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CNBC Exclusive: CNBC Transcript: SEC Chairman Jay Clayton Sits Down with CNBC’s Bob Pisani Today

WHEN: Today, Wednesday, June 6, 2018

WHERE: CNBC’s “Squawk on the Street” – Live from the Sandler O’Neill + Partners Global Exchange and Brokerage Conference

The following is the unofficial transcript of an EXCLUSIVE CNBC interview with SEC Chairman Jay Clayton and CNBC’s Bob Pisani today, Wednesday, June 6thon CNBC’s “Squawk on the Street” (M-F 9AM – 11AM.) The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2018/06/06/sec-chairman-on-investing-cryptocurrencies.html?play=1

All references must be sourced to CNBC.

BOB PISANI: THANK YOU, SARA. AT THE SANDLER O’NEILL GLOBAL EXCHANGE, THE HEAD OF ALL THE EXCHANGES TALKING ABOUT WHAT’S GOING ON IN MARKET STRUCTURE AND TRADING. SPECIAL GUEST RIGHT NOW, JAY CLAYTON, THE CHAIRMAN OF THE S.E.C. EXCLUSIVELY ON CNBC. JUST WANT TO GET THAT LITTLE PLUG IN FOR US. THANKS FOR JOINING US. YOU HAD A VERY INTERESTING DISCUSSION WITH ALL THE MEMBERS HERE – TALKED ABOUT A SENSE OF RESPONSIBILITY TO PROTECT INVESTORS. ARE THERE AREAS OF INVESTING THAT YOU’RE CONCERNED ABOUT NOW, WHERE YOU FEEL INVESTORS ARE BEING TAKEN ADVANTAGE OF OR SOME AREAS YOU FEEL THE S.E.C. NEEDS TO ACT ON?

JAY CLAYTON: WELL, BOB, THANKS AND THANKS FOR BEING HERE. LOOK, WE ARE ALWAYS CONCERNED THERE ARE AREAS WHERE INVESTORS ARE BEING EXPLOITED, PAYING TOO MUCH, BEING DEFRAUDED. THAT’S OUR JOB AND WE ARE LOOKING FOR THAT EVERYWHERE WHETHER IT’S OLD FRAUDS, PUMP AND DUMP IN – YOU KNOW - THE PENNY STOCK AREA OR SOME OF THE FRAUDS IN TODAY’S ICO MARKET. EVERY WOMAN AND MAN AT THE S.E.C. COMES TO WORK EVERY DAY THINKING ABOUT OUR MAIN STREET INVESTORS AND HOW TO PROTECT THEM.

PISANI: YOU BROUGHT UP ICOs. LET ME GO TO THIS AREA. INTEREST IN BITCOIN IS OFF THE CHARTS BY OUR VIEWERS. NOT SINCE THE 2000 AREA HAVE I SEEN SUCH INTEREST. TELL US A LITTLE BIT MORE ABOUT WHAT YOU ARE PLANNING TO DO WITH BITCOIN, CRYPTO CURRENCIES AND BLOCKCHAIN THIS YEAR. YOU BROUGHT UP ICOs. I TALK TO MY ICO FRIENDS – PEOPLE WHO ARE INTERESTED IN THIS – AND THEY SAY, “WE’RE STYMIED WE DON’T KNOW WHAT THE S.E.C. IS PLANNING TO DO.” CAN YOU TELL US WHETHER ICOs ARE DEFINITELY SECURITIES OR ARE YOU GOING TO CARVE OUT SOME EXCEPTIONS AND WHEN ARE YOU GOING TO MAKE A CLEAR RULING AND DECISION ON THIS?

