If Jay Clayton leaves the SEC, muni agenda may slow

The Securities and Exchange Commission's municipal market approach may soon shift following the announcement that SEC Chair Jay Clayton is President Trump’s top pick to become the new federal prosecutor in New York City.

If Clayton does leave the SEC before his term is up in June 2021, lawyers say there will not be wide-sweeping policy changes in the municipal space but said there could be some nuanced changes on how the SEC approaches enforcement.

“There has been consensus and bipartisan interest in making sure that the secondary market in terms of trading of muni bonds are more transparent,” said Peter Chan, partner at Baker McKenzie and former SEC assistant regional director for enforcement at the SEC’s Chicago regional office. “I don’t think that just a change of Chair Clayton is going to divert the commission’s overall policies and goals that have been established in the last decade-plus. However, where I do see potential nuanced changes is really in the process, approach and methodology.”

Attorney General William Barr announced last Friday that Trump intends to nominate Clayton as the next U.S. Attorney for the Southern District of New York. However, it appears that both New York Senators, Democrats Kirsten Gillibrand and Chuck Schumer, would have to approve Clayton.

Multiple news outlets reported that Sen. Lindsey Graham, R- S.C., who is chairman of the Senate Judiciary Committee, has said he plans to uphold the committee’s “blue-slip” rule, a tradition in which a senator is allowed to block a nominee in his or her home state.

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Last week, Barr announced that the current U.S. Attorney for SDNY, Geoffrey Berman, would be stepping down. Berman denied those plans in a statement, but on Saturday, Trump fired him though Trump did tell reporters he was “not involved,” according to news reports. On Saturday, Berman announced he would be stepping down.

In a statement Saturday, Gillibrand called for Clayton to withdraw his name from consideration.

“I will not be complicit in helping President Trump and Attorney General Barr fire a U.S. attorney who is reportedly investigating corruption in this administration,” Gillibrand wrote. “Jay Clayton should withdraw his name from consideration immediately and remove himself from this sham. President Trump cannot be allowed to desecrate our nominations process further.”

There is an assumption that Commissioner Hester Peirce would become acting chairman if Clayton leaves, Chan said, since she is the ranking Republican commissioner. If that is the case, Chan said Peirce won’t change the SEC’s policies and goals such as increasing transparency in the municipal bond market through more financial disclosures and timely annual financial information.

Clayton has been pushing for more timely annual financial reporting from issuers, as well as a more consistent release of unaudited interim information to improve municipal disclosure.

However, Peirce has been vocal and expressed concerns about how SEC staff should not establish rules or policy standards by enforcement action in the municipal and other markets.

Peirce called the SEC a regulatory agency instead of an enforcement agency during a speech last year at Rutgers Law School in New Jersey. In her speech, she said she did not like the “broken windows” philosophy, which was adopted in 2013-2017 and which holds that strict enforcement of minor infractions will deter bad actors more effectively than focusing primarily on the more serious offenses.

Peirce has expressed concern about making sure enforcement cases are not used to establish new standards, Chan said.

“I don’t think there will be less enforcement,” Chan said. “The cases, be it fraud or conflicts of interest or otherwise. There may be more deliberation, more concern on whether the enforcement is setting new standards. There will be more concern potentially about rulemaking by enforcement.”

Clayton was nominated as SEC Chair by President Trump and sworn in in May 2017. Before becoming chair, Clayton was a partner at Sullivan & Cromwell LLP.

During his time at the SEC, he has pushed for more disclosure in the municipal market and recently published a statement with the Office of Municipal Securities on disclosure during the coronavirus pandemic. SEC staff also came out with a bulletin to address how anti-fraud laws apply to disclosures earlier this year.

“He has certainly used the position as a bully pulpit to encourage more frequent and more timely and more fulsome disclosure, in part by his recent statement with the director of OMS, in part by asking for the staff legal bulletin and in part by speeches at different conferences,” said Rick Weber, counsel at Norton Rose Fulbright.

If Clayton does leave his post, the SEC may be “treading water,” for a bit, meaning future initiatives may be slowed, Weber said.

Clayton also announced last week that municipal advisors will temporarily be allowed to arrange certain private placement deals without needing to register as a broker-dealer.

Bond Dealers of America CEO Mike Nicholas said Clayton’s focus has been on municipal disclosure as well as MA exemptive relief. BDA opposes the exemptive relief, calling it a “solution in search of a problem and could negatively reshape muni market structure.”

On Monday, Schumer asked the U.S. Department of Justice Office of Inspector General and the Office of Professional Responsibility to conduct a joint investigation into the firing of Berman.

“As the Attorney General was not truthful when he initially represented that U.S. Attorney Berman was ‘stepping down,’ this corrupt firing cannot be explained by cause and gives the impression that the President interfered in ongoing criminal investigations into himself and his associates,” Schumer wrote. “To help restore confidence in and prevent further abuses to the administration of justice, the American people deserve to know the truth.”