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September 26, 2017

Issues to Watch For As SEC Chair Clayton Testifies Before Senate Banking

Wednesday, September 26, 2017
Contact: Nick Jacobs, 202-618-6430 or

TO:                        Editors and Reporters Covering SEC Chairman Clayton’s Testimony Before Senate Banking Committee

FROM:                 Lev Bagramian, Senior Securities Policy Advisor

SUBJECT:             Issues to Watch for in Today’s Hearing Before Senate Banking

In advance of SEC Chairman Jay Clayton’s first oversight hearing before the Senate Banking Committee, this memo breaks down the issues to watch for during the hearing:

1.  Hacking of EDGAR and Cybersecurity are top of mind but Chairman Clayton forgets to mention that Congress, in the last two budget cycles, and the new Administration has prohibited the SEC from accessing a Reserve Fund set aside for IT-only improvements. Cybersecurity and EDGAR hacking is the issue de jour for Chairman Clayton. He’s right to be transparent about the SEC’s own vulnerabilities, and to caution the investing public to more seriously appreciate cybersecurity threats. Chairman Clayton calls for greater investment into and immediate hiring of experts to strengthen SEC’s own IT infrastructure. But he fails to note that in the past two budget cycles Republicans in Congress, and now the new Administration, have cutoff SEC’s IT funding (by transferring the funds from a dedicated account to the Department of Treasury) that was supposed to serve agency’s short- and long-term IT needs, allowing the agency to upgrade its systems and make them secure.

2.  SEC’s soon to be released regulatory agenda needs to bring back Dodd-Frank items that were excluded from its March version. The March version reflected the priorities of then Acting-Chairman Mike Piwowar. The upcoming one (likely to be released in October) will be Chairman Clayton’s first. The new agenda needs to bring back Dodd-Frank mandated rules, such as rules prohibiting incentive-based compensation arrangements that promotes risky behavior and recovery of erroneously awarded compensation (the so-called clawback provision), and proposals to regulate security-based swaps.  Finalizing these rules is long overdue, so putting them back on the SEC’s agenda would be a welcome step in the right direction.

3.  Growing companies are choosing to stay private for reasons that go well beyond regulatory costs and burdens. Chairman Clayton is correct to be concerned about the impact of having fewer public companies for retail investors to invest in, he is also correct to point out that companies that go through the rigors of IPO process become better companies. But what he gets wrong is the misguided presumption that investors are overwhelmed with the amount of information available today. In his testimony, Chairman Clayton says that the Commission will continue the “Disclosure Effectiveness” initiative which risks reducing information investors rely upon and need to protect themselves. The Commission would also do well to NOT expand the “small reporting company” definition to essentially make it a useless distinction.

4.  Pay Ratio remains on the books, and must be implemented and complied with. The Dodd-Frank Act requires public companies to disclose the ratio of the CEO compensation to that of the median salary of an employee in the same company. The rule became an early target for Acting-Chairman Piwowar. The matter seems to be settled now with the SEC releasing a staff interpretive guidance, to allow companies to re-use certain data and statistical methods that will make compliance easier.

5.  SEC staff has found no evidence that companies are having difficulties complying with DOL’s Fiduciary Duty rule. Chairman Clayton lists specific ways the market and market practitioners are evolving in response to the rule, including issuances of “clean shares” which are free of any sales loads or distribution costs, and allow for brokers to be transparent with their clients as it relates to commissions and compensation. He also notes SEC’s extensive interactions with DOL, a point that contradicts the narrative some Congress want to draw: that DOL staff wrote and is implementing the rule in isolation. Chairman Clayton also notes that SEC’s own work on fiduciary duty is continuing.

6.  Certain market structure reforms are coming, but nothing fundamental. Chairman Clayton supports a 2015 SEC proposal to better regulate Alternative Trading Systems (ATS) and a 2016 proposal to increase information on how brokers choose to route customer trades. He also indicated no interest to delay the implementation of the Consolidated Audit Trail (CAT) but is wary of security surrounding personally identifiable information (PII). Chairman Clayton also expressed hope that the Fixed Income Market Structure Advisory Committee (FIMSAC), a new SEC advisory committee, unfortunately modeled after EMSAC, that’s supposed to take up issues related to corporate, treasury and municipal bonds, will hold its first meeting sometime in December. Unfortunately, Chairman Clayton does not indicate any urgency to fix some clearly broken aspects of the markets: the pernicious practice of kickbacks exchanges give to brokers for order flow, latency arbitrage (also known as HFT front-running) or weak or non-existent market surveillance that large exchanges conduct (in contravention to their obligations as self-regulatory organizations).


Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit

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