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Jay Clayton maps out the SEC’s future direction

Dimensions, September 2017 | September 20, 2017

The SEC is undergoing a crucial period of transition under Chair Jay Clayton, who was appointed by President Trump earlier this year. Unlike the previous chair, Mary Jo White, who is a former prosecutor and litigator, Mr. Clayton is a transactional lawyer. He is expected to focus more on improving the capital markets than on enforcement.

Mr. Clayton revealed his regulatory priorities clearly during his congressional confirmation hearing in March 2017. Stating that he opposes “rules that are unnecessarily complex,” he asserted that “the SEC should reduce complexity and provide clarity in rulemaking.” He also supports a thorough review of the “cost and economic impact of rules.” [See the May 2017 Dimensions for more on Mr. Clayton’s confirmation hearing.]

Joe Clayton Blog Merrill Corp

SEC rulemaking agenda cut in half

Mr. Clayton’s intention to curb enforcement-related rulemaking is already apparent. In August, the SEC released the latest version of its biannual rulemaking agenda. Expert SEC-watchers immediately noticed the absence of certain Dodd-Frank rules that had been proposed, including those on pay-for-performance, clawbacks, universal proxy cards, and board diversity. [See, e.g., commentaries from and Davis Polk & Wardwell.]

In fact, the SEC has almost halved its rulemaking plans, from 62 rules in the prior agenda to just 33 now. Proposed and pending final rulemaking still on the agenda includes: Inline XBRL; mining property modernization; and changes to the Smaller Reporting Company definition and Business and Financial changes under Regulation S-K.

The wide-ranging S-K Concept Release issued by the SEC in 2016 offers various other suggestions, including: structured data; disclosures on environmental and social issues; and audit committees. One recommendation from the Concept Release to improve the public’s access to information, Exhibit Hyperlinking, is already being implemented. While some more controversial rules have been placed on the back burner, it is clear the SEC is moving forward with Clayton’s vision of rules that improve and streamline disclosure.

What the chair’s speeches reveal about his view of the SEC’s future

In a July 2017 speech to the Economic Club of New York, Mr. Clayton mapped out his vision of the SEC’s policies under his leadership, with a list of guiding principles and explanations of how to put those tenets into practice. In keeping with predictions for his tenure, these essentials focus on investor protections, cybersecurity, capital formation, and improvements in SEC disclosures.

The SEC’s use of technology, including XBRL and other forms of structured data, will continue to grow. “Technology is not just the province of those we regulate,” he said. “The SEC has the capability to develop and utilize it, too. We apply sophisticated analytic strategies to detect companies and individuals engaging in suspicious behavior. We are adapting machine learning and artificial intelligence to new functions, such as analyzing regulatory filings.”

Overall, the speech emphasizes the costs of excessive regulatory compliance for companies. Pointing out the “roughly 50% decline in the total number of US-listed public companies over the last two decades,” Mr. Clayton links this decrease in part with the expansion of disclosure requirements—which, he believes, exceed the materiality threshold in many cases—although he and other regulators acknowledge that many factors are involved. To redress the decline, he wants the SEC to “review its rules retrospectively” and consider the cumulative effect of required disclosure. The SEC’s recent expansion of the confidential filing option is an effective, immediate step to facilitate access to capital, indicative of Mr. Clayton’s efforts to assist new and recent IPO companies.

With a view toward improving the quality rather than increasing the quantity of disclosure, he indicated that the SEC “has several initiatives under way to improve the disclosure available to investors.” Among these are enhancements outlined in the weighty 2016 concept release issued by the SEC on modernizing certain business and financial disclosures required under Regulation S-K. As Dimensions reported in June 2016, the proposals in the S-K release include the ongoing expansion in the use of structured data for financial disclosures, along with a drive to improve the quality of XBRL tagging by filers.

Mr. Clayton underscored these themes on July 26th at an event held by the Center for Capital Markets Competitiveness, part of the US Chamber of Commerce. [A recording of the event is available at the organization’s website.] In an address after the general discussion, he voiced doubts about the wisdom of continuing to place disclosure obligations on companies and again questioned whether increasing the quantity of disclosures really improves the quality. [See additional commentaries from law firms Cooley and Davis Polk & Wardwell.]

SEC budget proposal includes major resources for structured data

Mr. Clayton will continue to follow the path set by prior SEC leadership, to modernize disclosure by prioritizing the use of structured data in financial reporting and SEC enforcement. In his testimony on June 27, 2017, before a congressional subcommittee to establish the SEC’s upcoming budget, he spelled out the “key technology initiatives that will be supported with our FY 2018 request.” These include:

  • Broadening the data-analytics tools to compile and analyze the SEC’s vast volume of financial data, which will help SEC staff “detect potential fraud or suspicious behavior earlier and allocate resources more effectively.”
  • Enhancing the review process “through risk assessment and surveillance tools that help identify high-risk areas for further examination.”
  • Strengthening the public’s access to and the usefulness of the information in EDGAR.
  • Investing more in “business processes automation and enhancements, including the retirement of legacy systems.”

As Mr. Clayton pointed out to the subcommittee, the SEC’s ongoing modernization of data technology must keep up with the rapid expansion of data technology in the capital markets. “The $240 million that the SEC plans to spend on information technology in FY 2018 is quite modest, by way of comparison, to the amounts that the major Wall Street firms spend on their own information technology systems,” he noted.

Note: This was originally published in the September 2017 issue of Dimensions, a newsletter produced for Merrill Corporation focused on key issues in financial reporting, SEC disclosure and legal professionals. Download the latest issue today.

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