CLAYTON: OK, SO THERE’S A LOT IN THAT AREA. LET ME START WITH THE TECHNOLOGY, DISTRIBUTED LEDGER TECHNOLOGY. INCREDIBLE PROMISE. IT CAN DRIVE EFFICIENCIES NOT ONLY IN THE FINANCIAL MARKETS BUT IN A LOT OF MARKETS. FINE. TWO AREAS IN THE FINANCIAL MARKETS WHERE DISTRIBUTOR LEDGER TECHNOLOGY HAS COME TO THE FLOOR, CRYPTO CURRENCIES. THESE ARE REPLACEMENTS FOR SOVEREIGN CURRENCIES. REPLACE THE DOLLAR, THE YEN, THE EURO WITH BITCOIN. THAT TYPE OF CURRENCY IS NOT A SECURITY. LET ME TURN TO WHAT’S A SECURITY. A TOKEN, A DIGITAL ASSET, WHERE I GIVE YOU MY MONEY AND YOU GO OFF AND MAKE A VENTURE. YOU HAVE SOME COMPANY YOU WANT TO START OR SOMETHING YOU WANT -- AND IN RETURN FOR ME GIVING YOU MY MONEY, YOU SAY, “YOU KNOW WHAT, I’M GOING TO GIVE YOU A RETURN,” OR YOU CAN GET A RETURN IN THE SECONDARY MARKET BY SELLING YOUR TOKEN TO SOMEBODY THAT IS A SECURITY AND WE REGULATE THAT. WE REGUTE THE OFFERING OF THAT SECURITY AND WE REGUTE THE TRADING OF THAT SECURITY AND THAT’S OUR JOB AND WE’VE BEEN DOING IT FOR A LONG TIME.

PISANI: SO YOU’RE SAYING THE CLASSIC DEFINITION OF SECURITY, YOU INVEST IN A COMMON ENTERPRISE WITH AN EXPECTATION OF PROFIT. YOU’RE SAYING THE WAY YOU LOOK AT MOST ICOs, THEY ARE SECURITIES.

CLAYTON: CORRECT.

PISANI: ARE YOU PLANNING NOW TO MAKE A CLEAR STATEMENT ON THAT? -- BECAUSE THERE SEEMS TO BE A LOT OF CONFUSION ABOUT WHETHER ANYBODY IS GOING TO GET APPROVED OR NOT.

CLAYTON: BOB, I HOPE I JUST DID. IF IT’S A SECURITY, WE’RE REGULATING IT. AND LET ME JUST -- WE’VE BEEN DOING THIS FOR A LONG TIME AND WE’VE BUILT A $19 TRILLION ECONOMY -- A SECURITIES MARKET THAT’S THE ENVY OF THE WORLD FOLLOWING THESE RULES. IF YOU HAVE AN ICO OR A STOCK AND YOU WANT TO SELL IT IN A PRIVATE PLACEMENT, FOLLOW THE PRIVATE PLACEMENT RULES. THERE’S NO SECONDARY TRADING. YOU KNOW, YOU HAVE TO DO THAT. IF YOU WANT TO DO AN IPO WITH A TOKEN, COME SEE US, FILE FINANCIAL STATEMENTS, FILE DISCLOSURE, TAKE THE RESPONSIBILITY OUR LAWS REQUIRE AND WE’RE HAPPY TO HELP YOU DO THAT PUBLIC OFFERING.

PISANI: YOU SEEM TO BE SAYING THE S.E.C. IS NOT GOING TO BE CHANGING THE DEFINITION OF A SECURITY JUST TO SUIT THE ICO COMMUNITY. IS THAT RIGHT?

CLAYTON: I’M CERTAINLY NOT GOING TO SUPPORT THAT.

PISANI: OK. LET ME MOVE ON. WHAT ABOUT ALT COINS? WE HAVE DISCUSSED BITCOIN BUT THERE ARE OTHER ALT COINS OUT THERE. THERE IS ETHER, FOR EXAMPLE. THERE IS RIPPLE. ARE – IS ETHER A SECURITY?

CLAYTON: SO BOB I’M NOT GOING TO COMMENT ON SPECIFIC CRYPTO ASSETS AND WHETHER THEY ARE A SECURITY OR ARE NOT A SECURITY. BUT YOU CAPTURED THE DEFINITION VERY WELL. NOW, AM I GIVING YOU MY MONEY FOR YOU TO GO OFF IN A VENTURE OR I’M RELYING ON YOUR EFFORTS AND THE EFFORTS OF YOUR COLLEAGUES?

PISANI: THERE ARE – YOU UNDERSTAND THERE ARE LAWSUITS, I’M SURE YOU KNOW, RIGHT NOW FOR EXAMPLE, OVER RIPPLE ABOUT WHETHER IT IS OR IS NOT ACTUALLY A SECURITY. THAT’S PARTLY ONE OF THE ISSUES HERE. AND, OBVIOUSLY, HOW THE S.E.C. FEELS IS VERY IMPORTANT.

