Chair Clayton's Impact At The SEC

On October 25, 2017, the Hedge Fund Industry Practice team hosted an event at the New York Yacht Club titled "Chair Clayton's Impact at the SEC." Hedge fund professionals, including general counsels, hedge fund principals and chief compliance officers, attended the event, which featured an engaging panel discussion moderated by Marc Powers, national leader of BakerHostetler's Securities Litigation and Regulatory Enforcement and Hedge Fund Industry practices.

The panelists included Walter Van Dorn, Partner, Baker & Hostetler LLP; Simcha David, Partner, EisnerAmper LLP; Jonathan Forman, Counsel, Baker & Hostetler LLP; and Andrew Siegel, Chief Compliance Officer and Chief Regulatory Counsel, Perella Weinberg Partners.

Walter Van Dorn kicked off the panel with a discussion of the Security and Exchange Commission's regulatory impact under Chair Jay Clayton. Van Dorn explained that not a lot had changed at the SEC under Chair Clayton in the first eight to nine months of the Trump administration. Since President Trump took office, Congress has passed no securities legislation. The only significant securities statute it considered was the Choice Act, which had passed in the House of Representatives but had not yet been considered in the Senate and thus has not yet made it to President Trump's desk. The Choice Act, which had been pending under the Obama administration, is deregulatory in a number of ways. One Choice Act provision that affects the fund industry directly would roll back the Dodd-Frank provision requiring more frequent SEC registration of advisers to private equity funds. (Under Dodd-Frank, the thresholds for registration of investment advisers to nonpublic funds can be strict, and the Choice Act, if adopted, would relax this requirement in part.) However, Van Dorn opined that it likely would not gain the traction it needed to pass both houses of Congress, especially with legislation such as the Affordable Care Act and tax reform taking higher priority.

Van Dorn highlighted Chair Clayton's view on the role of the SEC and quoted an excerpt from a speech Clayton gave in June 2017 in New York.

I believe in the regulatory architecture that has governed the securities market since 1933. It is abundantly clear that wholesale changes to the Commission's fundamental regulatory approach would not make any sense.

Van Dorn noted, as an example, that Chair Clayton is rumored to be a Democrat despite being appointed by President Trump. He also explained that two of the five commissioners are Democrats and three are Republicans, all of whom appear to be moderate, mainstream individuals.

Various Operating Divisions of the SEC

Van Dorn then provided an overview of the recent developments of the various operating divisions at the SEC, noting that all the divisions - Corporation Finance, Enforcement, Trading and Markets, Investment Management, and the Office of Compliance Inspections and Examinations - were fairly well-staffed, particularly compared with other government agencies, and up and running. Van Dorn noted that the Corporation Finance Division, which regulates capital raising, had proposed substantial overhaul and simplification of Regulation S-K, the basic regulation that dictates the disclosure required for prospectuses and other offering documents and for periodic disclosure by public companies. According to Van Dorn, this revision, the first in a number of years, would have a deregulatory effect, but he noted that most of the proposed changes were quite logical. Van Dorn added that the proposal has been pending since before the presidential election.

Next, Van Dorn discussed the SEC's recent activities surrounding cryptocurrencies and initial coin offerings (ICOs), which he noted had been an almost entirely unregulated area that had become quite popular in recent months. The SEC released a statement in July 2017 that addressed the biggest related legal issue of whether a coin, cryptocurrency or token should be treated as a "security" and thus subject to SEC regulation.1 Van Dorn explained that according to the statement, if the proceeds of the issuance were being used for investment purposes, they were more likely to be classified as a securities offering. But if the transaction had more similarities to an exchange of currencies - for example, exchanging fiat currency, such as dollars, for cryptocurrency, such as bitcoin - it would be more likely to be classified as a currency transaction, which is not regulated by the SEC. If the issuance were subject to SEC regulation, the offer and sale would need to be registered with the SEC or, if not registered with the SEC, then carried out pursuant to a valid exemption from registration, such as a private placement. Van Dorn noted that the determination was very fact specific, but it became evident to the SEC that in the recent so-called ICOs, people were really raising capital, an...