Politics & Government

The Man from Sullivan and Cromwell

Under Trump’s SEC, Wall Street secrecy expands as enforcement shrinks.
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Jay Clayton testifies before the Senate Banking Committee during his confirmation hearing to become chairman of the Securities and Exchange Commission.

Late last October, several hundred handsomely suited financiers gathered in the ballroom of a luxury Marriott, just two blocks down Pennsylvania Avenue from the Trump International Hotel. Lisa Kidd Hunt, the new chair of the Securities Industry and Financial Markets Association, practically glowed as she addressed the crowd of bankers, brokers, and other money managers.

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“There has never been a better time to be in this industry!” she declared. The economy was strong, she said, there was “real movement on regulatory and tax reform,” and the United States boasts “the best capital markets system in the world.” The audience had every reason to feel elated. The stock market was setting records, and Donald Trump’s pick to regulate the industry — one of his most significant decisions as president from the perspective of those in the room — couldn’t have been better. Jay Clayton was a familiar face, having spent his career as a lawyer representing large Wall Street firms, and he was about to take the stage.

1. THE SEC 180

Since winning Senate approval as chair of the Securities and Exchange Commission in May, Clayton had talked tough about protecting small investors. But he had already given Wall Street any number of gifts, from easing up on enforcement of major firms to easing the rules for companies seeking to go public. In remarks last July at the elite Economic Club of New York, Clayton had acknowledged how “burdensome” some disclosures are to generate and openly invited companies to request exemptions. “I … assure you that SEC staff is placing a high priority on responding with timely guidance,” he said.

Key Findings

  • Jay Clayton worked almost his entire adult life at an elite law firm that includes many of the country’s largest publicly traded companies as clients—now he’s chairman of the SEC.

  • Four of Clayton’s clients were under government investigation when he was appointed as chairman of the SEC.

  • Clayton was a go-to lawyer for some of Wall Street’s biggest investment banks through the recession.

  • Under Clayton's leadership, Wall Street secrecy has expanded as enforcement has withered.

There was bonhomie in the air, then, when Clayton stepped on stage. Clayton and Tim Scheve, the Wall Street executive charged with interviewing him on that October day, were fast friends. Only minutes into their chat, the two were chortling that they had landed on the same side of a bitter regulatory controversy: whether all financial advisers must serve a client’s best interests. The Department of Labor had spent years fighting to require this “fiduciary standard” for advisers overseeing retirement accounts, but the SEC had authority to create its own rules. The adoption of less onerous SEC rules could have ripple effects on the Labor Department’s strict ones.

Clayton suggested that mom and pop investors should continue to have a choice between hiring fiduciary advisers and stockbrokers, who are not fiduciaries, spurring Scheve, the CEO of Janney Montgomery Scott, a large financial services firm, to jump in with his approval. “We would agree with you!” he said enthusiastically. There was a burst of relieved laughter from the audience, followed by Clayton’s sly response: “I’m not just saying that because I’m here.”

Clayton is a man Wall Street itself might have picked to run its most important federal regulator. Except for the two years that Clayton clerked for a federal judge after graduating law school, he has worked his entire adult life at Sullivan & Cromwell, an elite law firm based in downtown Manhattan that includes many of the country’s largest publicly traded companies as clients. Its sleek Washington, D.C., offices overlook the Washington Monument, where the firm’s attorneys assist banks and other large firms in their business before the Federal Reserve, the Consumer Financial Protection Bureau, and the SEC. Clayton, who made $7.6 million in his last year at Sullivan & Cromwell, has advised clients on everything from sensitive regulatory problems to initial public offerings to the large-scale mergers and acquisitions that make Page 1 of the business section. Clayton represented the likes of William Ackman and Paul Tudor Jones, some of the most prominent names in the hedge fund world, the very sorts of figures Trump had skewered early in his presidential campaign, saying, “The hedge fund guys are getting away with murder. … I have hedge fund guys that are making a lot of money that aren’t paying anything.”

