Editorial Board

What Trump's SEC Pick Needs to Explain

What does "undoing regulation" really mean?

Winds of change.

Photographer: Brendan Hoffman/Bloomberg

When Donald Trump announced that he would nominate Wall Street lawyer Jay Clayton to lead the Securities and Exchange Commission, he cited the need to “undo many regulations which have stifled investment in American business.” At Clayton’s confirmation hearing this week, senators should ask exactly what that means.

Scrutiny of Clayton has so far focused on his close ties to the industry he would oversee. He has represented large financial institutions facing U.S. investigations, and he worked on big investment deals for Goldman Sachs and Barclays Capital. His wife is a wealth manager at Goldman Sachs. Possible conflicts of interest matter -- but Clayton’s thinking on regulation and oversight of capital markets needs to be examined, too.

The SEC’s rulemaking -- much of it mandated by the 2010 Dodd-Frank Act -- has drawn criticism for doing too much and for doing too little. Some say its “risk retention” rule (which requires firms that repackage and sell loans to keep some of their own product) obstructs the flow of credit. Others complain that burdensome disclosure requirements prevent companies from offering their shares to the public. Traders say that the SEC’s failure to complete rules on credit derivatives is killing part of the market.

The agency’s leader will have the power to harden or soften the rules, and will decide how strictly to enforce them. So which of these regulations does Clayton see as the biggest obstacles to investment?

The SEC is also at the center of efforts to shed more light on markets, which would enable regulators to know what’s going on next time there’s a flash crash or some other crisis. It’s been working for more than six years to get market participants to build a system for recording all activity in stocks and options. Meanwhile it’s trying, along with other agencies, to put together the real-time derivatives data needed to spot dangerous concentrations of risk.

Without the SEC’s active support, such initiatives may founder. So does Clayton see the transparency they promise as important for investor confidence in U.S. markets?

Finally, the SEC is supposed to identify and punish misbehavior, to ensure that investors are treated as fairly as possible. Under former chair Mary Jo White, it cracked down in some new areas -- exposing, for example, the various ways in which private investment-fund managers divert money to themselves. It also came under fire, both for failing to hold individuals accountable and for steering too many cases to its in-house administrative proceedings, where defendants have fewer protections than they would in a real court.

Is Clayton satisfied with the aggressiveness and aim of the SEC’s enforcement actions? If not, what would he change?

Clayton’s insider status needn’t be disqualifying. As others, such as Goldman Sachs alumnus Gary Gensler, have demonstrated, it can be an advantage. Yet Clayton's views on how best to maintain U.S. markets’ reputation for dynamism and reliability remain unknown. It’s a mystery that the Senate must address.