Securities Regulation Daily Clayton talks CAT, markets at SIFMA meeting
Tuesday, November 19, 2019

Clayton talks CAT, markets at SIFMA meeting

By Anne Sherry, J.D.

In a fireside chat with SIFMA President Ken Bentsen, SEC Chairman Jay Clayton had some harsh words for the execution of the consolidated audit trail prior to his arrival at the agency.

SEC Chairman Jay Clayton took part in an interview with Ken Bentsen, president of SIFMA, at the group’s annual meeting in Washington, D.C. Billed as a fireside chat, the informal interview elicited the chairman’s view on the SEC’s near-term projects, recent rulemaking, and market efficiency and cyber preparedness. When it came to the consolidated audit trail, the chairman was candid in his dissatisfaction with how the project had been handled prior to his tenure at the SEC.

The two sometimes registered disagreement, but the interview maintained an air of levity. When Bentsen said that SIFMA was concerned with the SEC’s proposal to allow municipal advisors as placement agents, Clayton pointed out that the comment period was open and that SIFMA’s comments sometimes persuade him. "Well, we’re right usually," Bentsen quipped, to laughter both on the stage and off. The only moment that seemed to faze Clayton was when Bentsen observed that the SEC has spent a lot of time on the consolidated audit trail. "Since I was told it was almost done when I got here. Yeah, that was—not good," Clayton said, and while the audience laughed, he remained serious.

Consolidated audit trail. Clayton called the initial execution of the CAT "one of the worst conceived, worst executed projects I’ve seen." He said that the agency is back on track and that the SEC’s latest proposal on personally identifying information would collect just "phone book information," which is enough to conduct its surveillance function. The customer database is not expected to go live until 2022, which gives time to work out the remaining issues, he said. History has revealed that the SEC needs to be able to conduct market reconstruction, and this has to happen across markets and throughout the life cycle of an order. The SEC will minimize what information it collects and will only take what it believes it can protect.

Cybersecurity. Bentsen segued into a question about cybersecurity and resiliency more generally. Clayton began by addressing cyber within the SEC itself, saying that the agency is working on reducing how attractive it is as a target, increasing its defenses, and ensuring that it can recover if there is a problem. In terms of public company disclosure, he believes registrants are doing a better job of informing the public about cyber risks and their potential impacts. Finally, from the perspective of market infrastructure, it’s a matter of protection and resilience. He is examining whether there are sufficient resources to deal with a potential attack, particularly a systemic one. One question to ask is what third-party consultants people are using. If everyone is using the same consultant, will there be a run on those services if a systemic attack occurs?

Equity market structure. When asked about the near future, Clayton said that the new Reg Flex agenda will be out soon and that some long-term projects have shifted to that short-term agenda. One major agenda item is equity market structure. Clayton praised the work of Trading and Markets Director Brett Redfearn towards making the equity markets more efficient and said the project will occupy a lot of the SEC’s time in the next few months. Bentsen asked whether the SEC will be looking at the Regulation NMS market data rules. This is one part of an interconnected system, Clayton responded, and the agency will be looking at all parameters to see if they are working together to promote efficiency. He assured that whatever the SEC comes up with will be open to comment.

Private capital. Bentsen asked the chairman about the SEC’s concept release on private offerings and the balance between private and public capital. Clayton said that his discussions with his international counterparts have given him perspective on this issue: every one of them tells him that the nimbleness of the U.S. private markets is a significant competitive advantage. Without impeding capital-raising, Clayton sees a need to recognize that the market landscape today looks different than 30 years ago. He explained that the portfolio of a well-managed pension fund and that of a typical 401(k) look very different in terms of private and public allocation, even though they are invested for a similar time horizon. Maybe this is actually desirable, but we should at least be asking that question, he said.

Regulation Best Interest. Clayton also spoke about the controversial Reg BI rule package, opening by saying he appreciates the questions and engagement from SIFMA and others. He is "extremely pleased" with the result and said the rules add transparency and obligations that will benefit investors and ultimately the market. Bentsen said SIFMA would agree, calling it a "tough rule" but "the right thing to do." To that, Clayton added that he wants to be sure that the rule has preserved choice. The fee-for-service model is better for some types of investments, and transaction-based fees for others; it would be suboptimal to drive people to one or the other for all investments. Bentsen again agreed, saying that data shows investors are savvy about choosing the model that is right for them.

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