Clayton has represented Wall Street clients including Goldman Sachs, Morgan Stanley, Lehman Brothers, and Deutsche Bank, on everything from acquisitions to initial public offerings. Each of the firms has run afoul of the SEC. So have Volkswagen and Valeant Pharmaceuticals, two other well-known Clayton clients. Both were under SEC investigation at the time of his appointment. Disclosure forms Clayton filed with the government’s ethics office indicated two additional clients under government investigation at the time, both of which he could not name because the investigations had not yet been made public.

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The Goldman Sachs building is seen in lower Manhattan on April 15, 2016.

Clayton has promised to recuse himself for one year from decisions on enforcement actions against clients of his former firm. But Sens. Elizabeth Warren and Sherrod Brown were among those expressing skepticism that Clayton could properly manage his conflicts. “I’m concerned that you may need to recuse yourself too often at a time when we need a strong, independent SEC chair on the front line of enforcement,” Brown, the top Democrat on the Senate Banking Committee, said at Clayton’s confirmation hearing.” Already in his first seven months in office, Clayton was listed as present but “not participating” 23 times. Many of those cases involved big names, including UBS, Wells Fargo, and JPMorgan Chase. (An SEC spokesperson said Clayton was not available for an interview for this story. The spokesperson did not respond to subsequent questions sent by email.)

Former President Barack Obama had been criticized by progressives for putting an attorney from another top corporate law firm in charge of the SEC. But at least that pick, Mary Jo White, had worked as a federal prosecutor for nine years. As chair, White advocated a “broken windows” approach to securities markets, which meant the agency pursued even small infractions. In October, SEC Commissioner Michael Piwowar, a Republican appointee, described the current direction of the agency as “such a complete change from the past few years that you could appropriately call it ‘SEC 180.’”

2. SHIRTS AND SKINS

Jay Clayton’s rise to SEC chair began with a client call late in November 2016, shortly after Trump’s election. How, the client asked, could the incoming administration cut back on Wall Street regulations? In response, the Wall Street Journal reported, Clayton “dashed off” an email laying out his ideas for making it easier for businesses to raise money without so many rules imposed by government. Such deregulatory discourse is in the DNA of a firm like Sullivan & Cromwell, where lawyers dispatch lengthy letters to regulators seeking everything from exemptions from punishment to the insertion of industry-friendly language in new rules. The client shared the email with Trump advisers, who were apparently so impressed that they asked Clayton if there was any administration job that might interest him. By late December, according to the Journal, Clayton was in Mar-a-Lago meeting with the president-elect to discuss the SEC chairpersonship. His appointment was announced a week later, on January 4.

A Sullivan & Cromwell lifer, Clayton had never served in government prior to his swearing-in last May. But he was a top partner at one of a small universe of corporate law firms that, for a long time, have served as a feeder system for government, says Donald C. Langevoort, who teaches securities regulation at Georgetown Law. “When you look at who was in senior staff — whether in the Obama administration, the Bush or Clinton administration or now under Trump — it’s really pick and choose from 20 big law firms that represent big publicly traded companies that have interactions with the SEC,” Langevoort said. Jones Day is likely the biggest single feeder firm for the Trump administration, as the alma mater of White House counsel Don McGahn and Solicitor General Noel Francisco, among others, but Sullivan & Cromwell is competing for second place, with alums placed prominently in the White House, the Treasury, and the Solicitor General’s office. These include Brent McIntosh, general counsel to the Treasury; Jed Doty, associate counsel to the president; and Jeffrey Wall, the principal deputy solicitor general. A former Sullivan lawyer, Sean Memon, serves as Clayton’s deputy chief of staff and a former Sullivan partner, Steven Peikin, was named the agency’s co-director of enforcement.

