Commissioner Hester Peirce Amps Up Critique Of SEC Agenda

It’s been a long two years at the Securities and Exchange Commission (SEC) for Commissioner Hester Peirce.

She’s had to deal with an SEC Chair whose agenda she has openly disagreed with and a 117th Congress dominated by Democrats who were mostly loathe to reproach the Chair, a Biden-appointee. On top of all that, Peirce is entering her 5th year on the Commission – the longest tenure of any current member.

Time to get busy? Last Friday she did.

With the dawn of a new Congress and a Republican majority in the House, Peirce took the gloves off by delivering a 5,400-word keynote address at a Duke University crypto conference while simultaneously publishing an op-ed co-written with former Senator and Senate Banking Committee member Phil Gramm (R, TX) in the Wall Street Journal (read it).

On traditional banking

The piece in the WSJ is two-pronged and focuses on the traditional banking and investing world. The overall theme supports a commonly-held belief whether you’re in the banking or digital assets industry: the SEC agenda set by its Chair Gary Gensler is clearly overreaching. And overreach has mingled with overbroad climate concerns by the Commission argues Peirce/Gramm: “The SEC proposes to turn a disclosure rule into a how-to guide for companies seeking to reduce their carbon footprints.” The SEC has gone from regulator to management consultant, say the writers.

Peirce and Senator Gramm make the same case about new SEC rules coming for mutual funds: “Rather than simply work to enhance existing disclosures, the SEC has decided to remake the markets by forcing retail orders into auctions of its own design.” They conclude, “The SEC proposes to expand the role of government and reduce the economic freedom that has been the source of American economic exceptionalism.”

Republicans welcomed Peirce’s aggressive stance in the op-ed with Rep. Bill Huizenga (R, MI) tweeting on Wednesday that “I’ll lead the [Republican] response to @GaryGensler’s incessant desire to exceed his authority.” Huizenga has just been assigned the gavel for the House Financial Services Oversight and Investigations Subcommittee in the 118th Congress by Financial Services Committee Chair Patrick McHenry (R, NC).

On crypto listicles

In her thoughtful, exhaustive speech for the Digital Assets at Duke conference, Peirce dissected the impact of events in 2022 and the way forward with a set of listicles beginning with seven lessons that can be learned from the past year.

She started, “The first and most important lesson of the evening for people who believe in crypto’s future is that they should not wait for regulators to fix the problems that bubbled to the surface in 2022.”

Peirce advocated for the need to shine a light on crypto use cases; judging crypto “on its own merits” given all of the nuances; the importance of testing and QA; more awareness around the collision of trustless crypto and trusted centralized entities; and, the shared challenges of crypto and traditional banking.

Finally, she advocated for a willingness to listen to criticism inside and outside the industry saying, “Critics’ voices are sometimes shrill, and their messages sometimes melodramatic or nonsensical. However, thoughtful people raise more nuanced critiques of crypto assets and blockchain technology.”

Next on the crypto listicles docket were:

    • Stablecoins is not the SEC’s business – “Congress might opt for no federal regulation or decide another regulator is better. Legislative activity to date suggests that the SEC is unlikely to be the regulator of stablecoins.”
    • Regulation by enforcement is not the way – “The regulation-by-arbitrary-and-tardy-enforcement-actions approach on which we have relied is the opposite of a rational regulatory framework.”
    • Embrace input – “In contrast, a notice-and-comment process allows broad public and internal participation in developing a sound regulatory system.”

Unlike Chair Gensler who has said that existing banking and finance rules such as the Howey Test are all anyone needs to regulate crypto, Peirce advocated for the creation of a regulatory framework with still another listicle made up of five guiding principles.

First, she wants to seen a nuanced approach that takes into account the many facets introduced by blockchain technology and cryptocurrency such as accounting for the different Layer 1 blockchains.

Second, a cautious approach to regulation. You don’t want to break crypto and its innovation, she says.

Third, “when we do decide to regulate, we should be clear that government regulation is not the same as government endorsement. (…) A decision to regulate something is not a seal of approval.”

Fourth, she criticized Staff Accounting Bulletin 121 for scaring traditional entities away from crypto with its balance sheet listing requirements. Chair Gensler believes the contrary.

With her final guiding principle, Peirce suggested that any crypto framework must have decentralization as its core.  She believed there was a potential unlock to be discovered: “Decentralization can help support the resilience of the financial system.”

Making sure that everyone in the room knew where she stood, the Commissioner spiked the proverbial football in conclusion: “Our country is built on a presumption that people are best able to choose for themselves. People know their own preferences, limitations, risk tolerances, and circumstances better than the government does. Sure, sometimes people make very bad decisions on behalf of themselves or their families, but handing over the keys to the government does not ensure that decisions will be good.”

Side note: the Commission

The SEC divides officially across five commissioner roles with never more than three commission members from either the Republican or Democratic parties. Like the rest of the Commission, the Chair is appointed by the current President and therefore tilts the Commission agenda accordingly.

    • Gary Gensler, Chair (D), appointed 2020, term expires 2026
    • Caroline Crenshaw (D), 2020, exp. 2024
    • Jaime Lizzaraga (D), 2022, exp. 2027
    • Mark Uyeda (R), 2022, exp. 2023
    • Hester Peirce (R), 2018, exp. 2025