By Soyoung Ho
With the abrupt ouster of U.S. Attorney for the Southern District of New York (SDNY) Geoffrey Berman, who has been overseeing investigations of President Donald Trump’s associates, the president on June 19, 2020, announced he intends to nominate SEC Chairman Jay Clayton to replace Berman.
But the controversial move caught many off guard, and it raised a lot of questions about what it means for the commission.
It had been expected that Clayton—who has largely scaled back SEC regulations in line with President Trump’s policies to the delight of companies—would return to the private sector at the end of the year. Traditionally, the chair of the securities market regulator steps down following a presidential election whether there is a change in administration or not.
Moreover, just a day before on June 18, President Trump named Caroline Crenshaw to the Democratic seat left vacant when Robert Jackson left to return to teach in mid-February. Earlier, the president reappointed Republican Hester Peirce for a second term. All of them—Clayton, Crenshaw, and Peirce—need to be confirmed by the Senate.
Lots of Uncertainties and Moving Parts
“The key here will be how long it takes for Chairman Clayton to be confirmed by the Senate and whether the White House names a replacement,” Dave Brown, a partner with Alston & Bird LLP, said about what it means with the commission’s work. The chairman sets the agenda.
At this juncture, it is unclear when Clayton will be confirmed.
Outraged by the sudden political turn of events, Senate Minority Leader Charles Schumer and Sen. Kirsten Gillibrand, both from New York, called on Clayton to withdraw the nomination. And Senate Judiciary Committee Chairman Lindsey Graham indicated that he will not move forward with a nomination without getting two Democratic senators to sign off with a “blue slip”—a sheet of paper which states whether a home-state senator supports the nomination—before moving forward with the rest of the confirmation process.
Thus, for some, the nomination may be dead on arrival.
“Since the two N.Y. Senators have already called on Clayton to withdraw from the nomination, and Lindsey Graham has said he would follow senate procedure to permit home state senators to block a nomination, it would appear Clayton’s nomination is finished,” SEC former chief accountant Lynn Turner said.
Meanwhile, in an indication that Clayton wants the other job, he sent out an email late Saturday night to commission staff, saying that he is committed to his current job until confirmed for the U.S. attorney position. And he has some fans in the Senate, at least among Republicans.
CNN reported on June 23 that Senator John Kennedy, a Republican who sits on the Judiciary Committee, said it is a “great nomination.”
The SEC did not respond to requests for comment.
Dismayed Investor Advocates
As of late afternoon on June 23, there was no indication that Clayton will drop out or Trump will withdraw his plan to nominate him, and some were dismayed.
“I keep expecting him to withdraw his name from consideration. However, his continued silence suggests he may not be as concerned with preserving what’s left of his reputation as I anticipated,” Barbara Roper, director of investor protection with the Consumer Federation of America, said. “That sets up a series of questions: If he were to withdraw from consideration for the SDNY appointment, would he then remain at the SEC through the end of the year? He might, but I don’t assume that he would.”
However, assuming that the nomination moves forward, Hester Peirce would then become acting chair of the SEC. She has been a staunch laissez-faire advocate, more so than other conservative commissioners past and present.
If Clayton leaves, whether he is confirmed to be the U.S. attorney or not, Roper said that it sets up one of two possibilities. The Senate would confirm Peirce for the second term and Crenshaw to replace Jackson. This would leave the SEC with a 2 to 2 split vote. If the Senate does not confirm them, it means that the agency will have only three commissioners for the time being.
“Either way, the commission would have to get buy-in from Democrats to move controversial proposals,” Roper said. “So, even though Commissioner Peirce is more conservative than Chairman Clayton, it doesn’t necessarily follow that the commission’s regulatory actions would be more conservative.”
In her view, the SEC, under Peirce’s leadership, could see a bigger change on enforcement issues if it is true that she is reportedly less willing to back enforcement actions.
“One area where that could show up is in the enforcement approach to crypto issues, where she’s made her disagreement with the Commission’s past approach pretty clear,” Roper said. “Both of those scenarios assume you don’t get a new chairman confirmed this soon before the election, though I could be wrong about that. I just can’t imagine who would want the job under the current conditions.”
In Brown’s view, given the SEC’s current rulemaking agenda, especially with controversial plans to reform proxy advisers, “without a replacement much of the SEC’s agenda may be stalled. However, it seems that Chairman Clayton will remain at the SEC until he is confirmed so much of the agenda may continue during that time.”
Clayton could clear up this uncertainty if he decides to leave the agency at the end of the year. And some believe that may happen.
“More likely scenario is that he remains chair at least until end of year,” said Jeffrey Mahoney, general counsel of the Council of Institutional Investors.
What is Really Going On?
In the meantime, White House Press Secretary Kayleigh McEnany on June 22 told reporters Trump wanted to nominate Clayton because he wants to go back to New York where his family is. The SEC chief has played golf with the President on a few occasions.
“The President held Mr. Clayton in very high regard and wanted to nominate him to this position in SDNY to keep him in the government as he returns to New York,” McEnany said, adding that the White House is hopeful that Clayton will be confirmed.
However, Thomas Gorman, a partner with Dorsey & Whitney LLP, said there are odd aspects of the situation that suggest there is more to the story.
“This seems to be nothing but a political clean up and an effort to weaken the U.S. Attorney’s office in NYC,” Gorman said.
For one, Clayton “is a former Sullivan & Cromwell partner and his wife is a former Goldman partner; plenty of money to buy plane tickets,” Gorman said.
A disclosure filing in 2017 showed Clayton’s family wealth of $50 million.
Further, Clayton spent his career on Wall Street as a deal lawyer. Before going the SEC, he advised companies on initial public offerings (IPOs) and other deals as a partner at Sullivan & Cromwell LLP in New York.
“Jay Clayton is a highly experienced deal lawyer. He has no experience with criminal investigations and prosecutions. Letting himself get put into the middle of this farce makes no sense,” Gorman said. “If he is willing to step into the position of U.S. Attorney for Manhattan—one of the most demanding positions of its kind—with no experience, it more than calls into question his judgment. It also raises significant questions about true motives for putting him there.”
By contrast, for example, May Jo White—Clayton’s predecessor who was named by President Barack Obama to run the SEC—has had extensive litigation experience and served as the U.S. Attorney for that district in Manhattan, which includes Wall Street. White got a conviction on Mafia boss John Gotti, successfully prosecuted Ramzi Ahmed Yousef for the 1993 World Trade Center bombing, and pursued a criminal investigation into how Marc Rich, a hedge fund manager convicted of tax evasion, got a pardon from then President Bill Clinton.
Turner, who has been a staunch investor protection advocate inside and outside of the SEC, was equally critical of Clayton.
“Clayton’s willingness to take the nomination for which he is not qualified, highlights how he puts his own self interest above that of the public,” Turner said. “That is hardly what I would describe as a public servant.”
In firing Berman, Gorman said that it only makes sense that this is purely a political move by President Trump.
“It ends sensitive investigations into his administration,” Gorman noted. “But the new deal with the deputy stepping in makes no sense on that point because those investigations will continue.”
This article originally appeared in the June 23, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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