CLAYTON: NO I -- WE ARE NOT GOING TO DO ANY VIOLENCE TO THE TRADITIONAL DEFINITION OF A SECURITY, WHICH HAS WORKED WELL FOR A LONG TIME, AND I BELIEVE WILL CONTINUE TO WORK WELL.

PISANI: IS IT POSSIBLE THE S.E.C. MIGHT SAY THESE WERE SECURITIES AT ONE TIME AND NO LONGER ARE, BECAUSE THEY’RE NOT CENTRALLY CONTROLLED, FOR EXAMPLE?

CLAYTON: LOOK, THAT’S A QUESTION THAT IS OUT THERE AND, YOU KNOW, WILL BE ANSWERED IN SPECIFIC FACTS AND CIRCUMSTANCES. BUT WE’VE BEEN DOING THIS A LONG TIME AND THERE’S NO NEED TO CHANGE OUR FUNDAMENTAL APPROACH.

PISANI: LET ME MOVE ON. BITCOIN ETFS. A LOT OF PEOPLE CHOMPING AT THE BITS -- I COVERED ETFs FOR A LONG TIME, A LOT OF ISSUERS ARE WAITING. WHAT CRITERIA DO YOU NEED TO START A BITCOIN ETF? WE NOW HAVE A FAIRLY WELL DEVELOPED FUTURES BITCOIN MARKET THAT’S BEEN OUT SIX MONTHS NOW. ARE YOU PLEASED WITH HOW THAT IS GOING? IS THE DEVELOPMENT OF THAT MARKET SUFFICIENT TO ALLOW BITCOIN ETFs OR ARE THERE OTHER CRITERIA?

CLAYTON: SO BOB, OUR DIVISION OF INVESTMENT MANAGEMENT HAS PUT OUT AND BEEN VERY CLEAR WITH THE INDUSTRY ABOUT THE TYPES OF THINGS WE’RE GOING TO NEED IN ANY ASSET CLASS IF WE’RE GOING TO APPROVE A PRODUCT. AND ONE OF THOSE THINGS IS -- IS THE PRICING SOMETHING PEOPLE CAN RELY ON. ALSO ASSET VERIFICATION. OUR COMMUNICATION TO THE MARKET PLACE ON THIS HAS BEEN VERY CLEAR. I’M VERY PLEASED WITH MY COLLEAGUES AT THE S.E.C. BECAUSE I THINK WE’RE VERY OPEN ABOUT WHAT WE NEED FOR YOU TO SATISFY OUR VIEWERS.

PISANI: WELL, YOU SENT A LONG LETTER OUT THAT WAS WIDELY QUOTED IN THE INDUSTRY THAT CONTAINED A LOT OF QUESTION MARKS, IMPLYING YOU HAVE A – VERY HIGH HURDLE TO OVERCOME. YOU WHO WANTED BITCOIN ETFs TO SATISFY US AT THE S.E.C. EXPAND ON THAT.

CLAYTON: THOSE HURDLES ARE THE HURDLES WE THINK A MAIN STREET INVESTOR EXPECTS IF THEY’RE GONNA INVEST IN A PRODUCT. I UNDERSTAND THERE’S A GREAT DEAL OF DISCUSSION ABOUT THESE CRYPTOASSETS BUT AGAIN WE’RE NOT GOING TO RELAX OUR RULES BASED ON THE LEVEL OF DISCUSSION. WE NEED TO KNOW THAT THE PRICING IS THERE, WE NEED TO KNOW THAT THE ASSETS ARE THERE AND WE NEED TO KNOW THAT IT’S GOING TO FUNCTION AS OUR RETAIL INVESTORS WOULD EXPECT THOSE PRODUCS TO FUNCTION.

PISANI: YOU RECENTLY APPOINTED A CRYPTO CZAR. BY APOLOGIES TO VALERIE THAT’S WHAT SHE’S GOING TO BE CALLED FROM NOW ON. IS THAT A SIGN THAT YOU’RE TAKING THIS VERY SERIOUSLY AND YOU’RE LOOKING FOR WAYS TO ADVANCE THE BLOCK CHAIN/BITCOIN MEDIUM AND THAT YOU’RE NOT GOING TO BE OBSTRUCTIONISTS AND INTERESTED IN BASICALLY SHUTTING IT DOWN? BECAUSE THAT’S WHAT MY BITCOIN FRIENDS ASK ME.

