Term Member Meeting With Former SEC Chairman Jay Clayton

Monday, November 20, 2023
Brendan McDermid/Reuters

Former Chairman, U.S. Securities and Exchange Commission (2017-2020); Senior Policy Advisor & Of Counsel, Sullivan & Cromwell; Board of Directors, Apollo Global Management (Independent Chairman) and American Express; CFR Member


Advanced Mobility Investment Banking, RBC Capital Markets; Co-Author & Editor, Investment Banking: Valuation, LBOs, M&A, and IPOs; CFR Term Member

Stephen M. Kellen Term Member Program

Please join your fellow term members for a discussion with former Securities and Exchange Commission (SEC) Chairman Jay Clayton on a range of topics including how financial markets and corporate executives are navigating increased geopolitical instability, capital formation trends in public and private markets, assessing risks China poses to U.S. financial stability, the path forward for regulating crypto, and the latest sentiment in corporate boardrooms around ESG, digital innovation, and artificial intelligence.

GASPARRO: All right. So welcome to today’s Council on Foreign Relations term member meeting with former SEC Chairman, the Honorable Jay Clayton. I’m Joe Gasparro. I’m a term member here at the Council. And I’m also a senior member of the global industrials investment banking group at RBC Capital Markets. Thrilled to be here today presiding over this evening’s conversation. 

We are joined by members both in New York City as well as around the country and the world, joining us virtually. This meeting will begin with a half an hour conversation with myself and Jay, and then we’re open it up to members in the room and online. This meeting is on the record. 

Jay was the thirty-second chairman of the Securities and Exchange Commission, serving from May of 2017 until December of 2020. He is a senior policy adviser and of counsel at Sullivan & Cromwell, which he was there for about 20 years prior to the SEC and then rejoined. He’s also the independent chair of the board of directors of Apollo Global Management, as well as a member of the board of directors of American Express. Jay, it’s great to be with you today. Thank you, again, for taking the time. 

CLAYTON: Thanks for having me. And it’s nice to see a lot of friendly faces, given that this is on the record. (Laughter.) 

GASPARRO: So in September, literally in this room, you testified at a field hearing by the House Select Committee on the Chinese Communist Party. The main topic was systemic risk, particularly the CCP’s threat to U.S. financial stability. Underpinning this is the U.S.’s interdependence of China, particularly how never before two great powers have been so intertwined, yet, at the same time, be at such odds. One of the core proposals, the core suggestions that yourself and others talked about, was having select large U.S. companies disclose their exposure to China, as well as how their business operations would be affected if China-U.S. relations were to go astray.  

As someone who has followed you for many years, and admire you and your work, you generally oppose mandated disclosures. So the initiative speaks volumes to the risks that U.S. companies and—as well as our national security, could be at risk. It’s been about two months since that hearing in this room. Would love to understand the feedback from Capitol Hill, Wall Street, broader market participants about some of the ideas that came out of that hearing. 

CLAYTON: Sure. And I think you—I think you’ve captured the context very well. Which is, when in history have we had the two largest economies in the world be so deeply intertwined, but yet have the potential for conflict that would cause a disentanglement? I can’t think of one, particularly one that involves capital markets and our rapid flow of capital through our markets. So, you know, let’s just accept that we have sort of a new circumstance. And with new circumstances like this, there’s probably some risk because we didn’t see those risks coming.  

I made two points at the hearing which—one was a micro point. Which is, if you’re investing in a company, it would be very good to understand—and not at some granular level, but really at a qualitative level—what the risk of a substantial decoupling—economic decoupling would be to that company. I hope that boards of directors and management teams are thinking about that. So it probably should not be too hard to articulate the thoughts around that. I don’t want people to do a whole bunch of work that they shouldn’t already be doing.  

And then at a more macro level, I think that this has started to take place both in the private sector and the public sector. Not just company specific but across the economy what would a sharp decoupling between China and the U.S.—and it’s not just a bilateral issue; it’s a multilateral—what would that mean for our economy? What would it mean for their economy? The global economy and flows? I think the answer is, you know, a pretty big negative.  

And I do think that, even though the SEC hasn’t mandated disclosure of that type or the Treasury hasn’t asked people to think about it around government—which, you know, I think is not a bad idea—you’re seeing a lot of people recognize this. You’re seeing a lot of people in the private sector recognize it in their approach to investing. And you’re seeing, I think, our government recognize it. We had, what, Blinken, Yellen, Raimondo all go to China? We’ve had the APEC summit this week. I think a lot of that is driven by the fact that an economic decoupling would be a very negative event for both—for both countries. 

GASPARRO: What’s the broader end game? So five, ten years out, what does—what do you think is going to be the—is it going to be cooperation? Is it going to be a new Cold War? What is the kind of optimal solution for dealing with China, knowing how big of a counterparty it is for us? 

CLAYTON: Well, look, we made a bet. We, the United States and the Western world, made a bet on China. We bet that by bringing China into the WTO, by outsourcing to China, facilitating deep economic ties, there would be what, I would say, is greater economic cooperation, less conflict and, you know, in our own, what I would say is romantic view of the world, greater democratization. We made that bet. Now, some of the bet turned out to be right. The U.S. economy benefited greatly from cheap energy, cheap labor, outsourcing. And no doubt about it. Huge tailwinds from globalization helping U.S. and every other economy. 

