Jay Clayton on uptick rule: Leon Cooperman right to be worried

delayed earnings reports SEC-uptick rule SEC Chairman Jay Clayton coronavirus-driven volatilityImage source: YouTube Video Screenshot

 

CNBC transcript: SEC Chairman Jay Clayton speaks with CNBC’s Andrew Ross Sorkin on “Squawk Box” today on implementing uptick rule, the coronavirus-driven volatility and much more

WHEN: Today, Monday, March 30, 2020

 

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SEC Chairman Jay Clayton On the uptick rule

All references must be sourced to CNBC.

ANDREW ROSS SORKIN: Meantime, the New York Stock Exchange begins its second straight week of all electronic trading. And joining us right now on the phone is SEC Chairman Jay Clayton. Chairman, it’s good to have you on the phone again. It’s been quite a week, since we last spoke. Feels almost like a bit of a different world, even. But you've now seen the world, or at least the Exchanges operate, in the case of the New York Stock Exchange, completely electronically, with nobody on the floor. What are you seeing right now?

JAY CLAYTON: Well, Andrew, good morning. And good morning to morning to Joe and Becky. We have--we did have quite a week and it was a shift, I would say the culmination of quite a shift to telework for many of our critical market infrastructures, the exchanges, our central clearing parties and the like. I have to say that we're very pleased with the -- from an operational perspective with how that shift was accomplished. Of course, a lot of that is due to what I want to thank my colleagues at the Fed, and the Treasury for their, their amazingly quick intervention in the pockets of the market that were under particular stress, particularly at the short end of the curve. I mean, now we have a lot of 30, 60 day 90 day markets, in this country. Commercial paper. There are many others I could talk about, and we have an incredible shock—an incredible economic shock that we hope is 30, 60, 90 days, and the targeted intervention of the Fed certainly helped the operational side of the ledger.

ANDREW ROSS SORKIN: Chairman, one of the questions that we've been asked repeatedly over the past week and I know it's something you've been asked, so I'm hoping you'll respond to it, is about the uptick rule. And it came up again actually on our program on Friday. Investor Leon Cooperman had called into the program and actually talked about the uptick rule and what he thought was needed. I would just want to play it to you because I do want you to respond to it because I think it's probably one of the singular questions that at least we get. And I imagine you may to about the call for reinstating the uptick rule. Here's what Lee had to say:

LEON COOPERMAN: The area that really surprises me, I'm not looking to pick a fight with the SEC. But I'm absolutely surprised that the SEC has not weighed in here. In 2007 for some unexplained reason they removed the uptick rule, which aided and abetted a lot of these quantitative trading systems that are accentuating volatility in the market you're buying strength or selling weakness, so it works both ways. Okay. Certain countries have banned short selling. I'm not in favor of any short selling. I think short selling should be allowed. But we should have this uptick rule to slow things down is scaring the hell out of the public to scaring the hell out of the professionals, okay and the SEC should weigh-in, and to do something here.

ANDREW ROSS SORKIN: Chairman, can you -- can you speak to that? Because I know it's you probably get that, you know, a dozen times a day.

JAY CLAYTON: Sure. Sure. There are two points in Lee's comments. The first is, I totally agree with him that we shouldn't be banning short selling. You need to be able to be on the short side of the market in order to facilitate ordinary market trading. That's, that's an agreement. His point on the uptick rule is, do you have undue pressure on a stock that's moving down through short selling. We don't have the old uptick rule that Lee is referring to, but we did put in place and a lot -- a lot of people know this, an alternative uptick rule. And it's a rule that I believe more closely matches the electronic trading environment of today. Let me try to explain quickly how it works. If a stock drops more than 10% from its previous day's close. And it's important, it's the previous day's close. So, if we open down 4%.

It's only another 6% to go. But if a stock drops 10% from the previous day's close for two days -- for two days, you can sell short on the bid. So, if the bid-offer spread--I'm going to use numbers that are -- that are illustrative your spreads aren't this wide-- but if a bid-offer spread is 49 to 50, you can't sell short on 49. And we believe that this rule for single stocks in combination with our market-wide circuit breakers has actually worked to dampen the type of activity that Mr. Cooperman is worried about more effectively than the old uptick rule.

Now, there'll be plenty of times to examine that in light of the unprecedented volatility we've had in the last four weeks. But that alternative uptick rule is addressing the issue that Lee is -- that Lee is worried about. And he is right to be worried about it. We need, we need market integrity, but we believe what we believe we're taking care of it with this alternative uptick rule.

ANDREW ROSS SORKIN: Chairman, one of the other things that that you've done in recent days is extended some of the deadlines for certain disclosures for companies. So many CEOs are watching this program this morning, trying to understand what the new disclosure or deadlines mean. Also, investors trying to understand it. Can you explain what's happening?

