The announcement by President-elect Donald J. Trump that he will nominate Walter J. Clayton, a quintessential Wall Street deal lawyer, as chairman of the Securities and Exchange Commission raises questions about how securities laws will be enforced during the new administration.
As the latest “top cop” for the financial markets and securities exchanges, will he continue the aggressive approach taken after the financial crisis? Or will he pursue a lighter touch, resulting in fewer enforcement actions against corporations and the scaling back of the size of settlements in the cases that are filed?
Mr. Clayton has focused primarily on transactions since he joined Sullivan & Cromwell, one of the leading corporate law firms, in 1993 out of law school, helping companies come to the markets through initial public offerings and arranging mergers and acquisitions. He has been a longtime adviser to Goldman Sachs and other Wall Street firms, which were pilloried by Mr. Trump during the campaign but now have strong representation on his team, as an editorial in The New York Times recently noted.
The choice of Mr. Clayton signals that the focus of the S.E.C. may shift to the capital markets to ease fund-raising efforts by companies. This reflects part of a larger agenda for Mr. Trump to lighten the regulatory burden on the financial sector, something that Congress has pushed in the past few years by loosening the restrictions on crowdfunding and other ways companies can acquire capital. Mr. Clayton is expected to support rolling back the Dodd-Frank Act, the source of many of the rules restricting bank operations that have generated significant opposition from Wall Street.
The report was part of a concerted effort, led by the Chamber of Commerce, to cut back on the scope of the act so that businesses did not face potentially significant costs from dealings in countries in which corruption was endemic. The Chamber issued its own proposal, “Restoring Balance,” aimed at limiting how aggressively the law could be used to police overseas corruption.
That effort largely ended in December 2012 when The New York Times described widespread bribery by Walmart in Mexico. Instead of cutting back, the Justice Department and S.E.C. continue to pursue cases across a wide range of sectors, most recently one involving a $264 million settlement with JPMorgan Chase over its hiring of interns with family ties to leaders in the Chinese government. The Walmart investigation has gone on for nearly four years, costing the company hundreds of millions of dollars in legal fees, and a potential settlement is likely to be put in front of Mr. Clayton in the coming months.
We should be careful about reading too much into the committee report as a complete reflection of Mr. Clayton’s views, even though he was the committee’s chairman at the time. Lawyers often keep their advocate’s hat in place when working on these projects. Deal lawyers dislike the uncertainty posed by the F.C.P.A. when a company with global operations is involved because of the potential that an instance of bribery could be uncovered that might derail the transaction.
Mr. Clayton is not the only critic of the foreign bribery law who later came to enforce it. The current head of the Fraud Section in the Justice Department, which handles foreign bribery cases, was the lead author of the Chamber of Commerce report seeking to restrict its scope, yet the government has continued to pursue such cases.
The S.E.C. has changed since 2009, when Mary L. Schapiro, who had a strong regulatory background, took over after disastrous revelations about the agency’s failure to catch the Ponzi scheme operated by Bernard L. Madoff. Her successor in 2013, Mary Jo White, came into office promising an even more aggressive approach to enforcement, reflective of her background as the United States attorney in Manhattan, one of the premier offices pursuing financial crimes.
Mr. Clayton has a far different mandate, so a key indicator of his approach to enforcement will be the appointment of a new director of the enforcement division, which has primary responsibility for investigating violations and litigating civil charges.
Two of the last three enforcement directors were former federal prosecutors who cut their teeth under Ms. White. The S.E.C. has started to mimic the approach taken by the Justice Department by allowing deferred-prosecution agreements for cooperating companies and granting immunity to witnesses who can provide valuable information. Choosing someone with a background in criminal prosecution may signal that the aggressive approach to enforcement will continue.
The enforcement division also gained much greater freedom under Ms. Schapiro to operate without supervision in 2009, one of the responses to the scandal caused by Mr. Madoff’s fraud. Instead of having to get the five S.E.C. commissioners to sign off on a formal investigation, which allows subpoenaing documents and witnesses, now the director has that authority, allowing quicker development of investigations. This was a significant change from how the agency operated under the chairmanship of Christopher Cox, who left office in 2009 at a time when the agency was being criticized for a lack of supervision of Wall Street in the lead-up to the financial crisis.
Mr. Clayton could reverse this by shifting the authority to approve investigations back to the full commission, which would have the effect of slowing them down and perhaps narrowing the scope of an inquiry. That would also allow the commissioners to focus enforcement efforts rather than let the S.E.C. staff set the agenda.
Another area to watch is whether Mr. Clayton’s views on the F.C.P.A. result in de-emphasizing investigations in this area. The enforcement division currently has a specialized unit for foreign bribery, but a new director may reorganize staff members to shift resources away from these cases. The flip side is that the Justice Department shares jurisdiction over the bribery law, so federal prosecutors would also have to scale back investigations to effect a real diminution of these cases.
Policing misconduct by corporations and Wall Street requires at least a verbal acknowledgment from Mr. Clayton that it remains a priority; it is something of a “mom and apple pie” issue whose virtues are usually unquestioned. And we should not expect him to make the mistake of an earlier chairman, who once said that the S.E.C. would be “a kinder and gentler place” for accountants, even though that remark was largely taken out of context.
We can expect to see fewer enforcement actions because Ms. White’s “broken windows” policy, through which she pursued a large number of small transgressions, is likely to be dropped. That alone would not indicate that Mr. Clayton is taking a softer approach in this area, but the key will be whether there is a continued commitment of resources to the enforcement division. The proof will come in how the S.E.C. pursues violations, especially if there is a corporate scandal that is decried in Twitter posts coming from the White House.
The fact that Mr. Clayton has worked closely with Wall Street does not necessarily mean financial firms have a protector in office, much as when Joseph P. Kennedy, the first chairman of the S.E.C., was accused of being the fox guarding the henhouse when President Franklin D. Roosevelt nominated him. Just as the revolving door results in many lawyers switching from regulator or prosecutor to defender of corporations, so too the door swings the other way, so that a lawyer from private practice can adopt an aggressive approach in representing the interests of the new client that has significant law enforcement powers. As always, time will tell.