WHEN: Today, Thursday, September 19th
WHERE: CNBC’s “Squawk Box”
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Joseph Clayton, United States Securities and Exchange Commission Chairman, live from the CNBC Institutional Investor Delivering Alpha Conference in New York City on Thursday, September 19th.
Following is a link to video from the interview on CNBC.com:
Joseph Clayton: Individuals, Institutions Play By The Same Rules In Public Markets
ANDREW ROSS SORKIN: Chairman, thank you for being here. It's a privilege to have you here this morning. We're going to hopefully talk about the markets and where things stand and how you look at them, but I want to start our conversation this morning, if we could, about the public markets and what I think is the debate right now about the private markets, and how over the last decade there seems to be a sense that investors have made out a lot better in the private markets rather than the public markets. And this was the year of the IPO. Some of the most prominent names, whether they be Uber or Lyft or Slack. WeWork, which has not gone public yet, is in the press virtually daily. And I may try to talk to you about that. I imagine you will resist, but --
JOSEPH CLAYTON: Resistance is futile, right?
ANDREW ROSS SORKIN: But I want to talk to you, though, about this idea and what do you think of this idea that as an investor -- and there are so many asset managers in this room today, thinking about how much money am I allocating towards private markets, how much money am I allocating towards public markets? This idea that there is more of an opportunity today not in what classically was considered the stock market, but elsewhere.
JOSEPH CLAYTON: All right. I have to do this. Thank you for having me. I have to say my words are my own and not those of the Commission. But now that we've dispensed with that, I'll give you my views.
ANDREW ROSS SORKIN: A lawyer is always a lawyer.
JOSEPH CLAYTON: Look, our private markets perform a different function today than they did 10, 15 years ago. They perform a function that was largely performed by our public markets. A great deal of growth capital to take companies from, you know, small size, medium size, to a very large capitalization, all within our private markets. That is new. I think last year, depending what metric you used, more capital and certainly more growth capital was raised in our private markets than our public markets.
Probably means if it's growth capital, better opportunities, or at least different opportunities, or opportunities that people want to seek. I guess we're delivering alpha. You want to find alpha. Private markets are a good place to look.
ANDREW ROSS SORKIN: Oftentimes riskier, as well, though.
JOSEPH CLAYTON: No doubt. No doubt riskier. I'm glad we're having this debate. Because as I've said to you before, I've never seen a company go from a private company to a public company without coming out a better company, in terms of understanding its business and the rigor that the public market process puts on them. But we have to recognize that a lot of growth is happening in our private markets.
ANDREW ROSS SORKIN: Okay. But that gets to the fundamental question, which is if you think that companies do better coming through the process of becoming public, what does that say about the transparency or perhaps lack of transparency in the private markets and at a time, I'd add, that you have BlackRock, T. Rowe Price, and actually public investors oftentimes now in vehicles that live in this private market space.
JOSEPH CLAYTON: Well, you can't take a monolithic view of the private market space. There are lots of people operating in the private markets who are very good at understanding how companies perform and delivering performance.Are the rules not as rigorous as the public markets? Of course not. But, you know, we know lots of people who have operated in private markets for decades and have delivered alpha-sized returns by doing so and put management teams and whatnot through the same kind of rigor as they have in the public markets.
ANDREW ROSS SORKIN: What do you think of the valuations that have taken place in the private markets relative to the public markets? And I know you're going to, as I said, resist when it comes to speaking about specific companies. Let me mention something about WeWork as an example. And you can maybe speak to it in a broader context, which is WeWork, in its S-1, revealed all sorts of things that raised all sorts of questions about the company. Dick Costolo, the former CEO of Twitter, said the degree of self-dealing in the S-1 is so egregious and comes at a time when you've got regulators and politicians and folks across the country looking at Silicon Valley and wondering if there's an appropriate level of self-awareness.
And the reason I mention that is because here's a company that in the private markets was worth $47 billion -- by the way, there were public investors, if you will, to some degree, even in this at potentially some of those types of valuations. And then as the process -- which I think you might argue maybe it's working, as they've gone public, but clearly that valuation has been cut in half if not more.
JOSEPH CLAYTON: So let's just go back. You know I'm not going to comment on a specific company, but let's just go back to what we were talking about the debate. Price discovery in our public markets is different from price discovery in our private markets, right? One of the things our public markets provide is not daily liquidity, but microsecond liquidity.
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: In private markets, its liquidity is a negotiation.
ANDREW ROSS SORKIN: Uh-huh.
