Tuesday, Securities and Exchange Commission Chair, Jay Clayton, testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. In his last testimony, Chair Clayton confirmed his plans to conclude his tenure before year end. The Chair provided an overview of the work of the SEC during the year, addressing the SEC’s response to the pandemic, a number of regulatory and policy initiatives, and enforcement matters.
Chair Clayton noted that, “[d]espite the extraordinary trading volumes and volatility we saw in our securities markets earlier this year, at a high level, the “pipes and plumbing” of our securities markets have functioned largely as designed, and importantly, as market participants would expect….” He noted that the SEC Staff continues to review market function and whether additional improvements should be considered. He also discussed the work of the interdisciplinary COVID-19 Market Monitoring Group and referred to the recently published report on U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock. He also discussed the Initiative on the Effects of Mechanistic Portfolio Management Guidelines/Restrictions. The Staff is exploring whether credit assessments and credit rating agency downgrades—and market anticipation of, and responses to, those ratings actions—may (1) contribute to negative procyclicality in certain circumstances and (2) have implications for financial stability. Finally, he reviewed the SEC’s various targeted relief measures, and the SEC and Staff guidance relating to disclosure issues arising in connection with the pandemic.
The Chair commented on the work of the SEC’s Office of Compliance Inspections and Examinations (OCIE) and the Division of Enforcement. OCIE, he noted, engaged in regulatory outreach with hundreds of firms in March and April 2020 to assess the pandemic’s impact on market and liquidity risks, as well as firms’ risk exposure to certain industries, counterparties and asset classes. Interestingly, he noted that the SEC’s Division of Enforcement suspended trading in 36 issuers, with 24 of those in March and April alone, and followed with six enforcement actions against issuers and individuals alleging fraud based on COVID-19 related claims. Enforcement has also opened over 150 COVID-related investigations and inquiries.
The Chair reviewed the various policy efforts undertaken during the last year—citing improvements to the proxy process, amendments to the definition of “accelerated filer” and “large accelerated filer,” Regulation S-K changes, amendments to the accredited investor definition, and the exempt offering framework amendments. In his prepared remarks, Chair Clayton acknowledged that, “For companies that have valuations below $100 million or even $500 million, depending on their industry and other factors, the public capital markets are often not a viable option. In other words, for the vast majority of America’s companies, the public markets are not a viable option for their capital needs.” Perhaps anticipating questions regarding the decline in the number of U.S. public companies in recent years, the Chair noted that, in his view, the amendments would not favor the private over the public markets. He noted that he believed the SEC should continue to explore approaches that would allow retail investors more access to the private markets through fund structures. This seems to suggest that further action will await a new chair.
The Chair also addressed the risks to investors in connection with companies that have significant operations in emerging markets, including China. He noted that the SEC Staff is preparing proposals in response to the President’s Working Group on Financial Markets’ report, but that Congressional action would be welcome.
See the full text of the prepared testimony, which covers a number of additional topics not mentioned here, and which provides a summary of an eventful year of SEC rulemaking and enforcement activity.