Founded in 1879, Sullivan & Cromwell was the firm J.P. Morgan turned to when creating U.S. Steel, and its client list back then included one of the more notorious robber barons of the day, E. H. Harriman, whom President Teddy Roosevelt dubbed an “enemy of the Republic.” One Sullivan & Cromwell partner, John Foster Dulles, a future secretary of state, helped negotiate the Treaty of Versailles after World War I. Another, his brother Allen Dulles, would go on to lead the CIA. After the 1929 crash, John Foster Dulles tried convincing federal officials that there was no need to write new laws restricting businesses, according to “A Law Unto Itself,” a 1988 history of Sullivan & Cromwell. When Dulles lost that argument, another partner at the firm helped to write both the Securities Act of 1933 and the Securities Exchange Act of 1934.

  • When Lehman went bankrupt that September — the largest bankruptcy in U.S. history — Clayton simply switched sides.

The 2008 financial crisis again put a spotlight on the central role Sullivan & Cromwell and other large corporate law firms play at the intersection of business, politics, and the economy. In June 2008, Clayton had hitched a ride to Korea on a private Gulfstream jet with top executives of his client, Lehman Brothers, in a futile attempt to raise money to save the storied investment bank, according to Andrew Ross Sorkin’s “Too Big to Fail.” When Lehman went bankrupt that September — the largest bankruptcy in U.S. history — Clayton simply switched sides. According to Sorkin, only hours after the bankruptcy, Clayton sat down with a team from Barclays Bank in a New York conference room and said, “I’m switching from shirts to skins.” Lawyers for Lehman’s creditors weren’t amused. They ended up “furious about Lehman’s deal with Barclays, suggesting it was paying far too little” for Lehman’s investment banking business, Sorkin wrote.

Throughout the crisis, Clayton was a go-to lawyer for some of Wall Street’s biggest investment banks. He advised Goldman in its negotiations with the government over $10 billion in federal TARP bailout dollars and in its efforts to raise another $5 billion from Warren Buffet. Clayton also represented Bear Stearns in its crisis-related fire sale to JPMorgan Chase.

One of Clayton’s more senior colleagues, H. Rodgin (“Rodge”) Cohen — in the news recently for his role in protecting Harvey Weinstein — was even more of a central player. Cohen, according to Sorkin, “had the ear of virtually all the banking CEOs and regulators in the country” and was so linked to powerful government officials that Tim Geithner, then the head of the New York Fed, “often relied on him to understand the Federal Reserve’s own powers.” A 2009 New York Times profile of Cohen quoted Henry Paulson, who was Treasury secretary during the panicky early days of the crisis, saying that during the interminable crisis-related meetings, “every time I looked up, it seemed Rodge was in the room.”

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Clayton is sworn in before the Senate Banking Committee during his confirmation hearing.

“Rodge worked through Treasury and the Fed,” said a Senate staffer who wrote portions of Dodd-Frank, “and it’s not like he needed to have a scheduled conversation to get Geithner or [Fed Chair Ben] Bernanke on the phone.” Michael Barr, who served as assistant Treasury secretary for financial institutions in 2009 and 2010, was a key architect of Dodd-Frank. “Rodgin was able to call people in Treasury and express his views because we knew he was a thoughtful guy who wasn’t going to come in guns blazing,” Barr said. “People trusted him to be a total straight shooter.” (Cohen did not respond to a request for comment.)

For his part, Cohen saw nothing wrong with the coziness of the relationship between the banks, regulators, and lawmakers. “The country’s economy seems to perform better when there is more cooperation and collaboration … between the banking industry and the government,” Cohen said in 2016. “And when that cooperation and collaboration is reduced, the industry’s ability to serve its customers and its performance are reduced.” He called the idea of regulatory capture, that regulators often end up deeply under the sway of the very industries they regulate, “fatuous.” Clayton has echoed Cohen in urging business and regulators to work together, and often refers to the disclosures the SEC requires as “burdensome.”

3. GOLDEN YEARS

The 1933 and 1934 laws that created the SEC came in the wake of a collapse in investor confidence after the 1929 stock market crash. The laws enshrined the idea that when a company sells stock to the public, it must tell the truth about its business and the risks involved. The laws also dictate that the people who sell and trade securities must treat investors fairly.

