At the beginning of today’s House Financial Services (HFS) Capital Markets Subcommittee hearing chaired by Ann Wagner (R, MO), the Securities and Exchange Commission’s (SEC) enforcement strategy – particularly around crypto – appeared to be in focus.
quick tips:
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- When the hearing concluded, it was clear that Republicans tried to keep the hearing positioned around the wider abuse of power it sees at the SEC.
- Meanwhile, Democrats focused mostly on digital assets (some climate change issues), its support for aggressive enforcement and the need to protect consumers in the space.
- At one point late in the Q&A section, Rep. Bryan Steil (R, WI) observed, “I feel like some of my colleagues might feel like we’re in the financial digital assets subcommittee, not the capital markets subcommittee.
- Also, Rep. Sean Casten (D, IL) tipped his hand on new crypto mixer legislation he’ll be rolling out later this week.
- Ultimately, whether you were Republican or Democrat, “digital assets” was the elephant in the hearing room.
See hearing page with testimony and video.
opening
Wagner and the subcommittee’s Ranking Member Rep. Brad Sherman (D, CA) presented their predictable views – Wagner criticizing the SEC’s enforcment strategy, Sherman defending it.
Initially, it appeared the common thread for the Subcommittee hearing would be on digital assets.
witnesses
Next, the witnesses presented (click name for prepared testimony):
Paul Eckert, Professor, College of William & Mary Law School
Eckert was critical of the slow process of SEC enforcement actions which he suggested should be concluded within two years. Today, only 50% of SEC actions achieve such a goal, he said.
Nick Morgan, Founder, Investor Choice Advocates Network
Morgan was highly critical of “regulation by enforcement” and provided anecdotes of what he saw as an abuse of power by the SEC that ultimately harms victims.
Andrew Vollmer, Scholar at the Mercatus Center, former SEC Deputy General Counsel
Vollmer saw some commendable elements of the SEC enforcement strategy, but was critical of three areas in need of reform: the civil monetary penalty amounts, the new “disgorgement” strategy for the courts and Administrative procedures which are “biased against the defendant.”
John Reed Stark, President, John Reed Stark Consulting
Reed Stark declared “regulation by enforcement” was false and was not the strategy of the SEC- he believed they were “enforcing the law.” Reed Stark saw an industry that was attacking the regulator and his presentation was the only one solely focused on digital assets and defending the SEC.
Next, Ranking Member Maxine Waters (D, CA) spoke briefly and echoed themes from her statement the night before at the House Joint Resolution 109 hearing in front of the House Rules Committee. She was entirely supportive of the SEC’s enforcement strategy.
Q&A
Rep. Wagner started broadly – beyond just digital assets -and brought up issues such as the “gag rule” which shed a light on excessive penalties that she said were being levied by the SEC against defendants. Wagner also brought up the agency’s “quick draw” approach of enforcement versus letters and guidance.
Rep. Sherman criticized the Majority about attaching bills to the hearing which he said had nothing to do with the purpose of the hearing. Then, Sherman turned to digital assets and said the crypto industry believes the United States is a “criminal enterprise.” Asking Reed Stark about crypto mixers, he suggested if there was any other purpose than go around the law. Reed Stark affirmed mixers were there to break the law.
Rep. Frank Lucas (R, OK) brought up the Biden Administration’s climate initiatives and the changeability of enforcement agendas. Artificial Intelligence and “AI washing” was explored with Mr. Vollmer and how the SEC and Congress should approach it.
HFS Ranking Member Waters returned the conversation to digital assets and the Coinbase complaint brought by the SEC and the recent outcome to the Motion-To-Dismiss brought by Coinbase. She asked Reed Stark his thoughts on the case – echoing Waters, he said “they should stay within their boundaries.”
Rep. Pete Sessions (R, TX) turned very briefly to crypto and the fact that Sam Bankman-Fried – though left unnamed – had met with SEC Chair Gary Gensler. Then, he asked Mr. Eckert about Dodd-Frank (created coming out of the Great Financial Crisis in 2008) and changes needed at the SEC to encourage due process, “fairness and trust.” Sessions appeared to have issue with enforcement actions that should actually take place in Federal courts.