CLAYTON: DO NOT TAKE MY COMMENTS AS COMMENTS THAT – YOU KNOW -- WE’RE NOT PAYING ATTENTION. WE’RE SPENDING A GREAT DEAL OF TIME IN THIS AREA. I THINK BLOCK CHAIN TECHNOLOGY HAS TREMENDOUS PROMISE FOR THE SECURITIES INDUSTRY, ELIMINATING COSTS. I MEAN, THE COST OF VERIFICATION IN THE SECURITIES INDUSTRY, INCREDIBLY HIGH. IF WE CAN MAKE THAT MORE EFFICIENT, TERRIFIC. IN TERMS OF VAL, SHE HAS A VERY IMPORTANT JOB. WE HAVE AN ENFORCEMENT DIVISION, WE HAVE AN INVESTMENT DEMAND MANAGEMENT DIVISION THAT YOU TALKED ABOUT, WE HAVE A TRADING DIVISION AND WE HAVE CORPORATION FINANCE. HER JOB IS TO MAKE SURE WE’RE THAT COORDINATED ON THIS NEW ASSET CLASS ACROSS ALL THOSE DIVISIONS. AND I THANK HER FOR TAKING IT ON.

PISANI: LET ME MOVE ON. VOLATILITY HIT THE ROOF IN FEBRUARY. SEVERAL EXCHANGE TRADED PRODUCTS IN THE VOLATILITY SPACE ESSENTIALLY BLEW UP. ARE YOU SATISFIED THAT LEVERERAGE IN INVERSE ETFs AND VOLATILITY PRODUCTS DON’T CONSTITUTE ANY SYSTEMIC RISK TO THE SYSTEM?

CLAYTON: SO LET ME TAKE A STEP BACK AND SPEAK GENERALLY. I AM ALWAYS ON THE LOOKOUT FOR RISKS THAT WE DON’T RECOGNIZE OR RISKS THAT WE HAVE MISASSESSED. WHETHER IT’S IN A PRODUCT SPACE OR ANOTHER SPACE. I’M NOT GOING TO COMMENT ON SPECIFIC PRODUCTS BUT I COME TO WORK EVERY DAY ASKING OUR STAFF, “ARE THERE POCKETS OF RISK THAT WE’RE NOT RECOGNIZING OR THAT WHEN WE LOOK AT THEM, WE’RE WAY UNDERESTIMATING?” AND LEVERAGE, AS YOU AND I BOTH KNOW, LEVERAGE THAT YOU DON’T SEE OR LEVERAGE THAT’S EXCESSIVE HAS BEEN A HALLMARK OF PROBLEMS FOR A LONG TIME.

PISANI: ONE OF THE AREAS THAT WE SPEND A LOT OF TIME ON IS IPOs. I’VE BEEN COVERING THEM FOR 20 YEARS. IT’S BEEN VERY DEPRESSING TO SEE THE IPO MARKET SLOWLY GO DOWN. I THINK THE IPO MARKET IS 50% LOWER THAN IT WAS 20 YEARS AGO. THERE’S 3400 COMPANIES IN THE WILSHIRE 5000. THAT IS A DISGRACEFUL NUMBER.

CLAYTON: -- THAT’S A 10B5 VIOLATION.

PISANI: YOU HAVE BEEN VERY PASSIONATE ABOUT HOW TO CHANGE THAT. GIVE US SOME INSIGHT INTO WHAT WE CAN DO TO GET MORE COMPANIES TO GO PUBLIC.