The SEC’s most impressive period — its “golden years” of tough enforcement and investor protection — were in the 1970s and early 1980s, says Georgetown’s Langevoort. That was a time, he says, when politicians on both sides of the aisle in Congress were protective of the SEC “and gave it room to be more aggressive.”

It also was a time when career professionals passionate about the SEC’s mission were setting the agenda, says Robert Plaze, a private sector lawyer who previously spent nearly 30 years at the SEC, most recently as deputy director of its investment management division. “The agency is so much more politicized than it was when I started,” Plaze says. “In the old days, commissioners would come and go, but the place was largely run by staff.”

That era ended during the Carter administration, he says, and it never came back.

Today, the agency, which is run by a five-member commission made up of both Republican and Democratic presidential appointees, occasionally suffers from the same partisanship that has defined Congress in recent years. Commissioners often vote unanimously, but disputes have broken along party lines on everything from regulations to enforcement settlements. Neither party can have more than three commissioners — Hester Peirce, a Republican, and Robert Jackson, a Democrat, were recently sworn in to fill two vacant seats — so it’s the chair, also a voting commissioner, who sets the tone. “I do think more and more that chairmen of these independent agencies believe that they bring to the job this sense of playing on the same team,” says Plaze. “It’s dancing with the one who brung you.”

In March, the public got its first glimpse into Clayton’s world with the release of his mandatory government disclosure document, which detailed Clayton’s blue-chip roster of clients and his vast personal wealth.

  • At a rally last March, Sen. Bernie Sanders called Clayton “the embodiment of the greed that nearly destroyed the economy.”

The Ivy-League Clayton, who received his undergraduate and law degrees at the University of Pennsylvania, the president’s alma mater, is married to Gretchen Butler Clayton, who at the time of his financial disclosure was still a vice president at Goldman Sachs. There, at this SEC-regulated firm, she had worked as a wealth manager, an elite specialization that involves providing financial advice to some of the world’s wealthiest families and individuals. She stepped down on May 2, the day her husband was confirmed as commissioner, a Goldman spokesperson said.

The couple’s holdings are, if nothing else, elaborate — unimaginably so compared to the holdings of the average investors that Clayton claims to represent. A single-spaced accounting of their assets runs more than 30 pages and includes hundreds of investments. The list includes mutual fund investments and retirement accounts, along with pages listing ownership of stocks in individual publicly traded companies (including a raft of technology firms, including Facebook, Microsoft, and Alphabet), and so many bank and money market accounts, it’s dizzying. They have up to $500,000 in “U.S. bank account #1” and as much as $250,000 in cash in “U.S. bank account #5.” Millions more are stashed in a dozen-plus money market accounts. Then there are the choice investment opportunities only open to the very wealthy and well-connected: venture capital funds, real estate trusts, and private equity investments of all shapes and sizes.

The Claytons own a place in Ocean City, a beach community in southern New Jersey, that Clayton valued at $1 million to $5 million; a rental property there worth more than $1 million; and another property in Philadelphia, worth up to $5 million. And that doesn’t include their 3,000-square-foot loft apartment on Hudson Street, in Manhattan’s Tribeca, which they bought for around $3.2 million in 2006, according to city records. All told, the couple has a net worth of more than $50 million.

In a letter to the SEC’s ethics officer, Clayton said that if confirmed, he would withdraw as a partner at Sullivan & Cromwell, and he and his wife would sell most of their assets. One exception was a firm called WMB Holdings, held by his wife and children through a series of family trusts. Among other services, WMB, which is regulated by the SEC, helps corporate clients with regulatory compliance. The family’s stake in that company alone generates more than $4 million in dividends per year.

At a rally last March, on the eve of Clayton’s confirmation hearing, Sen. Bernie Sanders called Clayton “the embodiment of the greed that nearly destroyed the economy.”

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Sen. Richard Shelby (R-AL) speaks during a Senate Commerce, Justice, Science, and Related Agencies Subcommittee hearing on the Justice Department's proposed FY18 budget on Capitol Hill on June 13, 2017 in Washington, D.C.

