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Faced With a Mountain of Potential Recusals as Chair, Clayton Is Not Fit to Lead the SEC

At last week’s nomination hearing it was clear that Walter “Jay” Clayton, tapped to lead the Securities and Exchange Commission (SEC) by President Trump, is an unacceptable choice for the job. Mr. Clayton will likely have to recuse himself often from agency decisions based on his deep corporate background. These recusals coupled with his lack of familiarity with critical agency issues make him unfit to lead the SEC.

Mr. Clayton is a longtime corporate lawyer whose clients include Goldman Sachs, Bear Stearns, Barclays, Ally Financial, and other top financial companies. His corporate background raises numerous questions about his commitment to protect average investors and about how his significant conflicts of interest will impede his ability to perform his duties as head of the SEC. Leading up to the hearing, groups concerned about Mr. Clayton’s corporate background held a rally outside the Capitol on Wednesday with Senator Elizabeth Warren, Senator Bernie Sanders, and other progressive leaders. The rally’s purpose was to call attention to the fact that Clayton’s nomination is yet another attempt by the Trump administration to stack the deck against hard- working Americans.

Senator Sanders opened by citing the hypocrisy of President Trump’s choice in Mr. Clayton. He pointed out that candidate Trump promised to “drain the swamp,” but President Trump chose a financial industry insider to keep an eye on Wall Street. “We need somebody who is prepared to confront the system, not someone who is part of the system,” Senator Sanders said.

Senator Elizabeth Warren echoed Senator Sanders in calling for an SEC chair who would stick up for Main Street America. “We remember what… [the financial crisis] did to our communities, ” she said. “We want a government- we want an SEC- that doesn’t work for Wall Street. We want one that works for the American people.”

Additional rally speakers included:

  •  Jeff Weaver, president of Our Revolution and former campaign manager for Bernie Sanders for President
  •  Robert Weissman, president of Public Citizen
  •  Anthony Thomas, a food service worker in the Dirksen Senate Office Building
  •  Alba Morales, a cashier and food service worker in the Dirksen Senate Office Building
  •  Kurt Walters, campaign director of Demand Progress
  •  Dan Mauer, legislative representative for Communications Workers of America
  •  Morris Pearl, board chair of Patriotic Millionaires

All of the speakers highlighted the critical importance of having an unbiased authority as the head of the SEC who will enforce the rules. Watch the full line-up of speeches here.

At Mr. Clayton’s hearing the following day, Senate Banking Committee Democrats pressed him on his seeming unfamiliarity with enforcement issues and questioned whether he would be able to hold Wall Street truly accountable.

In his opening statement, Senator Sherrod Brown said,

You’ve spent your career protecting some of the biggest names on Wall Street, and those relationships pose a host of conflicts for this position. I’m concerned that you may need to recuse yourself too often at a time when we need a strong, independent SEC chair on the frontline of enforcement, not watching from the sideline.

Senator Warren picked up the conflicts of interest baton from Senator Brown and ran with it, emphasizing the significant problem Mr. Clayton’s conflicts present for the agency’s capacity to function properly. She pointed out,

Under the President’s Executive Order for ethics the first two years of your tenure as SEC chairman you would have to recuse yourself from participating in any enforcement matter involving any former client of yours. Now, that’s about half of your term as chair. So based on your personal client disclosure then for half of your tenure as SEC chair you would not be allowed to vote to enforce the law against several big banks including Goldman Sachs, Deutsche Bank, Barclays, and UBS.

Mr. Clayton confirmed that this was an accurate portrayal of his conflicts.

Senator Warren went on, “if President Trump wanted to make sure that the SEC would have a hard time in going after his Wall Street friends it seems to me you would be the perfect SEC chair.”

Mr. Clayton would also have to recuse himself from any enforcement case in which his former law firm, Sullivan and Cromwell, serves as the company’s representation. Senator Warren pointed out that any company worth its salt and looking to avoid a harsh judgement would simply hire Sullivan and Cromwell to represent the company in front of the agency. In this scenario, with Mr. Clayton recused, the Commission would likely split along party lines as it typically has in recent years on enforcement issues and the result would be a deadlock.

Throughout the hearing Mr. Clayton’s answers to Senators’ questions were lackluster and noncommittal. He showed a lack of familiarity with a number of issues, expressing a need to think about or learn more about them, including:

  • Ending forced arbitration clauses;
  • Whether the law needs to change to hold corporate executives strictly liable for criminal activity that occurs under their watch whether they have direct knowledge of it or not;
  • Whether corporate political spending disclosure is material to investors; and
  • Implementing the remaining provisions of Dodd Frank, the law passed to protect Americans from another financial crisis.

When asked directly by Senator Warren why he was a good fit for the job he stumbled over an answer, trying instead to refute the well-warranted characterization that the Commission’s Democratic and Republican members often disagree on the severity of enforcement determinations.

Considering the volume of his recusals and his lack of familiarity with critical issues within the SEC’s purview it would seem that Mr. Clayton is out of his league. Senators should reject President Trump’s attempt to fill the swamp with more Wall Street insiders and demand a head of the SEC who will commit to putting the interests of investors and Main Street Americans first.

Watch the full hearing online here. The Senate Banking Committee is expected to vote on Clayton’s nomination on Tuesday, April 4th, at 10am ET.