SEC's Clayton Slashes Investor Safeguards To Entice More Companies To Go Public

It looks as though the Securities and Exchange Commission isn't happy enough just allowing CEOs like Elon Musk to retain their C-suite position after committing egregious frauds like faking the largest buyout in history. The commission, under Jay Clayton, continues to make life easier for corporations while making protecting investors a second priority. 

Since Jay Clayton took over as head of the SEC, 17 changes have been made and 9 more have been proposed, that are part of a broad push to help "reverse a 20-year decline in U.S. public company listings", according to Reuters. The changes include modernizing disclosures and cutting regulatory costs for companies - and just making life easier for public companies in general.

This, of course, is not without its down side: these new rules will weaken investor safeguards or diminish their rights. 

Anna Pinedo, a partner at law firm Mayer Brown said: “Under Clayton’s leadership, the Securities and Exchange Commission has been quietly chipping away at an array of rules, many quite technical in nature. Although individually these haven’t gotten much attention, in aggregate the SEC’s rulemaking agenda under Clayton adds up to positive changes for public companies.”

SEC spokeswoman Natalie Strom responded: “The initiatives advanced under his leadership maintain or enhance investor protections, including by ensuring today’s investors receive the material information necessary to make investment decisions.”

Clayton was appointed by President Trump and presented with a mandate to entice more companies to go public. Clayton promised to boost jobs and pensions by making it more attractive for small companies to sell shares on public exchanges, while at the same time committing to protect mom and pop investors. 

There has been a nearly 50% decline in the number of listed companies over the past two decades, which many companies attribute to increasing amounts of red tape. 

Tom Quaadman, executive vice president of the Chamber’s Center for Capital Markets Competitiveness said: “Clayton recognizes that the decline of public companies is a threat to the long-term competitiveness of the American economy. Clayton has taken a holistic step-by-step approach to reverse this situation.”

But by cutting companies disclosure requirements, investors are privy to less information.

Robert Jackson, one of five SEC commissioners who has opposed several measures, said: “The deregulatory agenda now advancing at the SEC is too often driven by lobbyist intuition rather than hard facts about the markets we oversee.”

One of Clayton's proposals, for instance, will relax a requirement created by Congress in 2002 following the Enron scandal that forced companies with less than $100 million in revenue to have to have an independent auditor sign off on their financials. Another of his proposals would cap financial rewards for whistleblowers, reducing the incentive for company insiders to come forward with evidence of wrongdoing. This proposal may be "softened" by Clayton, as it has been fiercely attacked by corporate governance advocates. 

Clayton has also proposed changes that would limit the ability of shareholders to submit proposals on items like executive compensation to company management. 

And he has added oversight in some areas of the market. For instance, some measures that aim to simplify financial disclosures make it easier for investors to identify material information and gives investors more information on how company employees deal in their stock. He has also passed a package of measures this year that require stockbrokers to disclose potential conflicts of interest and the commissions that they earn. 

Cryptocurrency ventures have also slowed dramatically, as Clayton has said they should be regulated like stock offerings. 

Companies have been primarily choosing to stay private due to the costs associated with going public. Investment bankers, lawyers and auditors can all rack up bills in the millions and ongoing compliance ensures that these costs continue as a company stays public.

At the same time, deregulation in the private market since 1996 has made it easier for firms to raise money from private investors, leaving most Americans out of the equation. Over the last 5 years, at least $150 billion has been raised in private equity and debt placements, compared to $90 billion in the 5 years prior. 

And even though the total number of public companies is lower than 20 years ago, their total value has doubled, partly due to mergers and acquisitions. The IPO market has improved this year, as well. By the end of October, 37 small cap listings had generated between $300 million and $1 billion each from IPOs, on track to beat 2018's tally of 39 listings. Many bankers have attributed this to a rising stock market.

Jim Cooney, head of equity capital markets for the Americas at Bank of America, said: “Although these new tools have been put in place and positively received, the continued strength of the broader market has been the primary factor driving IPO volumes.”

Clayton, who was seen as timid about making harsh changes upon his appointment, has been more inclined to push through measures despite Democratic dissent lately. Two of the five current commissioners are Democrats, while the rest were picked by Clayton. 

Commissioner Jackson, a Democrat in the minority at the SEC, concluded by saying that Clayton's changes during his tenure have come with "real costs for real people".