But we didn’t get the democratization. And we didn’t get the lack of conflict. So that’s where we are. I think it’s pretty good to recognize that and try to figure out where to go from here. And it is clear—it is clear that there’s economic leverage both ways, right? I mean, if you saw what happened in California, I looked at it as very much like an industrial organization game theory, you know, you can—you can use your metaphor. The big customer has the bank at his mercy, little customer’s at the mercy of the bank. China needs all of those CEOs. Each one of those CEOs needs China. A very interesting dynamic.  

GASPARRO: We were in the backroom talking about the APEC conference. And as was one of the, you know, bigger takeaways was there’s now calls for more corroboration, there’s more—more of a partnership. At the same time, the chairman and the ranking member of the select committee was on Face The Nation on Sunday. And one of their biggest takeaways was President Xi still says he wants to take over Taiwan. And that doesn’t get as much press as other things with the APEC conference. So as much as there were things that were highlighted at the conference, there were other things that it still kind of shows, there’s a pretty big dichotomy between what the U.S. wants to achieve and what China wants to achieve. 

CLAYTON: It was an economic conference.  

GASPARRO: Yeah. (Laughter.) And? 

CLAYTON: You know, and agenda setting is a big part of, you know, the objectives you want to achieve. I think that agenda was set to be just focused on economics, because that was the objective that both sides wanted to achieve. 

GASPARRO: So the House Select Committee on the CCP, it’s been raved about, including by CFR President Mike Froman, about the bipartisan leadership and how it’s pretty unique, and potentially how others can use it as a guidepost of what’s possible. And you’ve obviously had a lot of, you know, discourse with both parties. Would love to just get your take on, you know, post the hearing, in terms of the actual, you know, bipartisan initiatives that that came out of it. 

CLAYTON: So I think—I’ll give you my view, but I think both Jeffries and, you know, it was McCarthy who set up the committee, are very happy they did so. They also picked people who have a reputation for working together on a bipartisan basis. I think those people are happy they’re doing it. I think they’re very happy with the product. You know, word of caution. The product is—it’s not a legislative committee, right? It’s an investigative committee. They don’t have the power to necessarily propagate legislation and put it to the House floor. 

So if you—if you look at the objective as creating a better understanding of our relationship with China and the economic risks that it entails, they’ve done a very good job. I have low expectations for any kind of legislation coming out of it, because then you have to go through the committees that don’t have as much bipartisan spirit and have other things to do. But I think on pure educational and understanding basis, it’s been a great success. 

GASPARRO: They’re hitting it out of the park in terms of just understanding all sides. More holistically, would love to kind of delve into CEOs and boards and just broader companies in terms of how they are dealing with this new world that’s in flux in terms of, you know, today’s CEOs are dealing with the revival of old-fashioned geopolitical risks, great-power competition, wars, imperial ambitions, on one hand. At the same time, they’re dealing with climate, they’re dealing with pandemics, and really dealing with AI or disruptive technology. It’s not a very easy time to be a CEO, especially in this market, mostly because the geopolitical risk really probably wasn’t top of their agenda until recently. 

If you look at geopolitics in 10Ks, the actual wording of, you know, geopolitics or geopolitical from ’05 to call it 2020, there was about a thousand hits. From 2002 and ’23, the past two years, it’s about three thousand hits. So it’s increased dramatically, where now every company, every board is talking about it. And when it comes to geopolitics, it’s really the second- and third-order effects, you know, being able to kind of look beyond corners to actually really get a benefit from it. 

CLAYTON: So there’s a lot in there. I’m going to start with looking at the disclosure of what people are saying in terms of the risks. This is an example of why I don’t like overly prescriptive rules, because the risks, the opportunities, the drivers of financial performance, they changed—they change over time. And if you’re writing rules for the moment, those rules stay in place. And if you continue to write rules for the moment, you end up with a large set of rules only a few of which really matter. That’s what’s happened to our securities laws. I do like a sort of a principles-based approach, what has risen to the attention of management and the board of directors in terms of risks. You know, we have very smart analysts who follow companies. We have conference calls and the like, and people who aren’t following these risks are made aware of them. So let’s just say that’s my—that’s my philosophy. 

In terms of this particular risk, there’s one thing you didn’t mention. And I know you know this, but the risk of not grabbing the globalization tailwinds was one that you couldn’t afford to take. If all of your competitors were grabbing the globalization tailwinds and you did not, you were going to underperform dramatically. That’s just—so you have to do it to compete, and then you have to adjust to the new risk. And we’re seeing people, like, what did we learn? It’s not just China. What did we learn from COVID? We learned that having an incredibly efficient supply chain with no flexibility puts you at—puts you at risk. 

GASPARRO: Yeah. If you look at just—you know, taking a step back from the actual regulatory, you know, purview, in terms of how fast technology— 

CLAYTON: And just—and just in that, and then in the supply chain second order, what did we learn? That the lowest marginal cost items are the most difficult to replace when there’s a supply chain interruption. And the lowest marginal cost items in a global economy are usually produced in low-cost jurisdictions. Low-cost jurisdictions tend to have more political risk. So there’s, like, this whole learning curve around, you know, how you look at your supply chain. Each element of it is not the same. 