At Clayton’s confirmation hearing the next day, Warren and Brown questioned him aggressively on his conflicts of interest, with Brown noting that Clayton had spent his career “protecting some of the biggest names in Wall Street.” But Republicans on the committee kept changing the subject, offering up softball questions about the workings of the capital markets. Alabama Sen. Richard Shelby even took a swipe at Brown, when he noted that although Clayton had risen “from modest means to the pinnacle of his profession … some will seek to minimize your accomplishments and impugn your motivation and ability to serve.” Shelby’s gentility appears to have been richly rewarded. Hester Peirce, a former Shelby aide, has been sworn in as a commissioner at the SEC; William D. Duhnke III was plucked by Clayton from his post as staff director for the Senate Rules Committee, which Shelby chairs, to be chair of the SEC’s Public Company Accounting Oversight Board; and Shelby Begany Telle, who also staffed the Senate Rules Committee, is now Clayton’s confidential assistant.

The Senate confirmed Clayton by a vote of 61 to 37, with nine Democrats voting in favor. Sen. Catherine Cortez Masto issued a statement saying she had voted no because of Clayton’s “long career representing companies regulated by the SEC.” Clayton, she said, had not fully responded to her requests to disclose all of his current and former clients.

4. STOCKHOLM SYNDROME 

From the start, Clayton won over potential critics with a well-rehearsed narrative about looking after the small investor and a relaxed, approachable style. In his July speech at the Economic Club, where he laid out his vision for the SEC, he said his analysis “starts and ends” with the interests of Main Street investors, “or, as I say when I walk the halls of the agency, how does what we propose to do affect the long-term interests of Mr. and Ms. 401(k)?” He said his enforcement priorities will be to “root out fraud and shady practices in the markets, particularly in areas where Main Street investors are most exposed,” “sinister behaviors that strike at Americans’ vulnerabilities,” such as “pump-and-dump scammers, those who prey on retirees, and increasingly, those who use new technologies to lie, cheat, and steal.”

This kind of talk has won over even staunch investor advocates like Joseph Borg, a securities commissioner in Alabama and president of the North American Securities Administrators Association, an alliance of state securities regulators known for its small-investor focus. “Any time he wants to work for the retail investor, we are right here with him, he said. Borg is known as an uncompromising enforcer whenever he believes people in his state are getting ripped off. He unearthed the penny-stock fraud scams of Jordan Belfort, the infamous “Wolf of Wall Street” who ran a Long Island brokerage firm that fleeced thousands of investors of more than $100 million. So it’s no small matter that Borg likes what he hears from Clayton about pursuing those who prey on everyday investors. “I think he’s sincere,” Borg said. “That’s the first time I’ve given that assessment of an SEC chair in a long time.”

Bill Singer, a former regulator and Wall Street lawyer who represents both investors and brokers in lawsuits, praises Clayton for having taken preemptive measures to crack down on shoddy operators and outright fraudsters, including those who pitch initial coin offerings, where startups sell virtual currencies directly to the public, bypassing the usual regulations for IPOs. By those measures, Clayton has been “the best SEC chair of my career,” Singer said.

But Singer concedes that Clayton’s work to cast a light on bottom-feeders may be “a calculated diversion … so the same light is not on the larger firms,” such as Goldman Sachs or Morgan Stanley.

At his confirmation hearing, Clayton openly expressed reservations about slapping companies with big penalties. After all, he said, “shareholders do bear those costs, and we have to keep that in mind.”

And Clayton’s new co-director of enforcement, Steven Peikin, has signaled that he would reduce its emphasis on White’s stated goal — however rarely attained — of getting lawbreakers to admit wrongdoing in settlements. When SEC targets settle cases without admitting guilt, “I don’t think most people in the world say, ‘Boy, they really got away with that,’” Peikin said at an October securities conference. Actually, the agency has been widely criticized for exactly that, with scholars and judges noting that bad behavior won’t change unless wrongdoers are subject to the accountability that comes with admitting that they broke the law.

