The US Securities and Exchange Commission may have filled a high-level vacancy on May 4 with the swearing-in of a private funds lawyer, but he is not the only key appointment required by the regulator.
Jay Clayton has revealed little about his plans for the agency or his views on deregulation, a key objective of the administration. During his confirmation hearing in March, he said cybersecurity will remain a key focus and he questioned whether disclosure was “where it should be.” Otherwise he remained tight-lipped on reform, such as the Republican proposal to strip back the Dodd-Frank Act. With so little information available, it’s hard to predict whether having Clayton at the head of the agency will ease scrutiny of the private funds industry.
The SEC was not just looking for a new chairman – a number of agency officials left at the end of the Obama administration. Who fills these positions will also have a big impact on its future direction.
There are two empty seats on the five-person commission and a third will be vacated on June 5. Commissioners’ views on enforcement penalties will dictate the severity of punishments the agency doles out. As we went to press, no nominations had been made.
Conflicts of interest prevented former chair Mary Jo White from voting on some enforcement actions, but some Democrats opposed to Clayton’s appointment said the extent of his conflicts could significantly reduce the number of successful actions. Not only has he represented many of Wall Street’s biggest names, including Goldman Sachs and JPMorgan, he also has a huge portfolio of private and public equity investments.
Clayton’s financial disclosure form showed he has interests in 54 private funds including big names like Warburg Pincus, TPG Capital and Bain Capital. He will be unable to vote on matters involving the managers of these funds for two years, despite being obliged to divest his holdings within 90 days of his confirmation.
The head of the enforcement division is another key role, and its holder has a bigger impact on the number of enforcement actions than the agency’s chairman. Under its former chief, Andrew Ceresney, now at Debevoise and Plimpton, actions and financial recoveries hit a record high. It’s unknown if his successor – yet to be appointed – will take such a hard line.
An initiative launched by the acting chairman of the SEC, Michael Piwowar, could also affect future enforcement actions. He ordered a review of the enforcement division’s power to issue subpoenas and negotiate settlements without commissioner participation. The initiative’s opponents say it could reduce the number of compliance exams. Clayton has not said whether he intends to continue this review, or even what he thinks of it.
Jay Clayton’s appointment has solved one of the SEC’s staffing issues, but until other vacancies are filled it is difficult to assess what impact he will have on its future direction. Private fund managers should not assume a new, looser attitude to deregulation and should make sure they continue to toe the line.