GASPARRO: So I guess, just on that, in terms of, you know, companies and you know, really boards trying to have supply chain resilience or, you know, geopolitical resilience, as someone who sits on Apollo’s board, American Express, other, you know, private companies, other advisory councils, amongst all these different, you know, corporations—and, you know, really at Apollo, just given they work with a bunch of other, you know, companies as well, are there—are there certain trends or kind of themes that you’re seeing when it comes to just being resilient, post a pandemic or geopolitical? In terms of, you know, are there—are there gaps that you’re seeing now in ’23, more or less, you know, ’21? 

CLAYTON: I’ll go with the positive, which is what—(laughter)—no, it’s—what is remarkable is actually how flexible many companies have been. Why is the U.S. performing relatively well out of this economic shock of the pandemic, the geopolitical shocks of two wars? We were talking before, you know, Mark (sp) and I, about the redirection of, you know, energy supply chains around the globe. Because we do have people who are able to respond, and quite quickly. And it does come down—it comes down to people, and resources, and capital.  

But the—I’ve been so impressed, to go back to oversight, at what management teams are able to do in order to adjust. And, you know, sitting there in March of 2020 when we shut down the economy, we asked. We said to all the public companies, tell people how you’re doing. I was remarkably impressed at the candor of companies. You know, these are the struggles. This is what we’re able to do. You know, the economy was, I would say, in many ways, back to normal within three or four months, despite substantially—the macro economy, that is—despite substantial adjustments. Pretty incredible. 

GASPARRO: And that goes to, I think, your leadership in terms of giving the broader investor community confidence in the markets, stability, transparency. 

CLAYTON: That was all good. And look, other people should get a lot of credit too. The fact that we lowered rates and let everybody turn out their debt so that they didn’t have maturities coming due in the face—and investors could—there were a lot of steps that were taken. But the ability of our private sector firms to adjust, it’s an incredible strength of the U.S. economy. 

GASPARRO: It felt like maybe, you know, ten or so years ago, where economic interests were driving geopolitics. And really in more recent memory, it’s now geopolitics driving economic interests. And if you think about the last time we had great-power rivalry, 1889, Soviet Union and U.S., but we didn’t have to decouple from the Soviet Union. It was nowhere near where we are now. 

CLAYTON: We weren’t nearly as integrated. 

GASPARRO: Exactly. So from that point of view, in terms of, you know, working with private companies—so besides, you know, the public companies that you help advise, but these smaller companies, who might not have as much resources. How are they dealing with this new dynamic? 

CLAYTON: Well, you know what? I think, so far, smaller and medium-sized enterprises—and this is my sense, I haven’t done a deep dive of this—have done pretty well. I do worry, with the continued credit contraction, you know, high rates, and credit rationing, you know, just how much credit you have to provide to people, that small and medium enterprises will start to feel much more stress. That’s—you know, monetary policy, its incidence is not uniform. It’s lumpy. And, you know, so far, hats off to, you know, the Fed. The economic tailwinds from the fiscal stimulus. But if we have a—if we have a point that will be of concern to me, it’s those small- and medium-sized enterprises, and whether they can continue to access credit the way they have for the last, you know, two or three years. 

GASPARRO: So that is definitely more on your mind than— 

CLAYTON: Well, this is your business, right? 

GASPARRO: Yeah. (Laughter.) I think for us, it is half and half. So oftentimes in boardrooms, people are definitely questioning that second and third order effect of broader—Russia invades Ukraine. Very clear cut, you know, black and white where the boundaries are. It’s that that next incident where it might not be as, you know, clean cut or easy to understand in terms of their preparedness or their ability to, you know, do things on an ad hoc basis versus having a resiliency. Whether it’s a board or whether it’s just their holistic thinking of just getting prepared for these— 

CLAYTON: Well, I mean, look, if we if we keep making—you know, “we,” global citizens—keep making lots of mistakes, at some point there are too many mistakes. You know, that’s—I mean, that’s just—not much else I can say about that. 

GASPARRO: So if we delve into just broader corporate governance board service, chair of Apollo, American Express, as well as counsels for Coinbase and Millennium Management. In terms of, what’s most on their minds? And, to your point, it might not be geopolitics. It could be monetary. It could be competition. But is there—is there a pattern in terms of, you know, when you’re in these boardrooms, in these meetings, what is—what is the most pressing issues that’s on their minds today, November, you know, ’23? 

CLAYTON: It’s funny, you know, Howard Marks? People follow Howard Marks, you know, famous credit investor, all that kind of— 

GASPARRO: Sea Change? 

CLAYTON: Yeah. And I think I think he wrote a book, you know, The Most Important Thing. And there’s, like, 150 most important things. (Laughter.) You know, it’s kind of the way it is. Like, what’s the most important thing in the moment? That sort of—that sort of intensity of what do I have to worry about today, but it’s many things. 

