SEC Enforcement Chief Speaks on the Need to Police Crypto

This morning,[1] I’d like to return to a theme I’ve touched on repeatedly in speeches throughout my first year on the job, and that is the urgent need to restore trust in our institutions, government, and the legal and regulatory processes. I’ve previously discussed the importance of corporate responsibility, the critical role of gatekeepers, the necessity for proactive compliance and cooperation, and the pervasive – yet unpersuasive – mantra of “regulation by enforcement,” in connection with the trust-building process.

But this morning, I’d like to approach this theme somewhat differently, by sharing some thoughts on how we apply this lens to our own efforts. An animating principle for any regulator is that government belongs to, and must work for, all of the people. Distrust and antipathy grow when there is a perception that the instruments and actions of government are benefiting a limited or favored group. In so many contexts, we’ve learned over and over again in recent years that inclusion and equity require tangible measures, broadening of perspectives, and accountability, not just good intentions. So I want to talk about how our actions reflect these lessons — how we are walking the walk – and how our efforts benefit the investing public.

As a starting point, the Division is focused on the essential project of diversifying our workforce and creating an environment in which talented individuals are welcomed, encouraged, and given the opportunity to flourish. We are engaged in a continuous process of self-evaluation to ensure that our hiring and promotion practices are fair, equitable, and structured to identify and reward contributors who bring to the job a variety of backgrounds and experiences.[2]

We are also focused on incorporating the lessons we’ve learned in the pandemic to increase opportunities for the extraordinarily talented staff in our regional offices, so that we can leverage their skills and retain enterprising staff who are hungry for new challenges.

Hiring, promoting, and importantly, retaining a diverse and talented workforce makes us more efficient and more effective, in ways both obvious and potentially less-so. It is no secret that this is a tight market for exactly the type of bright and capable lawyers who populate the Division. While we can’t always compete with all of you on pay, what we can do is give our staff the autonomy to do meaningful work in a creative and dynamic way. Our ability to police ever-more-complex markets is dependent on finding and keeping high-performing staff attorneys and supervisors, which we are better positioned to do when we can reduce the types of barriers, including unconscious or structural biases, which may have limited our ability to do so in the past.

A diverse workforce also helps us do our job better. Our investigations involve people from all backgrounds, many of whom may have been the victim of fraud. Some victims may have skepticism, or outright hostility, towards the government.

We often see this with certain types of affinity frauds, where the perpetrator may appeal to the victims’ closeness to their own community, and potentially their suspicion of outsiders.[3] Not infrequently, we encounter suspicion so strong that the victims are reluctant to cooperate with us or believe our allegations even in the face of overwhelming evidence of the fraud. While hardly a panacea, a staff that broadly reflects the country’s diversity can serve as a tangible reminder of the reality of the situation – the dedicated public servants who are too often derided as “faceless bureaucrats” are in fact ordinary Americans, who come from all kinds of places and believe all kinds of things, and do their jobs with honor and integrity. This type of connection fosters trust, encourages victims to come forward, and enables us to carry out our mission of protecting allinvestors.

It would be cliché at this point to say we do our job without fear or favor, but it’s true and it’s important. The pervasive loss of faith in important institutions is often the result of a belief that rules are unfairly or selectively applied, in order to help or harm some chosen group. I know this isn’t the case, and respectfully, so do most of you. That’s why it’s unfortunate when that idea is perpetuated and used to sow a mistrust that can ultimately harm vulnerable populations.

So let’s talk about the digital elephant in the room.

Every day I – and I’m guessing most of you – read and hear myriad jeremiads against the SEC, and Enforcement in particular, for “picking winners and losers” and “stifling innovation” in the crypto asset space. I’ve spoken about this before, and don’t intend to repeat here everything I’ve already said. But what’s interesting to me in the context of today’s remarks is that the argument is generally not that we have somehow unfairly targeted crypto to the exclusion of other products or markets. Instead, it often seems critics are upset because we’re not giving crypto a pass from the application ofwell-established regulations and precedents.

Many individual investors have been drawn to crypto in recent years, and may bear a disproportionate burden when adverse events impact that market.[4] Within the broader retail cohort, there have been numerous reports recently describing the potentially outsized impact on non-White and lower-income investors of problems in the crypto market.[5] Crypto may have heightened appeal to certain of these populations due to their skepticism of a financial system – and by extension, a financial regulatory system – that has too often failed, or simply ignored, them.[6]

Were we not to investigate and bring appropriate cases just as we always have simply to duck criticism or difficult questions, we’d be acting with both fear and favor. We’ve been given a hard, but important job: to impartially enforce the laws and rules on the books for the benefit of investors and our markets. So if we are going to uphold our mandate, we can’t simply abandon the field when we confront potentially novel issues, and that’s especially true when those issues trigger passionate beliefs.

There are legislative and administrative processes that can and should be followed. Rule changes, applications for relief, and legislation are all appropriate avenues through which to seek consideration of new requirements for products and markets that may fall under our jurisdiction. But non-enforcement of the most fundamental rules underlying our regulatory structure would be a betrayal of trust and not an option for us.

As I have stated publicly in the past, I believe the Howey and Reves tests remain vital and accurate means of identifying instruments that fall within the jurisdiction of the securities laws. When the evidence we obtain indicates that those laws have been violated, we will continue to bring actions regardless of what label is used or technology is involved (or not). Failure to do so would constitute an abdication of our responsibilities, and an abandonment of the investors who have been harmed in those markets, including through being denied essential disclosures and protections.

Restoring trust in the regulatory system and its institutions cannot start with us abandoning whole classes of investors by declaring our long-standing and well-established rules to be simply null and void for enforcement purposes. That would be unfair, unequitable, and undemocratic.

I know there are many other topics you are interested in hearing about from our panelists today. Before I go, I want to thank everyone attending in person and virtually, as well as all the speakers from the staff who took time out for this event. Continued dialogue and engagement is critical, and I appreciate having had the chance to speak to you briefly.

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