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SEC chairman discusses proposed changes for broker-dealers, what they mean for investors

Securities and Exchange Commissioner Jay Clayton
Securities and Exchange Commissioner Jay Clayton U.S. Securities and Exchange Commission

President Donald Trump nominated big-bank lawyer Jay Clayton to be chairman of the U.S. Securities and Exchange Commission on his first day in the Oval Office.

Clayton, a 51-year-old attorney who was sworn in as SEC chairman in May 2017, is viewed by many as the consummate Wall Street insider.

He is a former partner with the influential New York law firm Sullivan & Cromwell, which represented Goldman Sachs when it received a $5 billion investment from Warren Buffett’s Berkshire Hathaway, and advised Bear Stearns in its sale to JPMorgan Chase during the financial crisis a decade ago. He handled numerous corporate mergers and acquisitions.

Clayton’s wife, Gretchen, also worked at Goldman as a private-wealth manager. Clayton’s financial disclosure form filed with the federal government reveals that he and his wife possess assets of at least $50 million, according to the New York Times.

But while he is now policing the very companies he used to counsel on Wall Street, Clayton says protecting “Main Street” investors from brokers and advisers who flout the law is among his top priorities as SEC chairman. “Nobody who is providing [an investment] service can argue with being clear with their customers as to what that service is costing them,” Clayton told the Miami Herald in a recent interview. “Put another way, if [industry] people have a hard time [providing clarity to their customers], I don’t really care.”

Clayton has been touring major U.S. cities to tout the five-member SEC’s proposed rules for broker-dealers, who buy and sell securities on a commission basis, and investment advisers, who manage a portfolio of assets and get paid an annual fee based on their value. The SEC’s goal is to require greater transparency by investment professionals, so that investors better understand their relationship with them based on risks, costs and potential conflicts of interest.

In a statement published in April, Clayton said the rule changes aim to “require broker-dealers to act in the best interest of their retail customers” and “clarify the fiduciary duty owed by investment advisers to their clients.” The proposals, he said, also require “both broker-dealers and investment advisers to clarify ... the type of investment professional they are.”

In July, Clayton conducted a round-table discussion with South Florida investors at the University of Miami to gauge their views on the commission’s disclosure reforms. The SEC issued the rules in April, to be followed by a 90-day public comment period, a full report and a final vote.

Before the UM gathering, Clayton joined SEC regional director Eric Bustillo at the commission’s office on Brickell Avenue to talk with a reporter about the rule changes and what they mean for investors here and across the nation. The local SEC office is among the most active in the country, bringing civil enforcement actions against a slew of Ponzi schemers and other securities scofflaws.

Q. What brings you to Miami in the middle of the summer?

A. Well, Eric brings me to Miami. I’m a big fan of Eric’s. We share a passion for what I call Main Street investors or retail investors. This regional office of the SEC has a very diverse portfolio, and the largest portion of [that] portfolio are retail investors. And there’s a lot of fraud — elder fraud, affinity fraud, targeting particularly ethnic groups, targeting religious groups. This is really the front lines in terms of combating retail fraud. ... This one [region] sticks out in terms of the focus on retail investor fraud.

The other reason I’m here is a positive reason. Our markets depend on retail investor participation and retail investor participation is great for retail investors. I’m here to hear from people as to what they expect from their investment professionals. We have an enforcement side to the commission, which is in large part what Eric does. But we also have a part of the commission that I would also say is forward looking. We’re trying to make the rules that apply to investment professionals more in line with what investors would expect.

Q. The SEC, which was established in 1934, appears to be at a crossroads, according to your mandate. What is driving these new rules for the retail securities industry?

A. The market for retail investment advice has changed dramatically, not just since 1934, but in the last two decades. We do have broad retail participation, perhaps the broadest of the large industrialized economies. I think over 50 percent of households in America have direct or indirect exposure to the marketplace. Again, this is a good thing, participation in the growth of America is a good thing. But it’s our job to make sure that those investors are both well informed and appropriately protected. And so, we’ve taken a look at the rules that apply to investment professionals and said, “You know what, it’s a patchwork that’s been developed over many years and it’s not serving people as well as it should.” So, we’re trying to bring some uniformity and clarity and protection to the space.

When I arrived at the commission, it was clear that there needed to be harmonization. We’re not dictating to the various regulators what to do, but we are trying to provide a focal point for regulation. Let me give you an example, if you have a 401(k), an annuity and a few stocks, no less than five regulators regulate the relationship with your investment professional, and if you have that through a bank, there’s also the banking regulators. Those regulations are not as consistent as they should be. We, the SEC, are actually the ones who inspect most of those investment professionals and the ones who have the most experience.

