& Securities

SEC Chair Jay Clayton has signaled a strong interest in promoting small business capital formation and “detecting and punishing fraud.”¹  This past Tuesday, in testimony on the SEC’s fiscal 2018 budget before the Senate Appropriations Subcommittee, Chair Clayton gave further indication of his priorities.²  Unlike in previous years, the SEC Chairman is not asking for an increase in the budget from 2017.³

Click here for additional detail regarding the SEC’s 2018 budget justification. The budget justification has other interesting and helpful information regarding the SEC Staff’s past performance.  For example, the Division of Corporation Finance’s goal for 2018 is that 33% of public companies with disclosures be reviewed.  In 2016, the budget was the same at 33% but actual reviews reached a total of 56%.  Also disclosed is the Division’s goal to provide initial comments on Securities Act filings in 30 days or less.  In 2016, the Division exceeded the same goal by providing initial comments by 25.5 days.

Chair Clayton’s testimony revealed three main concentration areas for fiscal 2018: facilitating capital formation with an emphasis on small business growth; protecting investors through enforcement; and leveraging technology to achieve the SEC’s goals. The Chair indicated the SEC would be improving efficiency through automation, streamlining internal processes and utilizing data throughout the agency. Improvements in efficiency will be necessary to do more with less because the budget calls for small reductions in full time equivalent headcount in most areas (e.g., Enforcement down from budgeted FTE in 2017 of 1362 to 1329; Corporation Finance from 465 to 453, and Office of Compliance Inspections and Examinations (OCIE) from 1083 to 1055).  Below are some highlights of Chair Clayton’s testimony.

Capital Formation to Facilitate Smaller Business Growth

In his remarks, Chair Clayton emphasized that the SEC would strive to enhance capital formation, particularly for small and emerging companies, and to grow public capital markets more generally while maintaining investor protections. He noted that the recently appointed Director of the Division of Corporation Finance, Bill Hinman, is a recognized leader in advising companies of all sizes on capital raising.  The budget request seeks funding to staff the SEC’s newly formed Office of the Advocate for Small Business Capital Formation, which was created by legislation passed during the Obama Administration. The purpose of the new Office is to provide assistance to small businesses and their investors, conduct outreach to better understand their particular concerns, and recommend regulatory improvements to the SEC.

Protecting Investors through Enforcement

Under Chair Clayton’s request, more than 50% of the fiscal 2018 budget will be allocated toward the SEC’s enforcement and examination programs. The Chair noted that resources will be devoted to key areas where misconduct harms investors, undermines confidence, and impairs market integrity – including retail investor fraud and investment professional misconduct, insider trading, market manipulation, and accounting fraud.⁴

Chair Clayton also committed to strengthening OCIE, despite a reduction in its budget, noting that in 2017 the SEC is set to deliver a 20% increase in the number of investment adviser examinations and will strive to deliver a further 5% increase in 2018. In addition, Chair Clayton reported that OCIE plans to increase the number of inspections to assess compliance with SEC rules designed to secure cybersecurity infrastructure critical to the U.S. securities markets.⁵

Leveraging Technology

The 2018 budget proposal also includes $240 million for information technology improvements to help the SEC stay on top of critical IT developments and promote its mission in an evolving landscape.  The key technology initiatives include:

• Expanding data analytics tools to detect potential fraud or suspicious behavior;
• Improving risk assessment and surveillance tools to identify high-risk areas for examination;
• Increasing cybersecurity investments;
• Enhancing additional systems that support the SEC’s enforcement program;
• Improving access and usefulness of information available through EDGAR; and
• Investing in business process automation and enhancing its legacy systems.

ENDNOTES

[1] See, e.g., Remarks to the SEC Investor Advisory Committee (June 22, 2017).
[2] See here.
[3] In addition to the relatively flat year-over-year operating budget of $1.602 billion, the SEC is asking for funds necessary for the buildout of a new headquarters building (estimated to be $245 million).
[4] The SEC has already brought charges for fraud on Chair Clayton’s watch. For example, the SEC recently charged an oil and gas company and its top executives with accounting fraud and also charged a brokerage firm with failing to comply with anti-money laundering laws.
[5] The OCIE also recently issued a risk alert on ransomware.