JAY CLAYTON: Sure. Andrew we're going to have an earnings season that is anything but typical. We have many of our companies who are trying to do their cash flow analysis they have they have lots of uses, and many of their sources have been impaired or dried up. They have to figure out what their liquidity position. And our investors are thirsting for that information. They want to know how they're doing from a liquidity point of view, how they're doing from an operational point of view. And now, now that we have some, and I'm going to say some, insight into another 30 days of social distancing, and then something, how are they going to operate their businesses under the current social distancing and other rules and then how are they going to operate them going forward? All of those things, investors are thirsting for. In this country we have, we have a great thing for public companies. Investors get to know how management is looking at the business, both historically and forward-looking. Now, in an environment like this, that's not easy, because there's lots of routine things and other things in addition to all of those changes in the economy that reporting is going to have to deal with. So, what did we say to companies? We said, to the extent you're unable to get your reviewed financial statements together because the auditors can't get to your locations to do physical inventory or the extent you have other problems, we're going to give you more time. But in order for us to give you that more time, you're going to have to explain as much as you can to your investors at this time, including why you need more time. So, we're trying to be flexible, recognizing that investors and our markets thirst for the kind of information that--that I hope is going on in the boardrooms, and that I expect is going on the boardrooms of most good companies. How are we going to bridge this period to the other side?

JOE KERNEN: Hey, Jay. I am trying to figure out how to ask this question in just in a -- in a generic way a lot of people, a lot of people that have positions might go on media outlets to talk about the current crisis. Is there a difference in your view in calling for calm and saying wow these stocks are really cheap and knowing that that person has a position, and is talking about, you know, it could, if the market were to go up, they would help him? Is there a difference between that and coming on and talking about the market going down if they have a position where they benefit from it going down, are both of those things okay in the current environment, do you think?

JAY CLAYTON: Joe, you know, it's America, we love opinion. You guys are doing a great job of getting different views and trying to educate the public about our markets and their operation through this period. That said, there's a line where that ends, and bad behavior begins. Now, I'm not going to go into because every, every situation is facts and circumstances dependent. But do we -- do we like it if, to use the vernacular, somebody is talking, their book, particularly if they're active in the market and aren't disclosing it? No, we don't.

JOE KERNEN: Okay.

ANDREW ROSS SORKIN: And Chair. I think that he was very politely referring to Bill Ackman. But let me -- let me ask you, and I believe in that case--

JAY CLAYTON: Andrew, let me be clear. Andrew, Andrew, I'm not referring to anybody. I'm just saying that if people have physicians they're coming on, you know, they--let me just say as a citizen. Let's put aside, let's just say the general citizen if you're coming on and talking about the markets and you have particular trading positions, you probably ought to tell people.

ANDREW ROSS SORKIN: Right. And I should say, in the case of Bill Ackman, my understanding, and I can't speak to the segment itself. But I do know that that he had publicly disclosed in writing prior to those appearances, what his position around some of those hedges were. Let me ask you a different question

JAY CLAYTON: Yeah, let me jump in there and respond more generally to Joe's question.

ANDREW ROSS SORKIN: Yeah.

JAY CLAYTON: Because our enforcement division did put out some, some guidance here. And we are in volatile market times, and when you're involved in market times and there's uncertainty, that is a time when there is a great deal of asymmetric information, and what people would call material nonpublic information. We're telling companies and market participants, look, we know it's tough. But practice good hygiene. Make sure that if you're disclosing, you're doing it broadly. Make sure that you have controls over your material nonpublic information. The public needs to know that people are continuing their commitment to integrity here.

ANDREW ROSS SORKIN: Right. To that end, let me ask you about political leaders. One of the things that's happened in the last week is and there's a report out the FBI is investigating Republican Senator Richard Burr, related to some stock trades around the coronavirus and what he may or may not have learned in his role, in his job. What is your view of politicians trading stocks, period?

JAY CLAYTON: Andrew, we have the STOCK Act. And I want to be clear I'm not commenting, and we have a very rigid policy about not commenting about whether an investigation is happening or not happening or anything. It serves the public well serves us well, and it serves people else, it's America, it's good due process. But anyone who is privy to private information about a company or about markets needs to be cautious about how they use that private information. That's sort of fundamental to our security laws and that applies to government employees, public officials, etc. And the STOCK Act codifies that.

ANDREW ROSS SORKIN: Okay. Chairman, we always appreciate you calling into the program. As this progresses, I hope that we'll be able to continue this conversation. We appreciate you joining us this morning.

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About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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