Look, one of the great things about having a diverse economy and diverse approaches to—is it’s different in every boardroom. It’s one of the things about governance that I don’t think is recognized by what I would say is observers, academics, and the like. You know, there’s no specific prescription for governance. Like, should every company have a risk committee? No. Should some companies have one? Yes. Most importantly, governance is not an end in itself. It’s a means to an end. And what is—what is sort of implementing governance, it’s understanding that that’s your role. Your role is obviously oversight. Oversight for the strategic and—what I would say is strategic—the strategic and market objectives of the company. 

It’s also—now getting to your question—it’s also empowerment. Most of what’s written about governance is about structure and oversight. We should be writing much more and thinking much more about empowerment. How do you empower people to think about their company in the face of those kinds of threats and feel comfortable doing it, and think about their company in the face of those kinds of opportunities and feel comfortable doing it? Now, that’s really the kind of dynamic that you want to set up in the boardroom. And I think, you know, I’ve been fortunate enough to see a lot of good companies, and some not so good companies, over the years. The more that that dynamic exists, the more likely you are to be, you know, at a good company. 

GASPARRO: Yeah. NASDAQ put out their global governance report. And seven hundred, you know, board members. And one of the, at least to me, the striking takeaways was how much are you asking of your board? So as a board member, over the next twelve months is it time commitment? Is it more scrutiny? And— 

CLAYTON: Well, and regulators have lost total sight of what I just said. They think that boards are managers. No. Boards are not day-to-day managers of companies. Boards do— 

GASPARRO: There’s a separation purposely. 

CLAYTON: Well, there’s purposely a separation. And they’re there to oversee, to help set strategy, and also to empower. You know, and empowerment can mean, what resources do we need that we don’t have? And that can be personnel. That can be other things. But that’s the type of thing that boards should be doing. Boards board should not be involved in the day-to-day management of the company. That corrodes empowerment. Then you’re overseeing yourself. You’re checking your own work. But our regulators—and it’s really driven by a desire to impose responsibility on boards because you want a responsible person. It gets in the way of good—it actually gets in the way of good governance, this fight for, you know, accountability, down to every last metric gets in the way of good governance of boards of directors. 

GASPARRO: Especially in today’s, you know, fragmented world, as opposed to— 

CLAYTON: Look, you have a fiduciary duty, you know? 

GASPARRO: Legally, yeah. 

CLAYTON: No, and it’s—and, believe me, people take it seriously. 

GASPARRO: Yeah, you should. 

CLAYTON: You know, and it’s—and you have duties around financial reporting that are, you know, appropriate and significant. But micromanaging the day-to-day affairs of a company is not something that regulators should impose on members of boards of directors. 

GASPARRO: So diving deeper into one of the topics that I’m assuming is on the mind of many board members, cybersecurity. So before joining— 

CLAYTON: For example. 

GASPARRO: For example. Before joining the SEC, amongst other roles at Sullivan & Cromwell, you were co-head of the Cyber Security Group. So this has been on your mind with an expertise for years. At the SEC, you established the Cyber Unit. You published the first-ever report on cybersecurity, the first chief risk officer. November of 2020, almost three years to the day, you gave a speech at the revered Economic Club of New York. And through your prepared remarks and through Q&A you said, and I quote, “cybersecurity should be on everyone’s mind. It is something I’m worried about all the time.” November of 2020.  

So, three years later, and hopefully we’ve made progress since then. SEC disclosures will begin this December, March of ’23, the National Cybersecurity Strategy was produced. The State Department created the Bureau for, you know, Cyberspace and Digital Policy. So hopefully, a lot of progress over these past three years. That being said, is cybersecurity is still always on your mind today? 

CLAYTON: It is, but it is—the way it is on my mind has evolved over time. You know, I think that the American public is much more ready for a cyber event today than they were ten years ago, or eight years ago, or when we started. I mean, people understand that there are hacks, that we have nefarious actors that want to do—companies understand this. We understand—one of the things that took a long time to understand was the transmission mechanisms for a cyberattack and how a problem at one company could have knock-on effects and transmit through the rest of the economy, particularly in the financial services sector. 

You can have a supplier to financial services companies be the target of a cyberattack. And that cyberattack, you know, ripple through the financial services if you don’t have the appropriate firewalls. So we’ve gotten a lot better. We’ve gotten a lot better in understanding. But, you know, people are always— 

GASPARRO: It’s evolved. 

CLAYTON: It’s evolved. And, look, it is a significant geopolitical nation-state vulnerability. And like I always tell people, there is very little that any company, even a large company, can do if a nation-state wants to attack.  

GASPARRO: China’s ICBC bank had cyberattack. Obviously, it, for a time, hurt our Treasury market. So even if there’s episodes overseas, it could still be felt here. 


GASPARRO: Vegas MGM. So it’s progressed over those three years, but it’s— 

CLAYTON: I think the city of Atlanta. I mean, there’s—they are real. They are damaging. They are things we need to worry about. 