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Sen. Elizabeth Warren (D-MA) speaks during a rally in front of the Capitol March 22, 2017 in Washington, DC. Sen. Bernie Sanders (I-VT) urged the Senate to reject Trump's nomination of Clayton to head the SEC.

Peikin has estimated that budget cuts will reduce the SEC’s enforcement ranks by 100 people over the next year to 1,300, resulting in more selective enforcement — a significant loss in the eyes of Luis Aguilar, a former SEC commissioner. “The fewer people in enforcement, the fewer cases you can bring,” he says. “It’s simple math.” Clayton asked Congress in September to lift the agency’s hiring freeze and allow him to recruit people with skills in cybersecurity, retail investor fraud, and investment adviser oversight. (He did not take the opportunity to say anything specific about preventing the kinds of abuses by big banks that led to the financial crisis.)

Stephanie Avakian, Peikin’s co-director of enforcement, said in a speechin October that “the premise that there is a trade-off between Wall Street and Main Street enforcement is a false one.” Yet, already there are signs that Clayton’s team is directing the agency’s enforcement resources at smaller players rather than large, marquee firms.

Clayton’s agency has brought a number of cases alleging fraud against purveyors of initial coin offerings, lesser-known auditors, and even stockbrokers who churn customers’ accounts. A December press release from the SEC drew attention to charges against two auditors at a small firm in Newport Beach, California, for ignoring red flags in their reviews of penny-stock companies, those whose stocks typically trade below $5 a share, which each ultimately paid $15,000 in penalties. Another press release, from September, focused on charges levied against broker Laurence M. Torres for making unauthorized trades and churning his clients’ accounts. The broker agreed to pay back more than $250,000 to his customers, plus a $160,000 fine.

Yet no press release was issued on September 1, when the SEC forged a settlement with a former Merrill Lynch executive, whom the SEC had accused of “knowingly” helping Merrill dodge requirements to keep sufficient cash in a customer reserve account. He placed “billions of dollars” of customer money at risk to free up more money to trade Merrill’s money, the SEC said. But William Tirrell, who was in charge of regulatory reporting at Merrill and, for years, was an active SIFMA member, paid no fine at all. He wasn’t forced to admit any wrongdoing, only required to agree not to violate securities laws in the future.

By contrast, Merrill’s settlement of its portion of the same case with the SEC under White’s leadership in 2016 involved a $415 million fine. Reacting to the lenient September settlement with Tirrell, a lawyer who represents small investors joked in a blog post, “I want HIS lawyer!”

“I’m nervous about someone from Sullivan & Cromwell, who was an attorney for megabanks, being at the SEC,” said Bartlett Naylor, financial policy advocate at Public Citizen, an advocacy group. “Whether it’s Stockholm syndrome or cultural capture, I worry that there is not an appetite to arrest bad conduct at the highest level.”

Scholars have found that SEC enforcement actions in general have declined under Clayton, as have the size of fines. In a study released in November, Urska Velikonja, a professor of law at Georgetown University, found that the median fine in settled cases at the SEC was about $110,000 between 2007 and 2013, but in the SEC’s most recent fiscal year, which ended September 30, that number had dropped by more than a third to about $70,000. The cases brought against entities, as opposed to individuals, have “changed quite substantially,” she wrote, dropping from 47 percent in the first half of the year, before Clayton became chair, to 34 percent in the second half of the fiscal year, during which Clayton was chair for five of the six months.

Wall Street law firms have noticed the trend. One of them, Paul, Weiss, Rifkind, Wharton & Garrison, published a note in October anticipating that the agency’s more selective approach to enforcement, and reduced emphasis on admissions of guilt, “could potentially lead toward a changed dynamic in negotiating enforcement resolutions.”

5. ASK US FOR RELIEF

In keeping with his stated focus on “Mr. and Ms. 401(k),” Clayton has made several friendly gestures to average investors. He said in July that he plans to implement recommendations created by his predecessor to make disclosures more readable and that investors should have access to a searchable database of advisers who have been barred or suspended for federal securities law violations. In December, the SEC issued a bulletinwith guidance for the public about how to participate in the agency’s tortuous rule-making process. And Clayton has pushed back against the securities industry by backing a controversial plan that would allow the SEC to analyze massive amounts of data on individual trades in order to pinpoint potential wrongdoing.

