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US Senate panel presses SEC nominee Clayton on conflicts

Jay Claton testifies before the Senate Banking Committee during his confirmation hearing to be chairman of the Securities and Exchange Commission in the Dirksen Senate Office Building on Capitol Hill March 23, 2017 in Washington, DC.
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Jay Claton testifies before the Senate Banking Committee during his confirmation hearing to be chairman of the Securities and Exchange Commission in the Dirksen Senate Office Building on Capitol Hill March 23, 2017 in Washington, DC.

Jay Clayton, the Wall Street attorney tapped by President Donald Trump to lead the U.S. Securities and Exchange Commission, on Thursday defended himself against charges from Democrats that he had multiple conflicts of interest that would cause him to miss too many SEC votes.

Clayton, a partner at elite commercial law firm Sullivan & Cromwell, is expected to win confirmation easily, but Democrats on the Senate Banking Committee raised concerns about his professional ties to Wall Street, particularly with Goldman Sachs, a bank he represented during the financial crisis and that employs his wife, Gretchen.

Clayton, who is not registered with any political party, also told the committee the Dodd-Frank financial reform law should be reviewed, adding that whether it has been effective is on the minds of Trump administration officials.

The senior Democrat on the committee, Sherrod Brown of Ohio, said he was concerned Clayton's Wall Street relationships pose a "host of conflicts," and may have to recuse himself too often from SEC votes.

The SEC enforces securities laws and regulates U.S. stock, options and bond markets.

Clayton's client list has included Barclays, Deutsche Bank and the Royal Bank of Canada, as well as Bill Ackman's hedge fund Pershing Square Capital Management. He also represented William Erbey, former executive chairman of mortgage servicer Ocwen Financial Corp, who was forced to resign as part of a settlement stemming from an investigation into improper foreclosures.

"You've spent your career protecting some of the biggest names on Wall Street, and those relationships pose a host of conflicts for this position," Brown said. "I'm concerned that you may need to recuse yourself too often at a time when we need a strong, independent SEC chair on the front line of enforcement, not watching from the sideline."

Clayton's potential recusals could be significant because the commission currently only has two sitting members: Democrat Kara Stein and Republican Michael Piwowar.

Without two additional nominees to round out the commission, every Clayton recusal could set up a situation where the two remaining commissioners would not be able to agree on passing regulatory or enforcement actions.

Clayton pledged to be tough on fraudsters in his opening statement to the committee in his testimony.

"Bad actors undermine the hard-earned confidence that is essential to the efficient operation of our capital markets," he said to the panel.

Clayton will recuse himself from matters in which he has a financial interest, according to his disclosures with the Office of Government Ethics. He also told senators he was in discussions with that office and the SEC's ethics office to identify potential clients.

But Clayton said his long history as a transactions lawyer will be a "strength" for the chair role.

His wife is expected to resign her post at Goldman if he is confirmed by the full Senate.

The nominee said he would not show favoritism to Trump or anyone else in enforcing SEC rules. Trump, a real estate magnate in his private life, has had issues come before the commission and interacted with a previous chair, Harvey Pitt, Brown said.

Committee Republicans led by Chairman Mike Crapo of Idaho pressed on how to engender capital formation, a goal the Trump administration has embraced.

Cindy Fornelli, executive director at the Center for Audit Quality, a nonprofit whose board includes corporate chiefs and audit firms, said she hoped Clayton would continue a project started by the previous chair, Mary Jo White, to streamline corporate disclosures.

"I would be surprised if he didn't," she told Reuters in an interview before the hearing. "He is a transactional lawyer and knows very well the complexities and arcane nature of our disclosure regime."