Appearing on Capitol Hill June 25 for the first time since the dust-up over his potential nomination to serve as the next U.S. Attorney for the Southern District of New York, SEC Chairman Jay Clayton said he remains committed to his role while he awaits the nomination process.
The Securities and Exchange Commission Chairman testified before the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets for a hearing on “Capital Markets and Emergency Lending in the COVID-19 Era.”
While most of his testimony focused on market-monitoring and investor-protection efforts of the SEC in response to the effects of COVID-19, Clayton, in his oral remarks, briefly addressed the “elephant in the room” regarding his potential nomination.
“I have a long-held deep respect for the work of the Southern District, which is recognized throughout our nation and internationally for enforcing the law and pursuing justice without fear or favor,” Clayton stated. “I recognize the nomination process is multifaceted and uncertain. It’s clear the process does not require my current attention. In short, I’m fully committed to and focused on my role at the SEC.”
Clayton went on to note that his appearance before the subcommittee would focus strictly on the work of the SEC. Still, several members of the subcommittee attempted to question the SEC chairman on his nomination, whether he would continue to serve while awaiting the outcome and whether he would recuse himself on any overlapping issues.
In asking whether he plans to continue serving, Rep. Maxine Waters (D-CA), who chairs the full House Financial Services Committee, noted that she was “deeply concerned” that while Clayton’s nomination is pending, President Trump will interfere with his management of the SEC. Clayton responded that he has no plans to step down and that the Commission’s ethics office had cleared him to continue serving in the meantime.
Later in the hearing, Clayton acknowledged under questioning that the U.S. Attorney position was entirely his idea, centered around his interest in continuing in public service as he contemplates returning to New York. Asked whether he would recuse himself from investigations involving President Trump and associates, Clayton stated that he was “not going to get into that,” but said that he would approach any situation independently and follow all ethical rules.
Clayton’s term at the SEC doesn’t expire until June 2021 and he could continue to serve an additional 18 months if a replacement has not been confirmed. Since last weekend’s commotion, there has been encouragement from congressional Democratic leaders for Clayton to withdraw his name from consideration, noting that he does not have any prosecutorial experience.
Additionally, Sens. Chuck Schumer (D-NY) and Kirsten Gillibrand (D-NY) previously indicated that they would not support his nomination, and Senate Judiciary Committee Chairman Lindsey Graham (R-SC) said he would follow Senate tradition by essentially giving New York’s two home-state senators veto power over the nomination.
Reg BI Reminder
In a discussion with Rep. Michael San Nicolas (D-GU) regarding overexposure of retail investors under the current COVID-19 market circumstances and new market participants engaging in risky trading activity with exotic instruments, Clayton also took an opportunity to remind brokers of the forthcoming compliance deadline for Regulation Best Interest.
Noting that there are significant risks in leveraged investments and that the Reg BI obligation goes into effect at the end of this month, Clayton stated, “I want to make it clear to brokers right now that they should—through the care obligation—make sure that investors do understand those risks and are able to bear those risks.”
Private Equity in 401(k)s
Rep. Sean Casten (D-IL) inquired about the Department of Labor’s recent letter ruling allowing private equity investment as a component of a diversified asset allocation in 401(k) funds, asking whether the DOL can make that change without the SEC making a corresponding change.
“Is it your view that a 401(k) plan or an investor in a 401(k) plan would pass the ‘sophisticated test’ that would allow them to participate in ways that would not frustrate the spirit of section 506 of Reg D as currently written?”, Casten asked in expressing concern about private equity investments in plans.
In response, Clayton explained that the ruling was structured in a way so that there was not direct investing in private equity by an ERISA plan. “I read the letter and I thought it was structured very well, because the ERISA plan fiduciary would pick a fund as a fiduciary, but the fund has limited exposure to private equity, but not direct investment by an ERISA beneficiary in private equity,” he noted.
Casten stated, however, that he has “real concern that we could end up putting a lot of unsophisticated money in places where it’s hard for me as the CEO of a company to understand,” and noted that he would follow up with Clayton after the hearing.