Yet at the same time, the SEC appears to be backsliding on other core agency tenets, by dramatically reducing disclosure requirements for major firms seeking to go public and publicly expressing reservations about the Department of Labor’s robust fiduciary rule. In July, in his Economic Club speech, Clayton said that the SEC’s version of the rule, which Dodd-Frank requires the agency to develop, would need to be “carefully constructed” so that it does not deprive Main Street investors of “affordable investment advice,” which to Wall Street is code for maintaining a system in which brokers are free from fiduciary requirements. Then in October, the agency released a proposal that, if adopted, would give companies more leeway in deciding what information they share with investors. Lynn Turner, former chief accountant at the agency, said that the SEC has suggested that companies might be allowed to make some decisions about what is included in their disclosures based on what is important — or “material” — from management’s point of view, as opposed to what is material to the investor. Should that be allowed, investors might as well use the required quarterly and annual filings “to light the Yuletide log,” Turner said.

SEC Commissioner Kara Stein, a Democrat, raised additional concerns in an October 11 statement. The proposed rule would potentially eliminate “critical information” about financial performance and prospects by cutting back on management’s analysis of its businesses. She also questioned the section of the proposal that said companies should be allowed to redact sensitive information from publicly filed business contracts without having SEC staff first review the redactions.

Later that month, the agency granted exemptions from securities laws so that investment managers would not have to apply strict new European regulations demanding transparency in the way they charge U.S. customers for research. In the U.S., brokerage firms are permitted to bundle their charges for trading commissions and research reports in a single charge. Critics say the bundling of costs keeps investors from knowing what they are actually paying for their trades and leads to higher commissions, but the SEC sided with U.S. brokerage firms. Stein blasted that decision, too, saying that it “may be costly to investors” and that the SEC’s allocation of 900 days to “study” the issue was “simply unreasonable.”

In Clayton’s remarks at the Economic Club in July, his first speech as SEC chair, he spoke repeatedly about the urgency of making public capital markets more attractive. He noted that the number of publicly listed companies has declined by nearly half over the past two decades and blamed the skyrocketing costs of compliance on disclosure rules. That emphasis has already led to a dramatic erosion in disclosure requirements. Weeks earlier, when Clayton had been in office for less than two months, the SEC announced that it would expand disclosure exemptions created by the 2012 JOBS Act that eased the path for emerging companies to go public. That law waived many public disclosures for firms with revenues under $1 billion a year; now any company going public, however large, can withhold certain details of its finances and strategies when selling shares through an IPO.

This idea of less disclosure is an “unfortunate trend,” says David S. Fink, a Michigan-based lawyer. In 2016, Fink sued Ally Financial, the giant bank and auto lender, for failure to disclose enough about financial problems it was confronting at the time of its 2014 IPO — a stock offering Clayton had handled while at Sullivan & Cromwell.

“We either do or don’t believe in the benefits of free markets,” Fink said. “People who pretend to be advocates for free and open markets and then promote measures that allow less transparency are not supporting capitalism; they are simply supporting large economic institutions at the expense of small investors.” (Fink declined to discuss Clayton’s role in Ally while the case is unresolved.)

Other tests of Clayton’s tolerance for corporate secrecy lie ahead. It has been widely reported that Spotify, the music streaming service, will go public sometime in the first quarter of the year. Toward that end, the company has sought permission from the SEC to pursue a “direct listing” on the New York Stock Exchange that would circumvent many of the traditional IPO filings that require companies to submit to the scrutiny of auditors, who weigh in on the value of a stock and help set its price. Allowing a direct listing would be a “significant decision” by the SEC, said Benjamin Edwards, a securities law expert and associate professor of law at the University of Nevada, Las Vegas. “Investors should be cautious” about buying shares without the customary due diligence, he said. The agency has yet to publicly comment on the Spotify request.