JOSEPH CLAYTON: So the price discovery mechanism is completely different. It doesn't surprise me that you would have differing valuations over time in public and private markets for the same type of company.
ANDREW ROSS SORKIN: But you've talked and you've hinted about wanting the SEC to come up with steps to effectively make it easier for public investors to be in the private markets. What would that look like and what kind of transparency would be required?
JOSEPH CLAYTON: Let's talk about that. Because this is an issue. If the growth opportunities have shifted -- not all the way, but to substantial extent into our private markets and ordinary investors don't have access to them --
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: -- that's not good. The question is what do we do about it? One of the things I like in our public markets is Main Street investors. They invest right alongside the institutions with the same deal, virtually the same drag, they're all in it together. Can we replicate that in our private markets? Now it's very difficult to do that on an individual basis. It's hard to give individuals direct access to our private markets. So one of the questions is, can we have some kind of fund structure where we ensure that ordinary investors are getting the same deal as the institutional investors? It's a wonderful thing about our public markets. Ordinary people are right alongside the very sophisticated institutions.
ANDREW ROSS SORKIN: But then the flip side of that is, as we mentioned earlier, oftentimes these private market investments are considerably riskier.
JOSEPH CLAYTON: Uh-huh.
ANDREW ROSS SORKIN: And so when you talk about mom-and-pop out there, whether you want them in these risk remember investments. I should tell you by the way from a Goldman Sachs report. Goldman Sachs says that less than a quarter of the companies that have gone public in 2019 will report positive net income this year. That's the lowest level since the tech bubble?
JOSEPH CLAYTON: Uh-huh.
ANDREW ROSS SORKIN: What do you make of that?
JOSEPH CLAYTON: Look, it's hard to draw conclusions from single stats. But I will say that I -- I am concerned that our public markets are being used more for liquidity than for growth.
ANDREW ROSS SORKIN: And therefore you need to do what?
JOSEPH CLAYTON: Well, we're having this debate, right? So if they're being used more for liquidity than for growth capital and we want to make investing widely distributed, we have to look at how we can have access --
ANDREW ROSS SORKIN: For a very long time there's been --
JOSEPH CLAYTON: And let's get back to where I started, which is why are people waiting so long to access capital from our public markets? Why are they waiting so long? Is it because there's just so much capital available in our private markets, or are we doing something in our public markets? Are we too short-term oriented? Are we too -- is there too much cost associated with going public? What is happening that people are waiting so long?
ANDREW ROSS SORKIN: Isn't it that for reasons that -- and maybe they're rational or maybe they're inexplicable, private market investors seem to have a much longer leash for the types of investments they're making. They may be more willing to give over 20 to 1 voting rights to their founders and things that historically in the public market we would have thought as bad governance issues, but that a lot of these things are around governance, they're around things that for some reason in the public -- in the private markets, investors seem to be just fine with, but in the public markets, there's this sort of very different view.
JOSEPH CLAYTON: Look, I think we also have to -- we really have to, you know, be careful not to take a look at one segment of the private markets, say the tech segment, and then apply that across all of the private markets. Because I think if you look away from the tech segment, I can tell you that the people investing in the private markets away from the tech segment, they're pretty rigorous on their management teams. The kind of rigor that they apply to significant private market companies is in many ways equivalent to the kind of rigor that the public markets place on management teams.
ANDREW ROSS SORKIN: You spoke about this idea that so many private companies seem to be using the public markets for liquidity. A less polite way of describing that might be that they are letting the public sort of hold the bag after the growth opportunity really existed. What do you make of the sort of trend towards direct listings versus the classic, more traditional IPO process right now?
JOSEPH CLAYTON: Let's take a step back. Somebody asked me the other day, what's your job? That it's fair. You know? If a direct listing is providing the same kind of fair information, fair access to the market as your more traditional underwritten IPO, who are we to Judge whether one is better than the other as long as the investors have fair access to information.
ANDREW ROSS SORKIN: Let me ask you a question about that.One of the sort of never-ending -- it's endless questions that we always ask about IPOs is, if the stock goes up by 10 or 20 percent on day one, or, by the way, if it goes up 50 percent on day 1, who won? Was that a good thing? Was that a bad thing? What does the proper pricing really look like? There's some venture capitalists that say we love a direct listing because it actually means that the company will ostensibly collect more money; whereas, in the more classic IPO process, certain investors may be more advantaged than others both to get access and the idea that there's at least an opportunity on the pricing to move things around, let's just say.