GASPARRO: Given the war in Ukraine, where cybersecurity and really cyberthreats are a kind of a daily occurrence, has the way that war is being played out and the prominence that really cyberthreats are playing, does that impact— 

CLAYTON: Yeah, well, but let’s go back to our talk about what should regulation do. If you have a very prescriptive cybersecurity disclosure requirement for public companies that was crafted in 2019, it’s probably no good today. But if what you say is, you know, tell us about the risks you face, tell us how you’re mitigating them, tell us about your experience with this and what the—what the effects of a large-scale cyber incident at your company would be, and people update that as they update—that’s a much more meaningful disclosure. 

GASPARRO: So I guess December of ’23 is when it’ll come out, right? 

CLAYTON: Yeah, we’ll see what it says. 

GASPARRO: We’ll see what it says. 

CLAYTON: We’ll see if it’s appropriate for December of ’23. 

GASPARRO: Do you think it will be? Do you think it’ll be comprehensive enough and— 

CLAYTON: Well, will it be too comprehensive? Or will it be—what we really want to know is, with a reasonable level of detail, tell us what you’re doing about this issue so that I can look across the companies and see—one of the problems with standardized disclosure is it looks like everybody’s doing the same thing.  

GASPARRO: And, obviously, different sectors will have different— 



CLAYTON: Kind of like, standardized disclosures about climate.  

GASPARRO: Dot, dot, dot. 

CLAYTON: Yeah, no, not smart. 


CLAYTON: Not smart. (Laughs.) 

GASPARRO: I think people take that as the—you know— 

CLAYTON: Let me—let me give you an example. 

GASPARRO: Please. 

CLAYTON: Because climate, right? Big issue and everything, transition. Let’s just say that we’ve decided as a society we’re going to pursue carbon transition net zero 2050. You could ask everybody, what’s your carbon footprint today? That might give you some insight into how to allocate your capital. I seriously doubt it. But if you said to everybody, we’ve adopted—assume we’ve adopted a policy of carbon neutral 2050. What is your near-, medium-, and long-term strategy for your company to address that policy? Now, an airline would have an answer, like, unless we have a carbon transfer market that’s well functioning, we will not be able to operate.  

Now, that’s a really good piece of information. Not what’s your current—you know, all sorts of industries would say, this is where we’ll have to change. This is how we’ll have to source energy in the future. These are the—these are the types of things we’re going to need to do around distribution. And we as a society would have a much better appreciation for what carbon neutral 2050 means from an operational point of view and, therefore, from a capital allocation point of view. A super dumb way to go about it is to have a single or a few single metrics, about GHG emissions. But that’s where we’re headed. 

GASPARRO: To play devil’s advocate, it is the lowest, you know, common denominator in terms of it’s much better to be a little more, you know, idiosyncratic and more, you know, specific for certain sectors— 

CLAYTON: OK, let me give you—yeah. If you said to everybody, OK, disclose your EBITDA, and everybody who has an EBITDA of ten or lower I should buy their stock, everybody has an EBITDA of ten or higher I should sell their stock, because one’s overvalued and the other—like, you’d get laughed out. But yet, the people who are advocating for these blunt, you know, cross-industry metrics say that’s exactly how investors will use them. Look, I want to trade against those investors. (Laughter.) 

GASPARRO: I thought you were going a different way in terms of adjusted EBITDA and how it’d be different for every company out there. 

CLAYTON: (Laughs.) Yeah. And we could do that. That doesn’t—that’s also—that’s also a measure of current performance. And what we’re talking about is insight into transition. Yet, we’re approaching it like a backward-looking, static measure. Again, super dumb. 

GASPARRO: Yeah, and takes— 

CLAYTON: Am I clear on how I feel about this? (Laughter.) 

GASPARRO: Tell me how you really feel, Jay. Don’t hold back. 

CLAYTON: No, it’s, you know, going to waste a lot of time and money. Probably actually, not—if transition is our objective, not facilitate that. 

GASPARRO: Potentially better using that time and energy to talk about China exposure— 

CLAYTON: Or just—or just all of the things that we need to do as a society if we are going to have a transition that is somewhat lower cost. 

GASPARRO: Sure. You are one of the most prominent voices when it comes to broader corporate governance and processes. So we’d be remiss if we didn’t get your take on, you know, the past seventy-two hours at Open AI, in terms of broader governance processes. Still new, but— 

CLAYTON: So, look, crisis 101 for a board of directors, or big issue 101 for board of directors is, you know, what’s—where are we going to be when this is over? What outcome are we driving to? And it’s pretty clear that if that thinking was there, they executed very poorly. It doesn’t even seem like that thinking was there. It seems like, you know, they had a—we’ll call it a crisis. They had a falling out with a very prominent, you know, founder of the company. Removed the person, with no real, you know, day two plan. That’s bad governance.  

You know, it doesn’t seem like there was an acute harm that they were dealing with that needed to be dealt with in the moment. And certainly, didn’t have a plan for dealing with the ripple effects of their actions. So I don’t know. Maybe I’m missing something. But they haven’t come out and said what this acute problem was. 

GASPARRO: No report, no details. 

CLAYTON: They haven’t come out and articulated a vision of the company’s future. So it shouldn’t be a surprise that the ripple effects continue. 

