and investor confidence, including through a demonstrated commitment to good corporate hygiene. [39]

First, Rule 10b5-1 plans, when designed and administered appropriately, can facilitate long-term interest alignment and other principles of good corporate governance. There are practices, however, that, while they may be consistent with law and regulation, raise questions of interest alignment and fairness, including, in particular, issues that arise when plans are implemented, amended or terminated and trading occurs (or does not occur) around those events. I believe that companies should strongly consider requiring all Rule 10b5-1 plans for senior executives and board members to include mandatory seasoning, or waiting periods after adoption, amendment or termination before trading under the plan may begin or recommence. [40]

Second, a well-designed insider trading policy should have controls in place to prevent senior executives and members of the board of directors from trading once a company is in possession of material non-public information, even if an individual officer or director did not personally have knowledge of the information. This includes the time period between the occurrence of an event and the required disclosure of the event to the public under Commission rules. In my view such a policy is not difficult to adopt or administer, making the integrity bang for the compliance buck large.

Finally, I believe that companies should consider carefully the wisdom of issuing stock options to its executives while in possession of material non-public information. Many equity compensation plans require stock options to be granted with strike prices that are no less than fair market value. Implicit in this structure is the premise that equity awards are intended to incent performance that will result in future increases in company value. When a company grants an award based on the trading price of the stock while the company is in possession of materially positive non-public information, this premise is diluted to the extent future increases in company stock value are attributable to the release of positive information rather than future performance. In addition, such a grant may not be consistent with the terms of the incentive plan approved by its shareholders. Similarly, such a grant may also be inconsistent with existing accounting standards because, in short, the trading price of its stock is not a good indicator of fair market value.

These are important corporate governance and policy considerations that I believe public companies and boards, as well as the Commission and Congress, should consider moving forward.

Dodd-Frank Act Rulemakings

The Dodd-Frank Act provided the Commission with a substantial amount of work to complete—more than 80 rulemakings and dozens of reports and studies. It is a large undertaking and fortunately my predecessors tackled the lion’s share of those rulemakings.

During my tenure, we have endeavored to move a number of the remaining rulemakings forward. The most significant of which were the myriad rules necessary to stand up the SEC’s comprehensive Title VII security-based swap regulatory regime. The staff’s work was commendable in every way. These were multi-faceted, complex rules sets that not only needed to fit together within our regulatory regime, but also with the Commodity Futures Trading Commission’s (CFTC’s) Title VII swaps regime as well as those of our international counterparts. I also owe a great deal to Commissioner Hester Peirce for her leadership efforts to finally reach this significant milestone. The compliance dates for our rules go into effect in Fall 2021, and we are in the process of preparing for the registration and regulation of security-based swap entities, including by ensuring the Commission has the appropriate resources and operational structure to ensure compliance.

We also completed other Dodd-Frank Act rules, including hedging disclosures, but a handful of rules remain. For example, compensation clawbacks, for which market developments—including developments resulting from shareholder engagement—have, at least in part, mitigated some of the concerns that motivated the statutory requirements. I have previously noted that there are some company clawback policies that go beyond what would be required by the Dodd-Frank Act, and we have seen a few companies attempt to claw back compensation from their executives under these policies. [41]

Climate-related Disclosures

I am fond of saying that “ESG” is not monolithic and should not be treated as such. In fact, Ken Arrow won a Nobel Prize for disputing such a notion in the context of preference ordering (and you were starting to think I would not name my favorite economist this year?). “E” and “S” and “G” should each be viewed within its own context because, for one reason, the approach to investment analysis appears to vary widely, in some cases incorporating objectives other than investment performance over a particular time frame or frames.

I will focus briefly on the “E” disclosures where I believe there is the most interest (at least, in part, because “G” disclosures under U.S. rules are the gold standard). As a threshold matter, I note that, to the extent material, issuers are required to disclose the current and expected future effects of climate-related issues on their operations and performance. It is important that this disclosure be “decision-useful” (i.e., material). In other words, that it provide investors with the ability to incorporate this information regarding the current and future performance of the issuer into their investment decision process. It has often been noted that this process can be more efficient if disclosure is standardized or uniform. However, standardization can be difficult across industries, and in particular, with respect to forward-looking information, it can be vexing as it requires uniform assumptions about the future. Personally, I am of the view that any standardization should be approached on a sector-by-sector basis, starting with the sectors that are already using metrics to track and assess climate-related risks.

I expect to have more to say on this soon so please stay tuned.


