Securities Regulation Daily Clayton laments global neglect in anti-corruption enforcement
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Monday, September 9, 2019

Clayton laments global neglect in anti-corruption enforcement

By Anne Sherry, J.D.

SEC Chairman Jay Clayton suggested that a lack of global coordination in stemming corruption can create incentives for companies to cheat.

In remarks to the Economic Club of New York, SEC Chairman Jay Clayton denounced countries’ uneven enforcement of their anti-corruption laws, suggesting that the lack of progress in stemming corruption informs his discussions with foreign counterparts about coordination on enforcement generally. Clayton also discussed recent initiatives by the SEC, some areas of possible concern in the corporate debt markets, the LIBOR transition, and Brexit.

Recent initiatives. Clayton ran through a number of recent rulemakings and other initiatives. First, he spoke on the new Regulation Best Interest and Form CRS relationship summary, along with two interpretations under the Investment Advisers Act, all of which came out in June. He lauded these items as providing "clarity and comfort" on an individual level and fostering competition and better pricing on a market level.

Next, Clayton discussed recent initiatives designed to make the public markets more attractive targets for investment and increase opportunities in the private markets for Main Street investors. For the former, he cited the modernization of financial disclosures for business combinations and debt offerings; expanding JOBS Act initiatives to more public companies; and permitting scaled disclosures. Efforts in improving access to the private markets include Regulation Crowdfunding, expanding Regulation A, and lifting the ban on general solicitation for Rule 506 offerings under Regulation D.

Clayton said that while these initiatives have been beneficial, they have also "added new patches to an already patchwork regulatory framework that remains rooted in income and wealth tests." He revealed that the SEC is taking another look at this framework, including examining how funds can be structured to facilitate Main Street access while aligning incentives with professional investors and providing investor protections.

Finally, Clayton looked ahead to the possibility of improving the "plumbing" of the proxy system, revisiting the framework for company-shareholder engagement, and examining the role of proxy advisory firms. He noted that the recent guidance and interpretation about investment advisers’ proxy voting responsibilities and the effect of voting advice have not changed the SEC’s rules, which still remain rooted in the principles that voting is important; that advisers are subject to duties of care and loyalty; and that the engagement of third parties does not lessen those duties.

What FCPA says about international coordination. Clayton next expressed a grim outlook on FCPA enforcement specifically and coordination with international regulators more generally. Although he said that the Commission’s work in this area is important, and he does not intend to change the agency’s FCPA enforcement posture, he has not seen meaningful improvement in battling corruption because many countries do not have, or are not enforcing, anti-corruption laws.

Citing principles of game theory, Clayton suggested that if every country prohibits its companies from engaging in corruption, a hypothetical country with attractive business prospects may tighten up its anti-corruption policies to attract cross-border business. However, if only some countries are doing so, there is an incentive for other countries to turn a blind eye to corrupt actions by their companies occurring offshore. "If your company is the only one who is ‘cheating,’ your company ‘wins’ the lucrative offshore business with no competition," he said.

Clayton said that the effects of these incentives, including the withdrawal of U.S. and U.S.-listed firms from some jurisdictions, illustrates that globally oriented laws can be "individually unfair and collectively suboptimal" if they are enforced weakly or asymmetrically. "I assure you that this reality is at the front of my mind when I engage with my international counterparts on matters where common, cooperative enforcement strategies are essential, including the recent calls for greater securities law-based regulation of environmental and social issues."

Corporate debt markets. Clayton also spoke about the role of U.S. agencies in light of the growth of corporate debt. Favorable interest rates and other monetary policies encourage businesses to hire and invest (and consumers to spend), while globally regulators have encouraged banks to hold less debt. This has led to an increase in corporate debt and a greater share being held outside of banks, including by funds. Clayton said he is "not sounding alarm bells" in light of otherwise strong economic indicators, but said that the SEC should monitor the size of corporate debt, the location and type of holders, and the quality of credit.

Clayton said that, together with its fellow regulators, the Commission should monitor banks’ exposure to non-banks and should monitor flows into and out of credit funds and various portfolio characteristics, including concentration, liquidity, and leverage. He added that interagency coordination has been strong, particularly among Treasury, the Federal Reserve, CFTC, OCC, and FDIC.

LIBOR and Brexit. Finally, Clayton spoke on the "key macroeconomic risk areas" of the transition away from LIBOR and the potential effects of a Brexit. Market participants should assess their exposure to LIBOR and manage that risk, he said, and ensure that any contracts extending beyond 2021 either do not reference LIBOR or have effective fallback language. As to Brexit, he urged market participants to "fight off the complacency and fatigue that is endemic to situations of this type." This means preparing for, and reasonably informing investors of, the potential impacts of Brexit. The SEC is also doing so through its work with domestic and non-U.S. counterparts.

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