The following is the unofficial transcript of a CNBC EXCLUSIVE interview with SEC Chairman Jay Clayton and CNBC’s Bob Pisani on CNBC’s “Power Lunch” (M-F 2PM – 3PM) today, Tuesday, December 10th.
SEC CHAIRMAN JAY CLAYTON ON FRAUD
CONTESSA BREWER: CNBC today gets a rare look at the SEC’s enforcement activities. And Bob Pisani got to go inside the room where the Commission investigates fraud and insider trading and more. Bob joins us along with the Head of the SEC Jay Clayton. Hi, Bob.
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BOB PISANI: And we’re here right in the Division of Enforcement. And this is where they actually do investigations. So, Jay Clayton is here, the Chairman of the SEC. And Jay, we’ve been talking about this for a couple of years, you and I. You’ve made protecting the retail investors from the fraudsters, the scamsters, the Ponzi schemers, the whole lynchpin of your time here. Tell us a little about what you’re doing to protect the average investor right now.
SEC CHAIRMAN JAY CLAYTON: Well, it’s the men and women of the SEC who are doing that. Look, there – unfortunately, our markets have bad actors. And they have for a long time. But we are really focused on identifying them, particularly those who prey on our most vulnerable. And trying to get them back. When people entrust their money to our markets and someone rips them off, we should be focusing in those areas. And in particular, right now, we’re focused on teachers, people in the military and our elderly—our most vulnerable.
BOB PISANI: You just testified a couple of hours ago in front of the Senate Banking Committee that has oversight over the SEC. And you were asked about foreign actors. The question was very interesting. Are foreign actors having an influence on our markets that we don’t know about? What did you tell them?
JAY CLAYTON: Well, it was a very good question. And it was a question in two areas. Do they have interest in our public companies that we’re unable to track? And are foreign actors able to act inappropriately in our markets in a way that a domestic actor could not act? Very good question. We are making sure that our ability to detect bad behavior from outside the United States is what it is inside the United States. That’s a challenge. It’s something that’s ever evolving. But it’s something we’re focused on.
BOB PISANI: It’s not theoretical. You brought action against several Chinese traders just a short while ago, alleging they were trying to manipulate 3,000 stocks. Essentially a spoofing scheme run largely out of China. That’s not been resolved yet. But these are real time examples of things you’re monitoring and going after.
SEC CHAIRMAN JAY CLAYTON: We have globally interconnected markets. We have largely domestic authority. And we try to use that domestic authority as intelligently as we can to prevent bad actors from coming in from outside the United States.
BOB PISANI: I’ve spent the whole morning with your enforcement team. And what really impressed me is the depth of the knowledge and the ability — the sophistication of the computer monitoring systems. They seem very advanced now. And even they said to me five years ago a lot of these investigations could not be done. The way they caught the Chinese scheme was simply monitoring the trading activity and messaging traffic that did not appear connected, that using advanced technology they were able show was connected. So how important is that new technology now in detecting all the fraudsters and the scamsters?
JAY CLAYTON: Extremely important. A number of cases that we bring, it would be virtually impossible if not impossible to detect with the naked eye. Identifying partners across – facially disconnected data sets that you can bring together, it is a new enforcement tool. I’m very glad we have it. Because, as always, bad actors are getting more and more sophisticated. But, we’re keeping up with them in terms of the use of technology.
BOB PISANI: I know everyone is worried about cyber security. We’re all terrified about someone who can hack into the New York Stock Exchange, or Nasdaq and shut the trading operations down. We need to make sure they are secure. I know you brought an action against the Options Clearing Corporation just this year. They were fined several billion dollars for basically not beefing the security up to standards. Even here, you’re going after organizations that are an important part of the trading system in the United States.
SEC CHAIRMAN JAY CLAYTON: Our critical infrastructure needs to have strong cyber security. They also need to have something else. I don’t believe we’re going to be hack-free. It’s not going to happen. We are going to have a problem. They also need to be resilient. Not only need to be able to protect your infrastructure, to extent you have a problem, you need to be able to be resilient – and be resilient and get back up running, in a way that people continue to have confidence in your operations. It’s that two-legs to that story–
BOB PISANI: We have got to let you go. But I just want a quick question on buy backs. This is a really hot topic. A lot of people are wondering about whether or not some corporations should be required to direct their spending in other areas like capital allocation, capital spending. Does the SEC have any position on this at all?
SEC CHAIRMAN JAY CLAYTON: The SEC does not decide or tell people whether to buy back stock, pay a dividend, buy a company. What we do tell people is to the extent you make these kind of capital allocation decisions, tell your investors in fair and transparent way. And if you’re buying back stock, do it in way where you’re not manipulating the price and you’re doing it for the benefit of all shareholders.
BOB PISANI: Jay Clayton, always a pleasure to see you. Now, we are not letting Jay get away. We are going to go down right now to one or two floors below us to the forensic lab. This is the most secure part of the SEC. It’s a cooper-lined room designed to prevent any electronic communications in or out of the room. And this is the room where they hack into the cell phones and hack into the computer systems that the SEC has seized as part of their investigations.
Jay is going to give us an exclusive tour of what they do down there. And I have seen it and I am not handing my cell phone over to you ever again. No way. You’re going to be very amazed with what they are able to take a look at. And there’s a good look at some of the things you’re going to be able to see in the next couple of hours. Guys, back to you.