It is my hope that I have covered a lot of ground in an open manner that encourages engagement. That has been our stated approach from the start, and I also hope we lived up to it. In that vein, I await the engagement from our distinguished questioners.


1My words are my own and do not necessarily reflect the views of my fellow Commissioners or the SEC staff.(go back)

2Chairman Jay Clayton, Remarks at the Economic Club of New York (Jul. 12, 2017), available at back)

3Selected SEC Accomplishments 2017-2020, back)

4Chairman Jay Clayton, Observations on Culture at Financial Institutions and the SEC (June 18, 2018), available at back)

5SEC Coronavirus (COVID-19) Response, back)

6Just a few of the talented individuals to lead SEC divisions and offices since 2017 include: Bill Hinman (Division of Corporation Finance), Dalia Blass (Division of Investment Management), Stephanie Avakian and Steve Peikin (Division of Enforcement), Brett Redfearn (Division of Trading and Markets), Pete Driscoll (Office of Compliance Inspections and Examinations), S.P. Kothari (Division of Economic and Risk Analysis), Bob Stebbins (Office of the General Counsel), Raquel Fox (Office of International Affairs), Sagar Teotia and Wes Bricker (Office of the Chief Accountant), Jessica Kane (Office of Credit Ratings), Rebecca Olsen (Office of Municipal Securities), and Pam Gibbs (Office of Minority and Women Inclusion). I also have had an incredible team throughout my tenure in the Chairman’s Office, effectively led by two outstanding individuals who served as chief of staff, Lucas Moskowitz and Sean Memon, with support from too many to name.(go back)

7Press Release 2020-273, SEC Harmonizes and Improves “Patchwork” Exempt Offering Framework (Nov. 2, 2020), available at back)

8Chairman Jay Clayton, Modernizing our Regulatory Framework: Focus on Authority, Expertise and Long-Term Investor Interests (Nov. 14, 2019), available at (go back)

9SEC Division of Economic and Risk Analysis, U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock (Oct. 2020), available at back)

10See back)

11For example, since May 2017, the Commission brought over 2,750 enforcement actions, obtained more than $14 billion in financial remedies, distributed approximately $3.5 billion to harmed investors, and paid awards of approximately $565 million to whistleblowers. The Commission also conducted over 10,000 exams, including a record for the number of investment adviser exams in fiscal year 2018.(go back)

See e.g.

12Id. (go back)

13It is also important to highlight our investor education efforts, advanced principally through our Office of Investor Education and Advocacy. I’ve noted that in my many opportunities to speak directly with investors, a near-universal refrain is that investors wish they had started investing earlier and had known more earlier. In response to these direct interactions, I released a video series entitled “Notes from the Chairman” which highlighted financial concepts from compound interest to understanding fees. I anticipate that the SEC will continue to pursue new ways to reach out to investors—including reaching out to investors in underserved communities.(go back)

14See Press Release 2020-90, SEC Orders Three-Self Reporting Advisory Firms to Reimburse Investors (Apr. 17, 2020), available at back)

15See Press Release 2019-89 SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships with Financial Professionals (June 5, 2019), available at back)

16See Chairman Jay Clayton and Director Brett Redfearn, Modernizing U.S. Equity Market Structure (June 22, 2020), available at; Chairman Jay Clayton and Director Brett Redfearn, Equity Market Structure 2019: Looking Back & Moving Forward (Mar. 8, 2019), available at; Chairman Jay Clayton, Remarks at the Equity Market Structure Symposium Sponsored by the University of Chicago and the STA Foundation (Apr. 10, 2018), available at back)

17See Press Release, SEC Adopts Amendments to Enhance Retail Investor Protections and Modernize the Rule Governing Quotations for Over-the-Counter Securities (Sept. 16, 2020), available at back)

18See Statement on Staff Bulletin Related to Risks Associated with Offshore Omnibus Accounts Transacting in “Penny Stocks” and other Low-Priced U.S. Securities (Nov. 12, 2020), available at back)

19See Press Release 2020-192, SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K (Aug. 26, 2020), available at back)

20See Press Release 2018-22, SEC Adopts Statement and Interpretive Guidance on Public Company Cybersecurity Disclosures (Feb. 21, 2020), available at back)

21See Press Release 2020-58, SEC Adopts Amendments to Reduce Unnecessary Burdens on Smaller Issuers by More Appropriately Tailoring the Accelerated and Large Accelerated Filer Definitions (Mar. 12, 2020), available at back)

22See Press Release 2018-116, SEC Expands the Scope of Smaller Public Companies that Qualify for Scaled Disclosures (June 28, 2020), available at back)