GASPARRO: People often talk about this being one of the—you know, at least in recent memory—one of the most, you know, grossly negligent, you know, boards. But if you take a step back and you look at other examples, where FTX or just other Silicon Valley high fliers, where sometimes companies start as, you know, small and insignificant and then change very fast to become powerful and much larger. And sometimes governance doesn’t keep up as fast. And I guess, you know, we could bring it just to charge broader government, where technology change happens much faster than rules and regulations. So, you know, when were at the SEC and you were dealing with crypto and just things changing so dramatically and so fast that you couldn’t put in place regs fast enough, how did you deal with it? 

CLAYTON: Well, crypto is a good example of people arguing that new regs are necessary or that a lot of new regs are necessary. I don’t agree with that. I mean, I think that what was—well, let me give you—I like to use the example of Uber, OK? Our taxicab industry was lazy, monopolistic, inefficient. Uber saw this and said, we’re going to throw technology at this, capture the customer, and regulation will come to us. And that’s what happened. Customer got really, you know, enamored with a service that you can call on your phone. It was initially cheaper than, you know, a taxicab, much more efficient.  

And even though much of what Uber was doing was illegal—(laughter)—regulation came in their direction. And they captured a great market. The ICO craze, the people who used crypto to conduct what is nothing more than a securities offering, thought the same thing would happen. Is it was so efficient, so tangible, so direct to the customer that they would provide this and the securities laws would bend to—would bend to them. We have too much of an investor protection market integrity culture for that to have happened. And a lot of the argy-bargy that you’ve seen was a result of that misguided belief that you could do an Uber on the securities markets. That’s—but everything’s, you know, a little different. 

GASPARRO: Yeah. I’m going to ask one more question and then we’ll open it up to Q&A in a room and online. Retail investors can run for president. But a retail investor who doesn’t meet the quota can’t invest in private markets. This has been one of your biggest rallying cries at the SEC to kind of open up Main Street to private markets. And it feels like eventually one day we will get there.  

CLAYTON: Well, let’s go—let’s go back to the question you just asked. I am very sympathetic—very sympathetic to the entrepreneurs who wanted to reach out to the public to raise capital. And I’m very sympathetic to the retail investors who want those opportunities. What we’ve done with securities laws in the United States is we have reserved—effectively reserved those opportunities for only the well-heeled. And we’ve made it for entrepreneurs such that you have to have a company that is at least 2 billion, 3 billion, 4 billion (dollars) in value before it makes any sense to access the public capital markets. 

A lot of what you saw in the ICO craze and what you see from crypto people is great frustration at that state of affairs. They’re right to be frustrated. We should be looking at making it easier to raise capital for smaller- and medium-sized companies and making it easier for accredited—nonaccredited investors or even accredited investors to participate in those opportunities. That has met with great headwinds on Capitol Hill. There is a strong faction of people who believe that those opportunities should not be made available to ordinary investors. That ordinary investors at worst case should be pushed into index funds, and index funds only, because that’s the safest place. I worry that that trade gets really, really, really crowded, and that at some point it will be so crowded that we will be very sorry we pushed every retail investor into one option, which is an S&P 500-type index fund. 

GASPARRO: And, to your point on private markets, you can’t paint it with one brush. For every VC and private equity, there’s private credit, which has much more stable yields and less volatility. So—yeah. 

CLAYTON: The misunderstanding of the private markets knows no bounds. 


So at this time, I like to invite my fellow members and guests, both in the room and virtually. Want to go with Tao first. Tao knows, for everyone else, please stand up. Wait for the mic. Name, affiliation, and your question, please. 

Q: Hi, Chair Clayton. Thanks for being here tonight. Tao Tan, Perception Capital, and a former student of Robert Jackson. 


Q: My question has to do with your favorite topic, capital formation. As you’ve observed, public markets have become much more difficult. And I won’t ask you to comment on your successor. Private markets have become if, over the events of the past weekend, larger but much more erratic. So given where we are right now, how would you assess the state of capital formation? And what are the changes that are needed—regulatory as well as legislative—to make sure that the companies that will drive our economy for the economy for the next thirty years will be able to access capital, knowing that they will look very different from the companies that drove our economy for the last thirty years? 

CLAYTON: OK. So let’s just go with the state of the capital markets, because this is important. We have a credit-based economy. The availability of credit—and some equity—but a lot of the availability of credit is what drives our economy, OK? Consumer credit and, you know, industrial credit all alike. Dodd-Frank—let’s just say that the amount of credit that was provided on an annual basis was one hundred. Seventy was provided by banks, OK? You know what Dodd-Frank said? Really, only sixty or fifty can be provided by banks going forward. So you have to make up for that ten or twenty delta somewhere. That’s why private credit markets have grown. If they hadn’t, we would have an economy that shrinking. It’s not—people make it hard. It’s actually not any harder than that.  

And then if you’re going to have any growth, but you continue to constrain the amount of credit that banks can provide, you’re only going to have a disproportionate share of growth in the private credit markets. Or you’re not going to have growth in the economy. Luckily for the U.S., we actually had a pretty good start on a private credit system post-2008. Europe did not. So where are we today? In the U.S., almost 70 percent of credit is now provided outside the banking system. While in Europe, it’s still 70 percent inside the banking system. That means that they have been credit rationed relative to the U.S. One of the drivers for the differentiation in growth. 