So, the task that I put to the staff across the commission was, let’s come up with rules that make sense. And what rules make sense? Let’s start with what a reasonable investor would expect. And so, I think where we landed was, a reasonable investor expects to be told how their professional is making money and how much of their money is going to work in the marketplace. And they also expect that that professional is not going to put the professional’s interests ahead of the investor’s interests. Our proposals embody those principles.

Q. There is a distinction that you’ve made in the proposed rules between broker-dealers and investment advisers. It seems that you are trying to establish a new ‘bright line’ of conduct for both?

A. I think the line has not been as bright as it should be. We’re going to make the line brighter, and we’re making the standards of care consistent, recognizing that a broker-dealer relationship with a customer is different from an investment adviser relationship with a customer. If you make it clear, then the consumer can make a clear choice as to what’s best for him or her.

There are millions of relationships around the country. We need to define rules that people can follow, but that give the customer the ability to make good choices and, if the professional is behaving badly, give us the ability to detect it and deal with it. If an investment professional, be they a broker-dealer or investment adviser, clearly has to disclose how they are making money, that makes our job much easier if they’re misbehaving. If you know how the person you’re dealing with makes money — whether it’s a car dealer or an investment adviser — you make better choices and ask better questions. There has been a great deal of opacity, not just on the broker-dealer side but on the investment-adviser side, as to how people make money.

Q. How does the SEC hope to improve upon the transparency of commissions and fees charged by investment professionals?

A. It’s getting better, but there are things that we see that greatly disturb us. For example, investment advisers who tell people it’s a flat fee and then when they put somebody into a particular product, ABC’s mutual fund, they get a fee from ABC’s mutual fund as well. That’s less money of the customer that’s going to work in the marketplace. The customer should know whether the investment adviser is getting paid by a provider as well as the customer.

Q. One of the central themes in your reforms seems to be eliminating these types of conflict of interest in the securities industry?

A. Eliminate them ... but we have to recognize that in any principal-agent relationship, there are conflicts of interest. What we’re doing is eliminating the ones that can be reasonably eliminated, making sure that the others are disclosed and putting an obligation of mitigation on the professionals. People don’t mind paying a fee for a service as long as the fee for the service is reasonable and well understood. That’s what we’re learning. Consistently, throughout the country when I speak to people, they don’t mind compensating their investment adviser or broker. What they mind is when they’re paying more than they think they are or they’re paying for something and not getting it. They want to know what they’re paying for their money, and they want to know the motivation of the person on the other side of the table.

Q. I’m sure you’ve heard more from Wall Street than Main Street about these proposed securities rules. What is your sense of what the investment professionals think about these reforms?

A. I don’t think anybody can argue with clarity. I’m more interested in hearing from Main Street investors whether the clarity we’re proposing is something that works for them. Nobody who is providing [an investment] service can argue with being clear with their customers as to what that service is costing them. Put another way, if [industry] people have a hard time [providing clarity to their customers], I don’t really care.

What I do care about from the industry is whether they can comply with these rules in a way that isn’t so costly that they pull back from providing service. I think it should be pretty easy to comply with this kind of disclosure rule — how much is it costing me, how are you making your money, and don’t put your interests ahead of mine.

Q. A member of the SEC who was appointed by former President Barack Obama doesn’t believe these reforms go far enough to protect retail investors. What is your reaction?

A. We took a fresh look based on a lot of experience all across the commission. ... We’re raising the bar both in terms of disclosure and in terms of conduct. But it’s a proposal, and I’m here in Miami to hear what investors have to say. Calibration is part of this. People are going to have different views on calibration. But so far, I feel comfortable that we have calibrated this correctly.

JAY CLAYTON

Job title: Chairman of the U.S. Securities and Exchange Commission, a five-member board appointed by the president that regulates and enforces the nation’s securities industry. He was nominated on Jan. 20, 2017, and sworn in on May 4, 2017.

Experience: Before joining the SEC, Clayton was a partner at the New York-based law firm, Sullivan & Cromwell LLP, where he was a member of the firm’s management committee and co-head of its corporate practice. Clients included Goldman Sachs, Bear Stearns, Barclays Capital, Deutsche Bank, UBS, Valeant Pharmaceuticals International, SoftBank, the Japanese conglomerate, and William C. Erbey, former head of the mortgage firm Ocwen.

Clayton has authored publications on securities law, cyber security and other regulatory issues, and was a lecturer at the University of Pennsylvania Law School, according to his SEC biography. A member of the New York and Washington, D.C., bars, Clayton earned a B.S. in engineering from the University of Pennsylvania, a B.A. and M.A. in economics from the University of Cambridge, and a J.D. from the University of Pennsylvania Law School.

Clayton was born in Newport News, Virginia, and raised in Pennsylvania.

Best advice you ever got in your career: I have been fortunate, very fortunate, to work with and learn from many great lawyers and regulators. They each give greatly to their clients and the country while being true to themselves. My mentor, former partner and friend, John Mead, advised me early on in my career to do just that. I hope that I do.















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