23See Press Release 2019-188, SEC Adopts New Rule to Allow All Issuers to “Test-the-Waters” (Sep. 26, 2019), available at back)

24See Press Release 2017-121, SEC’s Division of Corporation Finance Expands Popular JOBS Act Benefit to All Companies (June 29, 2017), available at back)

25See, e.g., Press Release 2020-205, SEC Modernizes Disclosures for Banking Registrants (Sep. 11, 2020), available at; Press Release 2020-118, SEC Adopts Amendments to Improve Financial Disclosures about Acquisitions and Dispositions of Businesses (May 21, 2020), available at; Press Release 2020-52, SEC Amends Rules to Improve Disclosure and Encourage Issuers to Conduct Debt Offerings on a Registered Basis (Mar. 2, 2020), available at; Press Release 2020-192, SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K (Aug, 26, 2020), available at back)

26See Press Release 2017-176, SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors (Sept. 25, 2017), available at back)

27See, e.g., William Hinman, Director, Division of Corporation Finance, Digital Asset Transactions: When Howey Met Gary (Plastic), Remarks at the Yahoo Finance All Markets Summit: Crypto (June 14, 2018), available at; Strategic Hub for Innovation and Financial Technology, U.S. Securities and Exchange Commission, Framework for ‘Investment Contract’ Analysis of Digital Assets (Apr. 3, 2019), available at; TurnKey Jet, Inc., Division of Corporation Finance No-Action Letter (Apr. 3, 2019), available at and Pocketful of Quarters, Inc., Division of Corporation Finance No-Action Letter (July 25, 2019), available at back)

28One study has estimated that the amount raised in token offerings was $7 billion in 2017 and nearly $20 billion in 2018, and that it dropped to $4.1 billion in the first ten months of 2019, see Another study estimated that as of mid-2018, 86% of the prior year’s leading ICOs were trading below their offering price, with nearly a third of those ICOs having lost substantially all their value, see$FILE/ey-study-ico-research.pdf.(go back)

29See Press Release 2020-161, SEC Adopts Rule Amendments to Provide Investors Using Proxy Voting Advice More Transparent, Accurate and Complete Information (Jul. 22, 2020), available at back)

30See Press Release 2020-220, SEC Adopts Amendments to Modernize Shareholder Proposal Rule (Sep. 23, 2020), available at back)

31See Press Release, 2020-189, SEC Proposes Data Security Enhancements to the CAT NMS Plan, available at; Press Release, Press Release 2020-114, SEC Adopts Amendments to the CAT NMS Plan to Improve Transparency and Financial Accountability, available at See also CAT exemptive orders, available at back)

32Chairman Jay Clayton, Brett Redfearn, Director, Division of Trading and Markets, Manisha Kimmel, Senior Policy Advisor, Regulatory Reporting, Update on the Consolidated Audit Trail: Data Security and Implementation Progress (Aug. 21, 2020), available at back)

[33]See Press Release 2019-207, Agencies Finalize Changes to Simplify Volcker Rule (Oct. 8, 2019), available at

34See Press Release 2020-261, SEC Updates Auditor Independence Rules (Oct. 16, 2020), available at; Press Release 2019-98, SEC Adopts Amendments to Improve the Application of the Auditor Independence Rules to Loan Provision (June 18, 2019), available at back)

35We have contributed, for instance, to multiple COVID-19 initiatives coordinated by the FSB’s Standing Committee on Assessment of Vulnerabilities (SCAV) and Standing Committee on Supervisory and Regulatory Cooperation, as well as IOSCO’s Financial Stability Engagement Group.(go back)

36See Dalia Blass, Keynote Address: Regulating with Our Eyes on the Future (Sept. 24, 2020), available at back)

37See back)

38I highlighted these ideas in a letter to Rep. Brad Sherman and Rep. Bill Huizenga, the Chairman and Ranking Member, respectively, of the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. See back)

39That said, these are areas where market confidence, integrity and fairness require a universal commitment to compliance and regulatory vigilance. The Commission’s Divisions and Offices have emphasized this perspective since the onset of the COVID-19 pandemic.(go back)

40In my view, these required seasoning periods are appropriate between the establishment of a plan and the date of the initial trade, as well as between any modification, suspension or termination of a plan and the resumption of trading or entry into a new plan. Such seasoning periods not only help demonstrate that a plan was executed in good faith, but they also can bolster investor confidence in management teams and in markets generally.(go back)

41See Chairman Jay Clayton, Opening Remarks at the Securities Regulation Institute (Jan. 22, 2018), available at back)

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