So when people talk about regulation, they have to understand that the availability—just to start with credit. We can go to equity. The availability of credit needs to increase if we’re going to have growth. You know, that’s just—that’s just math, particularly the way we’ve set up our economy. And people who don’t recognize that, you should ask them, like, have you thought about this? Because there’s no credit fairy out there, right? (Laughter.) You know, everybody’s credit is somebody else’s asset that they want to be paid back on. 

GASPARRO: On the equity side, Jay, it feels like never before have we had so many different options. You could do an IPO, you could do a SPAC. You could do a direct listing. You could do a direct listing with a capital raise, thanks to people like Bob (sp), and Adina (sp), and Karen (sp), and NASDAQ, and others. So if I’m trying to raise capital today, from an equity point of view, it feels like there’s never been more options.  

CLAYTON: There are more items on the menu. Do you feel like there are more options for any one given company? I mean, we have Bob here. He’s the expert. I think, you know, look, SPACs were a fad. They’ve been around a long time. You know, it’s like kind of, you know, maybe bell bottoms will come back. (Laughter.) You know, but they’ve been around a long time. They were—they were a fad. People wanted to deploy capital and, for whatever reason, they saw, you know, frothy equity values and the like.  

But, look, I am—I am worried—I’m not worried about the availability of equity capital. I am worried about the availability of investor, retail, long-term, middle-class investor access to the growth phase of companies in America. That has been—that has been diminished, right? I mean, if you’re—if you’re an S&P 500 investor today, you’re 25-30 percent invested in seven stocks. Now, if you want to shock somebody, do that breakout for them. Say, here’s your $1,000. Here’s what you have in Microsoft. And they’ll see really quickly that they are so levered to tech it’s remarkable. Now, that’s been a good trade. But that’s—but those are the facts. 


Q: (Off mic.) 

GASPARRO: I’ll repeat the question as well. 

Q: Thank you. Is this better? There you go. Dhruv Singh, DEWS Holdings. Thank you so much for a great conversation. 

You know, would love to hear about how you think about the appropriate way to regulate cryptocurrency, digital assets, as you already touched on, and some of the tradeoffs which you’d consider. And if you wouldn’t mind also commenting on how you think that’s different from the current administration, and why you think they have a different perspective. 

CLAYTON: Yeah. So I think the appropriate way to regulate crypto is to recognize that it’s a technology not a product. It’s a different technology for, in almost all cases, delivering a product that we already know, in sometimes a more efficient way. So I do think Bitcoin is an exception to that characterization. A new commodity has been created, one that is mined, essentially, that people seem to like. But getting back to your question. look, I don’t know what—I don’t know whether it’s going to be worth a little or a lot. But I am at the point where I think the market can decide. There’s enough what I would say is efficacy and trading and the like, where we can get that point. But in terms of regulating crypto, I’ve sort of been, you know, it’s a technology.  

I think the classification issues about whether it’s—whether a product is a security or commodity are overblown. I think most of those decisions are pretty easy. To the extent that we are going to continue to wrestle with those classification decisions, I say get on with it. Let’s have regulated platforms where you can put either, waiting until those classification decisions get decided. You know, I do think we can custody digital assets, whether they’re digital assets, securities, or others. Those types of things could—the banks—the large banks are working on them. You know, look, it’s also been one of the most political regulatory issues in the last thirty years, with the amount of campaign finance funds that went in. It is—I recognize that it’s a hot issue and it’s a politically sensitive issue. But you can take that down if you recognize at the end of the day that it is really a technology that it’s enabling new delivery for products. 

Q: Hi. Thank you so much for the great conversation. Claire Guehenno. I’m a lawyer at Wilmer Hale. 

And I must admit, I’m in the enforcement space. I deal with the SEC a lot. (Laughs.) And so I’m coming at this from an enforcement perspective. I’m curious to draw out your comment on prescriptive rules and how you see that for enforcement specifically, and where you draw the line on providing sufficient guidance to people, companies on what the law is. You know, like an area like insider trading where there is no sort of clear law, clear statute that tells you what that is. And how your perspective on that has changed from SEC to private practice. and advising clients on how to navigate that, and whether that balance is currently in the right place. 

CLAYTON: So on insider trading and the law, I think most practitioners are pretty good at telling people when they come with hypotheticals, yeah, you can do that, or, yeah, you can’t do that. There are very few edge cases. And I would say that anybody who’s on an edge case, you know, is probably already going too far. (Laughter.)  

GASPARRO: A lot of stories— 

CLAYTON: Yeah, no, I—you know, and, look, that’s, I think, where the law is. Sure, what—does anybody who—do people like bright lines for defense? Yeah, if they’re in their favor. They also hate them if they’re against them. I mean, in Europe there’s essentially strict liability, including for trading on anything that moves the market, which—that’s not a great line, if you develop your own information. Like, if I go running around and, you know, counting boxcars and figure out that the railroad’s lying about their volume, I ought to be able to trade on that information generated by myself. I ought to be able to share it with others, it’s my information, and let them trade it. Now, there are some rules around manipulation and things like that, but, you know, how do you deal with a bright line on that? If I want to tell my—you know, I want to tell my mom, hey, Mom, this company’s a fraud, you should, you know, short it, I ought to be able to do that, right? At least, I think so. (Laughter.) 