Rep. David Scott (D, GA) addressed his initial question on raising capital to Mr. Eckert, who said small businesses need a federal court venue. Scott continued his questioning on fixed income and equity markets, and their differences.
Rep. Bill Huizenga (R, MI) posed his question initially to Mr. Morgan regarding the DEBT Box crypto enforcement action and the two SEC lawyers that were sanctioned. Regarding DEBT Box, Morgan said the process needs to change, it’s not a signal about the state of the SEC enforcement staff. Huizenga brought up the wave of Wells Notices flooding the inbox of crypto companies as the SEC brings enforcement actions. Mr. Vollmer said that the Wells Notice was a good process, but he believed the problem was with the staff’s process – no one can talk them out of a case, the SEC staff can just go silent.
Rep. Juan Vargas (D, CA) commented on the “reasonable”-ness of the hearing and then asked witnesses whether they believed in climate change. Among other comments, Mr. Morgan told Rep. Vargas that the cost of litigating with the SEC is significant and potentially damaging. Rulemaking versus piece meal litigation was Morgan and Reed Stark’s preferred method in the climate area.
Rep. Meuser (R, PA) was critical of the SEC’s attention to assist small business. His stance seemed to be that the SEC needs to encourage investment rather than a focus on enforcement.
Like Vargas, Rep. Sean Casten also complimented the hearing’s focus which importantly framed a political debate around enforcement and the SEC’s function. Rep. Casten asked questions around former President Donald Trump’s media organization and then turned to crypto. He asked Reed Stark about what to do with Tether, stablecoins and anti-money laundering legislations. Reed Stark said Tether needs an audit which he said they have never had.
Rep. Casten then announced a new bill looking to reign in crypto mixers:
“I just want to flag myself, Mr Sherman, Mr Foster, Mr. Cleaver are introducing a bill this week, specifically to clamp down on mixers and to say that until we’ve studied and have a good audit trail, the presumption should be that these are money laundering channels, let’s go through, get that cleaned up and fixed.”
Rep. Bryan Steil began “I feel like some of my colleagues might feel like we’re in the financial digital assets subcommittee, not the capital markets subcommittee.” And this was the Republican strategy for the hearing as they looked to create a broader story around SEC overreach.
Rep. Wiley Nickel (D, NC) returned to digital assets and bubbled up the Wells Notice sent to Robinhood and the SEC’s “regulation by enforcement” strategy. “Chair Gensler maintains that there’s clarity on what is and isn’t a security, but it appears that the only way to actually find out is to endure an enforcement action.” Vollmer provided his thoughts saying Congress needs to draft authority in a way it thinks is correct. He believed the “blunt instrument” of disclosures was not appropriate and the SEC should not “pre-empt the field” of digital assets. Vollmer added on enforcement, “I think there needs to be more effort to achieve compliance in less costly ways and in less in ways that don’t cause as much terror.”
Echoing his fellow Democrat Nickel, Rep. Stephen Lynch (D, MA) also turned hard toward digital assets. He referenced a Politico article on the SEC and its wins against crypto last Friday. Reed Stark said he believed there has been plenty of guidance for digital asset companies. Lynch disputed that crypto needed a whole new set of rules. Reed Stark supported Lynch’s comments and essentially agreed that crypto tokens are securities.
Rep. Zach Nunn (R, IA) focused on the “unelected bureaucrats” effect in Iowa. Nunn noted the abundance of rulemaking and fear of enforcement by the SEC. Rep. Nunn asked about the chilling effect of “regulation by enforcement.” Mr. Morgan said that entrepreneurs will be less likely to take chances with innovation. The DEBT Box case and the sanctioning of SEC lawyers were brought by Rep. Nunn.
And then the hearing concluded as it began – with the digital assets “elephant” in the room.