(Bloomberg) When Donald Trump interviewed Jay Clayton to be his chief securities regulator in December, the then-president elect was fixated on the steep decline in U.S. initial public offerings.
During the meeting at the Mar-a-Lago club in Florida, Trump even cited statistics on the drop, which started two decades ago, said people familiar with their discussion. He was particularly concerned that more companies were choosing to sell their shares overseas, rather than on the New York Stock Exchange and the Nasdaq Stock Market.
The conversation showed Trump’s eagerness for the Securities and Exchange Commission to focus on promoting growth, after it has spent years layering tough rules on Wall Street and other industries. In Clayton, a corporate lawyer, the president has nominated an SEC chairman who should know which regulations may need loosening.
“Public markets need to be more attractive,” said David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “We need a modern, effective regulatory system that enables growth.”
While there is disagreement about how much rules are stifling markets, and even why companies are choosing to stay private, regulation has long served as a boogeyman for the chamber and other corporate lobbyists. Much of their attention has focused on the Dodd-Frank Act, which set new restrictions for Wall Street after the financial crisis.
But with Trump in the White House, Republicans controlling Congress and an SEC pick who has worked on some of the biggest IPOs, business groups see a chance to go further. They want to revisit long-standing SEC policies on what corporations must disclose to investors and chip away at onerous accounting requirements imposed more than a decade ago in response to frauds at Enron and WorldCom.
A new, deregulatory slant would mark a major shift in the SEC’s priorities. It also would rekindle a debate that went mostly quiet in the years after the 2008 financial meltdown: Is the agency’s main job to police markets and protect shareholders, or should it give more consideration to helping businesses raise capital?
Clayton may have his Senate confirmation hearing next month, and Democrats are expected to press him on how to strike the right balance.
Trump has made clear he sympathizes with corporate complaints. As he noted last month after picking Clayton, the SEC chief will “play an important role in unleashing the job-creating power of our economy by encouraging investment in American companies.”
The tone is troubling to investor advocates who credit an aggressive SEC for stemming a long tide of corporate wrongdoing.
Over the past 15 years, the agency has imposed numerous regulations required by two major laws, Dodd-Frank and the Sarbanes-Oxley Act, which Congress passed in 2002 after investors lost trillions of dollars in the wake of the Enron and WorldCom failures.
Mark Flannery, who stepped down as the SEC’s chief economist in December, said there is always an inherent tension between adding rules to protect shareholders or easing them to goose markets.
“It’s a tradeoff,” said Flannery, who is now a business professor at the University of Florida in Gainesville. “The question is, what’s the right balance?”
Trump signed a directive in early February ordering the Treasury secretary to review financial regulations, with an eye toward identifying policies that hurt U.S. competitiveness. While his administration framed the order as an attack on Dodd-Frank, the look back is likely to go deeper and touch on Sarbanes-Oxley as well.
The law has been on Trump’s radar for years. It required chief executives to swear to the accuracy of their books and set new, expensive rules for auditing the internal controls companies use to catch wrongdoing. In a 2008 CNN interview, the then-real estate mogul and reality TV star, said Sarbanes-Oxley was a classic case of government overreach, noting “it really puts this country at a competitive disadvantage.”
Statistics do show a dramatic drop in IPOs. The best year for U.S. listings was 1996 when 863 companies sold shares amid the tech bubble, according to data compiled by Bloomberg. This decade, the high-water mark was 2014, when 362 companies went public. Last year, there were just 130 U.S. IPOs, compared with 1,367 on foreign markets.
Even though the decline started before Sarbanes-Oxley, the law’s critics say it has played a leading role in stifling IPOs.
“Those of us who opposed Sarbanes-Oxley at the time it passed said it was going to be a disaster. And it has turned out to be,” said Peter Wallison, a senior fellow at the American Enterprise Institute in Washington. “It is a terrible problem for our economy when we are not having companies go public.”
Clayton, a partner at the Sullivan & Cromwell law firm in New York, is among those who have said regulatory burdens have put pressure on startups, though he also has cited other factors for why companies remain private. He got on Trump’s radar by writing a policy paper for the transition that argued smaller companies should be exempted from some rules when they go public.
Clayton declined to comment through a spokesman.
In recent meetings with lawmakers and others in Washington, Clayton has shared an anecdote that he says shows the need to cut some of the SEC’s regulations. Twenty years ago, when midsized companies sought his opinion on whether to go public, he advised 80 percent of them to go for it. Now he recommends that just 20 percent of the time.
In 2012, Congress eased some burdens when it passed the Jumpstart Our Business Startups Act. The law, which as its name suggests was designed to spur jobs, allows smaller companies relief from SEC disclosure requirements when they go public. Still, it hasn’t spurred a flood of new IPOs as some lawmakers expected.
Clayton, in his Washington meetings, has spoken approvingly of the JOBS Act and has said it should be expanded, the people familiar with the matter said.
Some securities lawyers argue that blaming regulation oversimplifies the situation. Firms have an ever-expanding menu of ways to raise money outside the stock market. And capital is easier to keep around when companies are private and investors aren’t poised to flee every time quarterly earnings miss expectations.
“There’s just such a deep private capital market,” said David Lynn, a former SEC attorney who is now a partner at Morrison & Foerster.
If Trump and Clayton want to make big changes to Sarbanes-Oxley, they will need Congress’ help.
In the House, a wide-ranging financial regulation bill could be introduced as soon as this month that would exempt more companies from Sarbanes-Oxley’s internal control requirements. These audits, which are meant to ensure public companies have adequate safeguards to prevent fraud, collectively cost corporations billions of dollars annually.
Once the legislative wrangling begins, business lobbyists said they will try to get lawmakers to strike down even more of Sarbanes-Oxley. Chief on their list is a mandate that CEOs certify, under the risk of criminal penalties, that their companies’ financial results are accurate. Accounting firms, too, may make a push to overturn the law’s so-called independence restrictions, which bar them from doing many kinds of consulting work for audit clients.
Should that happen, “it would take less than five years to get back to Enron,” said Lynn Turner, a former SEC chief accountant who helped write Sarbanes-Oxley.
“This is not how you create jobs,” Turner said. “That is a figment of someone’s imagination.”
- Robert Schmidt and Ben Bain