CLAYTON: SO I AM PASSIONATE ABOUT IT BECAUSE IF THIS IS OUR TOTAL EQUITY INVESTMENT SPACE, THE PRIVATE PART OF IT USED TO BE THIS SIZE. IT’S PROBABLY NOW THIS SIZE. SO HALF OF OUR EQUITY INVESTMENT SPACE IS NOW PRIVATE WHICH MEANS IT’S AWAY FROM OUR MAIN STREET INVESTORS. I DON’T LIKE THAT AS JUST A RESULT, AS A GENERAL POLICY MATTER, BECAUSE WE’RE SHRINKING THE OPPORTUNITIES FOR OUR MAIN STREET INVESTORS. THERE ARE A LOT OF DRIVERS OF IT WHO ARE LOOKING AT THOSE DRIVERS. SOME POINT TO REGULATION. SOME POINT TO THE AVAILABILITY OF PRIVATE CAPITAL. SOME POINT TO SECONDARY TRADING. IT’S PROBABLY ALL OF THOSE BUT, LIKE YOU, BOB, I WOULD LIKE TO SEE THE SUITE OF OPPORTUNITIES FOR OUR MAIN STREET INVESTORS BE VERY BROAD.

PISANI: LET ME MOVE ON. I’M GOING TO HIT YOU WITH SEVERAL QUESTIONS ON DIFFERENT TOPICS RIGHT NOW. CYBERSECURITY. YOU’VE BEEN INCREASING EFFORTS RECENTLY TO MONITOR CYBERCRIMES. CAN YOU TELL US WHAT YOU’RE DOING TO STAY ON TOP OF THIS?

CLAYTON: SO CYBERCRIMES COME IN MANY FORMS. SOME OF THEM ARE OLD FRAUDS THAT WE KNOW ABOUT, JUST CYBER ENABLED. SOME OF THEM ARE NEW WE FORMED A CYBER GROUP IN OUR ENFORCEMENT DIVISION. THESE ARE PEOPLE WHO HAVE EXPERTISE IN THE DARK WEB, EXPERTISE IN UNDERSTANDING HACKING. HACKING, TAKING INFORMATION, USING IT TO TRADE ON. THIS IS AN AREA WE’RE FOCUSED ON. I DON’T WANT TO GIVE AWAY TOO MANY OF OUR INVESTIGATIVE SECRETS BUT WE HAVE PEOPLE –

PISANI: ARE YOU BEEFING UP THE DEPARTMENT THAT HANDLES THIS?

CLAYTON: YES.

PISANI: I MEAN, OBVIOUSLY, THIS IS A MAJOR ISSUE. WE HAD ISSUES ABOUT HOW TIMELY COMPANIES NEED TO BE IN REPORTING CYBER VIOLATIONS FOR EXAMPLE. ARE YOU GOING TO GIVE MORE CAREFUL GUIDANCE ON WHEN COMPANIES ARE REQUIRED TO TELL US ABOUT WHEN THEY’VE HAD BREACHES?

CLAYTON: SO IN THE AREA OF DISCLOSURE, WE DID COME OUT RECENTLY WITH GUIDANCE FOR PUBLIC COMPANIES ON HOW TO LOOK AT A CYBER INCIDENT AND HOW TO ASSESS WHETHER DISCLOSURE SHOULD BE MADE. I’VE SAID GENERALLY SINCE I STARTED IN THIS JOB THAT THE LEVEL OF DISCLOSURE IN THE MARKET BOTH AS A GENERAL MATTER ABOUT CYBERRISK AND OF SPECIFIC INCIDENTS IS NOT WHERE I WOULD LIKE TO SEE IT. I THINK IT’S BEEN IMPROVING. I THINK THE PUBLIC HAS A BETTER SENSE OF HOW CYBER DEPENDENT WE ARE AND, THEREFORE, THE LEVEL OF CYBER RISK BUT I’D LIKE TO SEE MORE.

PISANI: LET ME MOVE ON, TALK ABOUT THE BOND MARKET. THERE WAS AN EQUITY MARKET COMMITTEE TO LOOK INTO THE EQUITY STRUCTURE, MARKET STRUCTURE OF THE STOCK MARKET THAT WAS UNDER YOUR PREDECESSOR. YOU HAVE A NEW COMMITTEE TO LOOK INTO THE BOND MARKET STRUCTURE. ONE OF THE THINGS THAT’S AMAZING TO ME WATCHING THIS FOR SO MANY YEARS IS WHILE STOCKS HAVE ESSENTIALLY MOVED TO AN ELECTRONIC TRADING MODEL, THE BOND MARKET HAS NOT. THERE ARE EFFORTS TO DO SO. AND IT’S MOVING BUT IT’S VERY SLOW BUT YOU KNOW, MOST OF THIS IS DONE OVER THE COUNTER. WHAT WOULD YOU LIKE TO SEE CHANGE IN THE WAY BONDS ARE TRADED AND HOW IT MIGHT IMPACT INVESTORS?

