Regulation by enforcement at SEC is here to stay

Three little words

Have you just been nodding along, pretending to understand what the crypto industry means when it complains about regulation by enforcement? Really, it’s just the latest application of a decades-old criticism of the SEC. Outside of the companies getting their knuckles rapped, there’s less concern about the SEC hauling firms to court versus making rules, but either way, the practice doesn’t seem to be going anywhere any time soon.

What is regulation by enforcement?

• Here’s how UCLA law professor James Park explained it recently to Protocol: “Instead of passing a regulation that would provide sufficient specificity and give the industry notice, the SEC instead is bringing enforcement actions that are interpreting broadly worded statutory phrases to develop the law case by case.”
• In other words, the industry says it’s not sure what it’s supposed to do or not do, even though people are already getting sued for their conduct.

The latest flashpoint is an SEC lawsuit alleging insider trading by a former Coinbase employee, which argues nine of the currencies involved are securities subject to the industry’s jurisdiction.

• That’s a new legal position, and it could have significant consequences for the industry, which would prefer if the SEC had first staked out that contention in guidance, warnings or a rule-making process in which industry representatives got to have some say.
• The court complaint has kicked up similar moaning to what arose after the launch of the SEC’s ongoing lawsuit against Ripple.

The counterargument is: There are 75 years of case law available on what constitutes a security that curious crypto company lawyers can read if they want.

• The SEC can’t dither with time-intensive rule-making, supporters say, when it’s trying to protect consumers in a market that’s shed trillions of dollars this year and that has its share of alleged corner-cutters and over-hypers.
• “Some market participants may call this regulation by enforcement,” SEC Chair Gary Gensler said last year. “I just call it enforcement.”
• In fact, many practices we think of as ultra no-nos — including insider trading and making bribes overseas — were originally punished through enforcement and the resulting binding court interpretations. There were no rules or separate statutes until later.

Complaints of regulation by enforcement, by the way, aren’t unique to the novel digital asset industry. They go all the way back to the beginnings of the SEC enforcement division in 1972.

• The first woman to serve as an SEC commissioner, Republican Roberta Karmel, published a book called “Regulation by Persecution.”
• Oddly — if you think crypto’s cries reflect a studied approach to good governance — the rest of tech right now is pushing the FTC to do more enforcement and less regulation, and other industries are upset about the SEC’s attempts at regulation.
• Of course, the problem isn’t really enforcement: Industries just tend to object to most government action, though novel sectors do often seek light regulation in the hopes of gaining stability and distance from the skeeviest actors.

The longevity of the term “regulation by enforcement” probably signals that neither the complaints, nor the underlying cases, are going anywhere, maybe even after Gensler or a future chair who feels similar skepticism about the industry leaves office.

• For one thing, lawmakers have made pretty clear they’re months away from agreeing on what regulatory setup they want to put in place for crypto — and when they say months, they mean years.
• For another, the Supreme Court recently signaled it’s shifting toward a much more dramatic skepticism of agency rule-making, which likely leaves enforcement as a bigger part of any approach to industry oversight.

None of this means that the SEC won’t get around to industrywide pronouncements. It already has an extensive docket on other matters, like climate risk disclosure, and the ability to issue less fraught (but also less binding) guidance. They’ll just mean, though, that crypto has something else to complain about.

— Ben Brody (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

In Washington

Sen. Chuck Schumer’s team is sending mixed messages on antitrust. A press secretary for Schumer told the New York Post that he’s planning to hold a vote on the American Innovation and Choice Online Act. That counters previous reports that Schumer previously told donors that he didn’t think there were enough votes for it to pass. Making matters stranger, the New York Post amended the article to remove the part of the quote that included “plans to bring it up for a vote.”

Sen. Kyrsten Sinema agreed to move forward with the Inflation Reduction Act. That gives Democrats enough votes to move the bill forward, though some details still need to be worked out. Sinema reportedly demanded the removal of the carried interest loophole and a watering down of the 15% corporate tax minimum.

Microsoft flew dozens of Hill staffers to Washington state in late June, according to Sludge. It then hosted an event in which the staffers met with Microsoft’s senior director of government affairs, around the same time Schumer was there to discuss antitrust. During the event, Microsoft also made 18 donations to a PAC that allocates funds to Democratic senators, including Richard Blumenthal and Patty Murray.

An FTC watchdog audit scrutinized the agency’s increased use of unpaid consultants. The inspection found that the use of those unpaid experts had risen under Chair Lina Khan, and it warned that those unpaid consultants could create legal and compliance risks for the agency.

The Consumer Financial Protection Bureau is investigating Goldman Sachs over its credit card practices. The Wall Street bank launched the card in 2019 in partnership with Apple. The CFPB is looking into areas such as how Goldman Sachs handles refunds and billing disputes with merchants.

Sen. Ron Wyden sent a letter to the Chief Justice John Roberts urging the court to better protect sensitive personal information contained within court filings.

In the courts

Twitter released a court filing rebutting Elon Musk’s allegations. It includes quite a few zingers, including a line saying Musk’s counterclaims are “a made-for-litigation tale that is contradicted by the evidence and common sense.”

Activision Blizzard hired a law firm in an attempt to block employee unionization. Microsoft, which agreed to acquire the video game maker for $69 billion, has already promised not to block unionization efforts within Activision, but that transaction has yet to go through.

A MESSAGE FROM CCIA

S. 2992 could break digital services like Google Search, Amazon Prime, and your phone’s security. Americans are feeling the squeeze of record inflation; why do some members of Congress want to set the economy back by an estimated $319 billion?

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Around the world

The European Commission is scrutinizing Google’s response to app store legislation. In July, Google said it would preempt the Digital Markets Act by allowing third-party payments — but still with a 27% fee on some revenue. As we noted previously, this would make the third-party payment option relatively unattractive.

The Foreign Ministry of Taiwan reported a series of cyberattacks following House Speaker Nancy Pelosi’s visit. In the days since the visit, China has been running military operations in the region as a show of force.

Meta banned a pro-Putin group from its platform. The group, Cyber Front Z, had been using a public Telegram channel to mobilize harassment of those against the war in Ukraine, Protocol previously reported. Meta said most of their activity on Instagram came from inauthentic accounts.

Italy is preparing subsidies to lure Intel. If the deal goes through, Intel would build a $5 billion facility, with up to 40% of that investment coming from the Italian government, Reuters reported. A complicating factor — to put it lightly — is that the deal is being negotiated by outgoing Prime Minister Mario Draghi. Reuters reports the two parties are attempting to finalize an arrangement by the end of August, with the Italian elections scheduled for late September.

In data

50%: That’s how much value Tiger Global’s flagship fund has lost year-to-date, according to an investor letter obtained by the Financial Times. “We did not appreciate how unique the circumstances were that enabled inflation to rise and persist,” the company’s letter said.

A MESSAGE FROM CCIA

Some policymakers are intent on passing S. 2992—flawed legislation that could undermine free and reliable digital services that families use daily. Without Amazon’s guaranteed 2-day shipping, Google search, or phone security, consumers’ finances will be squeezed even further.

Learn more

¿Hace calor?

Spain instituted new rules on air conditioning for public and commercial buildings: no air conditioning below 27 degrees Celsius (about 81 degrees Fahrenheit), and no heat above 19 degrees Celsius (about 66 degrees Fahrenheit). The decree came within a bill that attempts to reduce Spain’s domestic gas consumption amid the broader EU energy shortage. Predictably, there was some outrage about the temperature bands. Climate and energy austerity are not going over well in Europe — just ask the Dutch.