JOSEPH CLAYTON: Well, look, let's put it this way. You're an owner of a company that's private and looking to access the public markets. If you have different choices in how you're going to do that, I think that's good. Are you going to have a larger deal and are you going to have a smaller deal? Are you going to do a direct listing?How are you going to do it? Those are all variables that go into what you're talking about. An IPO where 10 percent of the company is floated versus an IPO where 30 percent of the company is floated, those are different transactions.
ANDREW ROSS SORKIN: I want to pivot just for a moment in terms of how you're thinking more broadly about the economy and its relationship to the stock market. You're someone who lived through the financial crisis or a lawyer in the midst of all of it, and I remember having a bit of a heart palpitation on Monday of just this week, when we saw this issue with the short-term repo at the banks and the New York Fed stepping in. I'm sort of curious, when you saw that, if you had the same heart palpitations that I did and how you're sort of looking at things right now.
JOSEPH CLAYTON: Okay. So, look, I think that we both know that liquidity is the lifeblood of markets. And any time that you see something that says, oh, liquidity isn't what was expected, you have to ask yourself why and think about it. The Fed stepped in, and there we have it. But, look, I -- I hate to say this because I'm, you know, I guess getting paid to worry. But I'm always looking for things that may be out of whack. I'm always looking to see if somebody has mispriced something. When I say "somebody," I mean there's a significant mispricing in the marketplace. If we go back to 2007, mortgage risk was mispriced, substantially mispriced on a wide basis, and that was a problem. I wake up every morning and think, is there anything that's significantly mispriced.
ANDREW ROSS SORKIN: Okay. So you look at negative interest rates around the world. What does that say to you?
JOSEPH CLAYTON: Well, will that says to me -- that's new. And it is rare that there are new things in our market economy, and it's a new one, and it's a significant one, and it's widespread. Now, my job is market function and market fairness. I'm not a Central Banker, so I want to be careful not to step into the Central Bank lane. But I do look at it and say what does this mean for -- coming back to my job, what does this mean for how the market functions? There are a lot of functions in the marketplace that, let's put it this way, they have never modeled before negative interest rates.
ANDREW ROSS SORKIN: I have a question about -- the way you think about your job. If more of the American public starts -- were to start investing more directly in the stock market, is that considered success for you? Is that a good thing? Is that a bad thing? Do you think about that? Do you say to yourself, okay, we're in this economic cycle, I don't know what inning we're in, and do we want more of the public to be in the stock market now? Or you're just --
JOSEPH CLAYTON: Now, look, maybe I am stepping outside of my lane, but financial literacy, understanding our markets, understanding investing, it's an important part of functioning in our society, okay? We're responsible for funding our own retirement. We're living longer. And when I go around the country, the thing I hear all the time is: I wish I knew more earlier, and I wish I started earlier. And, you know, I am a big proponent of financial literacy. I'm a big proponent of getting your debt under control. Get your debt under control before you get into the market. But we need a large section of our society that understands we live in a credit-based economy. You need to take care of your financial house, and if you don't have the basic tools, participation is really hard. Not just in our markets, but in our society generally.
ANDREW ROSS SORKIN: Talking about society, what do you make of what the business roundtable did just several weeks ago in announcing that profit is now just one of several component parts of the "mission statement" of the largest corporations in America? And I ask this in part because I think you probably have long thought about the idea of a fiduciary duty, the way CEOs and boards think about their role. There seems to be some debate about this.
While some big American companies think this is a great idea and they signed on to this -- I should tell you, I interviewed the Treasury Secretary, Steven Mnuchin, just last week, and I asked him whether he would have signed it, and he said flat out: No, I wouldn't have signed it. Steve Schwarzman, who is a member of the business roundtable, did not sign it. What would you have done?
JOSEPH CLAYTON: Well, no one asked me to sign, but -- I'm kidding. Let me say this. I've never been in the boardroom of a good company that wasn't thinking about customers, employees, and community along with their shareholders. So that's just, like, sample size, you know, 25 years, when you see good companies, they think about all those things. And they drive it. Shifting to what is their legal obligation --
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: -- that's a different story. That is largely a creature of state law in America. And different states have done this differently. We have states where companies are incorporated where you do have multiple obligations, or I should say can consider multiple factors. In fact, in most states you can consider multiple factors. I think this debate is a little confused because people talk about what's right and what your perspective should be versus what your hard legal obligations are.