  • “I don’t know how the chairman and his staff can say they are concerned about retail investors and then screw them over with those types of moves.”

The SEC will also face a big test if companies — as they have done in the past — ask the agency for permission to include a provision in a public offering that bars their shareholders from suing them. Such “mandatory arbitration” clauses have become common in consumer contracts, employment contracts, and customer agreements with brokers, and have garnered notoriety in recent months because of their role in keeping workplace sexual harassment complaints private. Historically, the SEC has pushed back on such requests, as it did in 2012 when the Carlyle Group, a private equity firm, tried to include an arbitration clause in its IPO documents.

After objections from the SEC, and a flurry of bad press, Carlyle withdrew the provision. In recent months, however, two top SEC officials have raised the possibility that companies may test the waters with a new round of arbitration proposals.

At a Q&A during an appearance at the Heritage Foundation in July, Republican Commissioner Michael Piwowar suggested that companies seeking to avoid shareholder lawsuits “can come to us to ask for relief to put in mandatory arbitration,” adding that he would “encourage” companies to do so. Two months later, Clayton’s director of corporation finance, William Hinman, told a gathering of the Council of Institutional Investors that laws have changed since the Carlyle flap, and the SEC would have to analyze developments “to see if we would take the same position” today.  Turner, the former SEC accountant, was in the audience that day and said people in the room “were floored” when Hinman suggested that the SEC would consider allowing mandatory arbitration clauses without even soliciting public comment. “I don’t know how the chairman and his staff can say they are concerned about retail investors and then screw them over with those types of moves,” he added.

Andy Green, managing director for economic policy at the Center for American Progress, a liberal think tank, says a green light for public companies to bar shareholder lawsuits “would potentially be the single biggest undermining of the strength of the U.S. capital markets that the SEC could let happen.”

In his mission to prune regulations in order to encourage more companies to go public, Clayton’s stated goal is to give small investors more chances to participate in potentially lucrative investment opportunities. Yet when the agency announced in June that companies of any size could begin to use the disclosure exemptions given to emerging firms in the JOBS Act, it looked more like a gift to corporations, which could begin filing some IPO documents on a confidential basis and pare back on the information they disclosed to the public.

There is little evidence that Main Street investors have benefited substantially from IPOs, says Mary E. Barth, a professor of accounting at Stanford University, because brokerage firms save their allocations of hot IPO shares for big institutional investors and very wealthy individuals. “Most people can’t get shares,” she says.

Barth co-authored a paper with Wayne R. Landsman of the University of North Carolina and Daniel J. Taylor of the University of Pennsylvania that raises serious questions as to whether you can cut back on IPO disclosure requirements without shortchanging investors. The professors looked at 158 companies that went public using the scaled-back reporting requirements of the JOBS Act and compared their IPO prices to 218 similar companies that had gone public prior to the act.

The professors found that JOBS companies, unable to reassure investors with detailed company information, were forced to lower their offering prices 7.1 percent, on average, when compared to a sample of firms that went public before the new law, which were obligated to report extensive financial information. And Barth says that rather than help small investors, these lower prices gave an advantage to moneyed institutions that — unlike everyday investors — had the means to evaluate a company on their own. Small investors tended to stay away, Barth said. “There is no evidence in our paper that suggests Mr. and Mrs. 401(k) are better off because of this,” she says.

A speaker at a law seminar in New York last November sharply laid out the disadvantage to investors of insufficient disclosures when he explained how hard it is for investors to find current, reliable information about penny-stock issuers. These stocks, he said, have “a conspicuous lack of transparency” since so many are not required to disclose current audited financials or other key information. “The shortage or absence of this critical information makes it at best very difficult for investors to evaluate the potential risks and rewards of such investments,” he said.

That speaker was Jay Clayton.

This article was reported in partnership with The Investigative Fund at The Nation Institute.

About the reporters

Susan Antilla

Susan Antilla

Susan Antilla is a reporting fellow with The Investigative Fund.

Gary Rivlin

Gary Rivlin

Gary Rivlin is a reporting fellow with The Investigative Fund.

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