Q: Thank you. Hey, there. Thanks. Elliot Waldman, with Point72. 

The Biden administration has taken a pretty firm approach to antitrust regulation. You alluded to the bigness of the main components of the S&P 500 earlier. Curious if you could opine on just, like, the propriety of that approach? And is the consumer welfare standard still sufficient for antitrust issues in this day and age? Thanks. 

CLAYTON: So I’ve been—I’ve been public about this. And I think it’s an accurate characterization. Maybe it’s not. Maybe it’s unfair. But I think when you have the power of the government you should be bringing cases that you’re pretty confident you’re going to win, not cases that you’re bringing to make a statement. I believe that firmly, because you are—if you’re bringing cases that you don’t think you can win, you are using the power of the state against somebody who has not violated the law and doing so knowingly. And I think that’s inappropriate. I think it leads, over time, to a disrespect for the law. 

And so to the extent that that’s going on, I find that corrosive. You want to change the law, make the law more rigorous? You know, there’s a place for that. Congress. To your point of have a consumer welfare standard, it’s been a good standard. It’s been one we’ve used. If we’re going to replace it, I’d like to know what the standard is. I have heard some articulations about market power and, you know, checking excess market power. What I can say is that, from my perspective, measuring consumer welfare and having an understanding of what consumer welfare means is a little easier to get my head around than knowing what is too much or too little market power. Does that answer your question? Not easy. 

Q: Hi, Jay. Dan Katz, former Treasury Department official. 

We touched briefly on the FTC just now. And you also touched on the SEC’s climate disclosure proposal in your—in your comments earlier. Question about the independent agency framework generally. It does seem under the current administration that there’s been a fairly partisan and aggressive regulatory agenda coming out of these, you know, supposedly independent agencies, which do have bipartisan structures. So I’m curious, do you think the independent agency structure right now is currently functioning the way that Congress really designed it to function? Or instead, would it be better to revert to a system more akin to a unitary executive, where we have at least clear accountability for independent agency action? I mean, in particular in light of the way Supreme Court jurisprudence is going on removal of protections. 

CLAYTON: Yeah. I mean, I think the independent agency journey of the United States is one that’s—is one that’s ongoing. I think embedded in your question was, have we preserved the New Deal promise of the administrative agency, with the idea that you would have experts in the in the area of authority who would come to Washington and smooth out the ups and downs of the political process and provide the public companies and individuals with sort of a—what I would say is a consistent approach to regulation. I think we did that incredibly well, for about fifty years. And the flourishing of the U.S. economy has a lot to do with the fact that we did that very well in the securities markets and, you know, pick FCC, you know, and the like. 

Somewhere in the late ’80s, the fear that you can see in the New Deal legislative history started to creep into administrative agencies, in that they became populated with people who were not experts in the field but people who had a more politically based pedigree. But it happened over time. Now, as you look across most administrative agencies, you see that they are populated by people whose profession was politics or their profession was, in many cases, not the industry over which they regulate. I don’t believe that everybody in an administrative agency should be from industry, but we’ve lost a lot of industry expertise. And I’ll bring it forward. If AI is going to be as impactful to our economy and society as people think it is, we better get some people in government who understand AI to craft the regulations that we’re going to need. 

And the government better start using it, because unless you use it you probably don’t know how to regulate it. I think that that’s one of the things that—why we are so behind with social media platforms and the like. We really did not bring people in from the outside. And it’s hard now. It is very hard to bring in expertise from the outside because of this visceral reaction to the revolving door, which is one of the—we’re here at—we’re here at the Council of Foreign Relations. This is one of the dumbest things from a policy perspective you can adopt, because if you go and sit—you’re at Treasury. If you go sit beside our counterparts from around the world, and you sit at these meetings, they say the greatest strength of U.S. regulatory policy is that you bring people in from the outside, from the private sector, and refresh your knowledge on an ongoing basis, where that doesn’t happen in most countries. And that’s why we’re usually leading the way in crafting regulations that make more sense. 

GASPARRO: So I think we are at time. 


GASPARRO: I feel like we could have gone a lot more. So thank you all for joining. 

CLAYTON: Well, I’m so evasive. (Laughter, applause.) 

GASPARRO: So transparent, like the markets, right? (Laughter.) Thank you for joining today’s CFR meeting. Just want to take a brief moment to thank the Council for hosting us tonight, particularly Meaghan Fulco, President Mike Froman, Nancy Bodurtha, Vera Ranola, and Sam Dunderdale, Danielle Lam, and the entire indispensable CFR staff and fellows. (Applause.) I just want to thank you for this very substantive and, you know, transparent conversation. Everyone here appreciates it, online as well. 

CLAYTON: Thank you, Joe. Yeah, it was great. (Applause.) 

GASPARRO: Please note that the video and transcript will be up by tomorrow morning, tomorrow afternoon. And for those in New York, please join us for cocktails, where we will continue the conversation. Thank you, again. (Applause.) 


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