ANDREW ROSS SORKIN: Let me ask you a separate question, though. As a manager, if you will -- and this is a point that Steven Schwarzman effectively made. He said: Look, I consider it a given effectively that I have to do all these other things, taking care of my customers and suppliers and communities, but I really have to serve one master. That, actually, if you give me five things to do, it makes it too complicated. If you give me one thing to do, I can do that and at the same time I can take care of these other issues.
JOSEPH CLAYTON: Well, look, let me tell you, at the Commission -- I'll put it in my perspective. We have a three-part mandate: We have capital formation, we have fair and efficient markets and we have investor protection. Now, which one do you do? You know how I rationalize that? I say what's good for the long-term Main Street investor? So in my own world, I have to deal with those three things, try to maximize all of them. But I do it. I try to -- it's much easier to make decisions if you can find a lens through which to make those decisions. And for me, for serving the long-term interest of Main Street investors, we are going to fairness, we are going to capital formation, and we are protecting them.
ANDREW ROSS SORKIN: Let me talk about a different lens, which is the ESG lens. There are a number of investors in this room who are spending a lot of time and energy on ESG, and that's become the metric. What do you make of that phenomena?
JOSEPH CLAYTON: Well, let's break them down. Because lumping E, S and G together, I find it's difficult to make a comment because they are quite different. Let's start with G and investing and what we do at the Commission. We're a disclosure-based organization. We say here's the kind of disclosure you have to provide. In G --
ANDREW ROSS SORKIN: The disclosure already exists. It's there.
JOSEPH CLAYTON: Actually, everyone will tell you there's too much. We have 30, 40 pages of G. How many people read all 40 pages of G in the proxy? Yeah, exactly. So there's a lot there.
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: Now, E, what are we doing with E? There is a fair amount of disclosure with E. And, you know, and then S -- what is S?
ANDREW ROSS SORKIN: ESG, it's sustainability.
JOSEPH CLAYTON: Okay. But what --
ANDREW ROSS SORKIN: You're saying how to measure that?
JOSEPH CLAYTON: How to measure that.
ANDREW ROSS SORKIN: And that's what I was going to ask you as my follow-up, which is do you believe there will be a day when the SEC is going to oversee how these metrics are calculated?
JOSEPH CLAYTON: Here is what we said recently because there is an S metric that I think we should be looking at and we should be looking at differently today than we were three decades ago, and that is human talent, human capital. If you look at intangibles on the balance sheet of companies three decades ago, that was kind of less than 6, 7 percent. Now it's closer to 30 percent. Again, good companies and good investors, they engage on how companies manage their human talent.
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: So that's an area where we actually just put out for comment and said, Hey, tell us how you're thinking about this. Tell us if there are metrics. How do companies look at it? How do investors look at it? Because there's a different debate today over human talent than there was over 30 years ago. It's not a cost anymore.
ANDREW ROSS SORKIN: But related to all of this is, you know, CalPERS, which was one of the most sort of progressive and aggressive in this ESG space, had a consultant come in -- I don't know if you saw this story a couple months ago -- and showed them that they'd actually lost an incredible amount of value in terms of alpha by pursuing this path. And so how do you see this whole thing playing itself out over the next couple years?
JOSEPH CLAYTON: You know what? Engaging around these topics and recognizing that they're all different, I like that because that's a real substantive engagement.
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: And our economy is about, like I said, human talent. Good investors are asking people: How do you manage your human talent? How do you raise the level of your company? So I see it playing out like things have played out in the marketplace for years. Investors and companies having dialogue. First thing you should ask companies is: How do you look at this?
ANDREW ROSS SORKIN: Right. One way that a number of leaders are starting to look at their businesses is to become more politically active. They are jumping into a space that oftentimes people say there is a void of leadership maybe even in Washington or at least a deadlock in Washington, and the CEOs feel that they have to step in, whether it be on foreign policy issues, on immigration, on guns, on things of that sort.
JOSEPH CLAYTON: On market regulation?
ANDREW ROSS SORKIN: Perhaps even on market regulation. I'm sure they are lobbying you. But what do you make of the phenomenon of CEOs and investors speaking out on these issues in, frankly, ways that they had not in years past?
JOSEPH CLAYTON: Look, we live in a society where your ability to express your opinion is something we hold dear. I think that's fine.
ANDREW ROSS SORKIN: Okay. But let me ask you -- sometimes this becomes political. I'm going to give you an example. And I've written, as you know, extensively on the issue of guns and -- and the opportunity that I see the business community having a role, perhaps, in gun safety. There was a situation last year where Citigroup, which actually stepped away or tried to distance itself effectively from the gun industry, went to have a meeting with one of our commissioners about a topic wholly different than the issue of guns.
