SEC Guiding Principles

Any time a regulator offers firms some insight into the inner workings of the regulatory machine, compliance officers should pay attention. In a July 12, 2017 speech, newly-appointed SEC Chairman Jay Clayton outlined his vision, introducing eight principles he believes should guide the agency. The following is a summary of those principles:

1. Focus on the mission.

First, Chairman Clayton reiterated that each element of the SEC’s three-pronged mission – to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation – is critical to the agency’s success.

2. Keep small investors in mind.

Everything the SEC does should be done with the long-term interests of the “Main Street Investor”, the average American with a 401(k) to invest, in mind. To focus solely on institutional investors would likely disadvantage the everyday people who need to rely on the securities market to help them realize their retirement goals.

3. A solid regulatory framework.

The regulatory framework that has been behind the Commission and its activities for more than eighty years is sound. Its disclosure requirements for regulated firms and individuals, the system of rules and regulations and its anti-fraud regime and enforcement capabilities are functioning well and should not be changed simply for the sake of change.

4. Effects of change.

The SEC makes small changes through regulatory action all the time. Every time a regulation is added or changed, it’s done with the intention of furthering the agency’s mission. Chairman Clayton discussed his belief that the SEC needs to view regulatory changes through both an incremental lens, eyeing the sometimes-minor changes intended, and through a cumulative lens, evaluating the impact over time.

5. Keeping pace with changing times.

Investment markets and transactions have been fundamentally changed over the past several decades by advances in technology. The SEC needs to keep an eye on these changes, evaluating the impact and risks of such innovation, improving its own technological capabilities at the same time regulated entities do so. Chairman Clayton also acknowledged that the SEC needs to be mindful of the costs that come with increased compliance and technology at financial services firms, costs that are largely borne by shareholders and clients.

6. Retrospective review.

The Commission recognizes the need to periodically review previously-enacted rules, and to evaluate their effectiveness. Where a rule isn’t functioning as originally intended, the agency needs to take notice – and act accordingly.

7. The cost of compliance.

Chairman Clayton stated that the SEC needs to be mindful of the costs firms will incur when they’re required to demonstrate compliance with new or amended regulations. At the time of adoption for a new rule, the agency needs to understand the expenses and potential roadblocks firms will face when implementing changes, as well as what will be involved to examine for compliance with the rule(s).

8. The importance of regulatory coordination.

Recognizing that the SEC is not the only regulator in the financial services space, Chairman Clayton stated the agency’s intention to continue coordinating and working with the more than 15 other federal regulatory bodies, more than 50 state and territorial regulators, SROs, the Department of Justice, and more than 115 regulators in foreign jurisdictions around the world.

Broad Application

These eight guiding principles will underlie the agency’s activities in carrying out its mission, including its enforcement and examination efforts, capital formation, market structure, and oversight of investment advice and disclosures given to investors. Last, but not least, these guiding principles will help the SEC fulfill its goal of continuing to educate the investing public.

Takeaways for Regulated Firms

Only time will tell how (or whether) the SEC’s rulemaking and enforcement will change under the leadership of Chairman Clayton. However, SEC-regulated firms can take heart from his stated intention not to make wholesale changes to the way the commission approaches regulation of the securities industry today.

Firms can always benefit from taking a close look at their compliance structure and systems to determine whether compliance resources and tools are adequate to meet the demands of an ever-evolving industry. Organizations that may not have needed a compliance technology platform a decade ago would be well-served to re-evaluate their ability to effectively demonstrate compliance in today’s regulatory environment.

 

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