The New SEC Enforcement Program: Anchored In A Long Held Tradition
A key focus of the SEC Enforcement Division under Chairman Jay Clayton is retail investors. The program’s new focus comes at a time when it faces new challenges. Virtual currencies, whether the new tulip bubble or the latest and greatest investment, are now all the rage. Despite few regulatory protections, and recent warnings from the Directors of Enforcement at the SEC and CFTC about the hazards of the investments, companies which, for example, add the word “blockchain” to their name, or announce a new coin offering, are virtually stampeded by investors. All to often those quick investments end with enforcement actions charging fraud and investor losses (here).
SEC Chairman Jay Clayton delivered what he called a “simple and a bit stern” message to market professionals and gatekeepers: “I have instructed the SEC staff to be on high alert for approaches to ICOs [initial coin offerings] that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar.” Chairman Jay Clayton, Opening Remarks at the Securities Regulation Institute, Washington, D.C. (Jan. 22, 2018)(here). Those market professionals and members of the securities bar “need to act responsibly and hold themselves to high standards. To be blunt, from what I have seen recently, particularly in the initial coin offering (“ICO”) space, they can do better” the Chairman cautioned.
While Mr. Clayton’s message was not limited to virtual currency, he used the phenomenon as an example for all market professionals and gatekeepers in the securities markets. The securities laws “assume that securities lawyers, accountants, underwriters, and dealers will act responsibly . . .” according to the Chairman. He gave two examples to illustrate the point. “First, and most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an ‘ICO,’ which sounds pretty close to an ‘IPO.’ On the other hand, those lawyers claim the products are not securities . . .” and investors do not receive the protections of the securities laws.
“Second are ICOs where the lawyers appear to have taken a step back from the key issues – including whether the ‘coin’ is a security and whether the offering qualifies for an exemption from registration – even in circumstances where registration would likely be warranted . . . [and say well] ‘it depends’ equivocal advice, rather than counseling their clients . . .” that the product is likely a security Mr. Clayton noted. Accordingly, the SEC “is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering,” according to the Chairman. To underscore his point the Chairman closed stating “I cannot overstate the importance of the role of those who provide legal advice and other professional services in our markets.”
The issues posed by virtual currencies are new. The hype concerning the offerings of coins and blockchain technology is new. And the use of social media to reach scores of investors quickly is new. In many instances, however, the solution to investor losses is not. It is the gatekeepers. While Chairman Clayton and his approach to SEC enforcement may be new, his solution traces at least to the earliest days of the Division of Enforcement. Since at least the creation of the Division in the early 1970s there has been an emphasis on market professionals, securities lawyers and accountants to step up to their professional obligations to help ensure the integrity of the markets and the products sold to investors. These professionals are frequently the keys to bringing investment products to investors and the markets – the gatekeepers. By invoking the gatekeeper theory Chairman Clayton has firmly anchored the new Enforcement Program in one of the long held and best traditions of the Commission.