It was about deregulation and some other just direct, sort of daily issues that they were dealing with. And one of your commissioners effectively said, look -- apparently, reportedly said: Look, I can't even have this conversation with you. I'm not even going to engage on you with this other topic because I'm unhappy with the position you've taken on guns. And so all of a sudden, the business meets politics in a remarkable way, and is that appropriate?
And by the way, I should say it didn't just happen within your own office. You saw what happened in the state of Georgia related to Delta and taxes. Bank of America, which also distanced itself from the gun industry, all of a sudden had a bill written in the state of Louisiana that prevented them from bond sales. It gets very complicated very quickly. But specifically to the issue within the SEC, appropriate?
JOSEPH CLAYTON: I'm not going to comment on that -- you know, that situation. What I will say is how I approach this. And what I do is I look at the fundamentals of how we've regulated markets very, very successfully for, you know, 70, 80, 90 years, whatever that is. And that is materiality. What is material to an investment decision? How does the company look at it? How do investors look at it and the SEC facilitating that engagement? It really is around investing and managing your company and making those two meet in a fair way with materiality. You can't force people to talk about everything. You have to ground it. And what is material to what I say is a long-term investment decision.
ANDREW ROSS SORKIN: Okay. Separate question. We had maybe more of a geopolitical question. We had Steve Bannon on the program right here this morning on Squawk Box from the Pierre, and he made a fascinating comment as we were talking about China. He said: Look, there are a number of Chinese companies that live on U.S. exchanges that don't have to abide by the same rules, Sarbanes-Oxley, Dodd Frank, so many others, that American companies do.
JOSEPH CLAYTON: Uh-huh.
ANDREW ROSS SORKIN: And that Joseph Clayton should change --
JOSEPH CLAYTON: He knew my name?
ANDREW ROSS SORKIN: He knew your name. That Joseph Clayton should be changing the rules. What do you say to him?
JOSEPH CLAYTON: Well, look, we have had rules in place for a long time that non-U.S. companies who list in the U.S. do not have to comply with all of our governance rules. They can have their local governance and still list in the United States. That's been good for American investors because they still do take on a number of our requirements, including liability and the like. Some of this extends to Sarbanes-Oxley. But I will tell you, Andrew, we are looking at this. Because the world has changed. It's not just foreign companies coming to the U.S. who may have -- and I think Steve was probably in many ways talking about audits and audit rigor. We have foreign companies coming to the U.S. that have perhaps different auditing standards --
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: -- in their country. We also have U.S. companies who derive a majority of their revenues, a majority of their operations outside the United States. And audit quality around the world is a focus of mine.
ANDREW ROSS SORKIN: But in an America-first world, if you will, you don't feel compelled to try to write the rules such that they effectively advantage U.S. companies over international companies?
JOSEPH CLAYTON: Let's go back to investors, managers, transparency, fairness. If there's something that is happening that is unfair or I'll use the hard word, "fraudulent," I should do something about it.
ANDREW ROSS SORKIN: Right.
JOSEPH CLAYTON: But putting my thumb on a scale outside of that lane, that's a big ask.
ANDREW ROSS SORKIN: Okay. We're going to have to run in a second. I have two very quick questions, very rapid fire. Bitcoin, Crypto, is it ever -- what has to happen for it to be something that you see on exchanges?
JOSEPH CLAYTON: Well --
ANDREW ROSS SORKIN: Do you think it will ever happen?
JOSEPH CLAYTON: Look, I've said this for a long time on this. People see the price of Bitcoin trading on whatever report it is. If they think that there's the same rigor around that price discovery as there is on the NASDAQ or the New York Stock Exchange and the protections, they are sorely mistaken. So, you know, we have to get to a place -- in my view -- this is just speaking for myself -- we have to get to a place where we can be confident that that trading is better regulated.
ANDREW ROSS SORKIN: Final question. I know you reached a settlement with Elon Musk over tweeting. How do you feel about emails and internal communications that seem to magically reveal themselves into the public?
JOSEPH CLAYTON: Look, when executives communicate with the marketplace, they have to do so responsibly.
ANDREW ROSS SORKIN: But how do you feel about if it's not a direct communication but actually is a direct communication?
JOSEPH CLAYTON: When they communicate with the marketplace, they have to do so responsibly.
ANDREW ROSS SORKIN: Joseph Clayton, everybody. Thank you for the conversation.
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