CLAYTON: WELL, LET ME SAY THIS. I DON’T THINK IT’S FOR ME TO DECIDE WHAT I WOULD LIKE TO SEE. BUT WHAT WE ARE SEEING IS INCREASED ELECTRONIFICATION. AND OUR JOB IS, AS TRADING CHANGES, TO MAKE SURE THAT TRADING IS EFFICIENT, THAT IT’S TRANSPARENT AND THAT OUR MARKETS ARE RESILIENT. AND WE FORMED THE FIMSAC, THE FIXED INCOME MARKET STRATEGY, BECAUSE AS THIS ELECTRONIFICATION IS COMING TO THE FIXED INCOME MARKET WE WANT TO MAKE SURE THAT OUR REGULATIONS ARE KEEPING UP WITH IT AND THAT WE’RE GETTING THOSE RESULTS. RIGHT? AND WE DID THIS IN THE EQUITY MARKET. TODAY’S EQUITY MARKET IS MUCH MORE EFFICIENT THAN THE EQUITY MARKET OF 20 YEARS AGO IS THERE ROOM FOR IMPROVEMENT? THERE ALWAYS IS AND WE’RE LOOKING AT IT. BUT I WANT TO MAKE SURE THE SAME THING HAPPENS IN THE BOND MARKET.

PISANI: LET ME GO TO THE STOCK MARKET BECAUSE THIS IS AN ISSUE WE DEBATE AT CNBC ALL THE TIME. AND THAT RELATES TO THE FRAGMENTATION OF THE MARKETS. ABOUT 40% OF THE TRADING IN STOCKS TODAY ARE DONE IN DARK POOLS WHERE, AS YOU KNOW, THERE ARE RESTRICTIONS OF COURSE. THEY’RE NOT BASED IN MAKING BIDS AND OFFERS. THEY’RE NOT CLEARLY AVAILABLE. SOME PEOPLE HAVE RAILED AGAINST THIS, SAYING THE MARKET HAS BECOME TOO FRAGMENTED, TOO DIFFICULT TO OPERATE IN. WHAT’S YOUR VIEWPOINT ON THAT?

CLAYTON: SO LET ME TAKE A STEP BACK. MY VIEWPOINT ON THE EQUITY MARKET IS WE HAVE TO UNDERSTAND THAT THERE’S A LOT OF DIFFERENT ASPECTS OF THE EQUITY MARKET. THE LARGE CAP STOCKS TRADE MUCH DIFFERENTLY FROM THE MID CAP AND SMALL CAP STOCKS, SO A CONCLUSION LIKE THAT ONE ABOUT, YOU KNOW, WHERE TRADING TAKES PLACE AND WHETHER IT’S EFFICIENT OR NOT MAY BE DIFFERENCE FOR A LARGE CAP VERSUS A MEDIUM CAP OR SMALL CAP STOCK. WE ARE LOOKING AT THOSE ISSUES AND ASSESSING WHETHER OUR RULES, INCLUDING OUR RULES FOR ALTERNATIVE TRADING SYSTEMS ACCOMMODATE BOTH LARGE CAP AND SMALL CAP STOCKS.

PISANI: I’VE GOTTA LET YOU GO, BUT BEFORE I DO, ARE YOU CONVINCED THAT INVESTOR -- THE AVERAGE INVESTOR BUYING STOCKS ON A REGULAR BASIS TODAY ARE GETTING A BETTER DEAL, A FAIRER DEAL, A MORE TRANSPARENT DEAL, THAN THEY WERE GETTING SAY, 40 YEARS AGO?

CLAYTON: YES. I’M CONVINCED OF THAT. BUT IT’S OUR JOB TO SEE IF WE CAN GET THEM A BETTER DEAL.

PISANI: OKAY. JAY CLAYTON, CHAIRMAN OF THE S.E.C., THANKS SO MUCH FOR JOINING US.

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