On November 4, 2021, U.S. Securities and Exchange Commission (“SEC”) Chairman Gary Gensler spoke at the Securities Enforcement Forum. While Gensler spoke on a variety of topics related to the agency’s enforcement mission, his remarks on cryptocurrencies, particularly as they relate to attorneys, are of particular importance given the rise in popularity cryptocurrencies have enjoyed in recent years. Gensler previously served as Chairman of the Commodity Futures Trading Commission (“CFTC”) under President Barack Obama from 2009 to 2014 and was as an aggressive enforcer of the derivatives markets under the CFTC’s purview.
At the conference, Gensler urged attorneys to help register cryptocurrency companies with the SEC instead of advising them on how to circumvent and skirt U.S. securities laws. Gensler’s comments were spoken as part of a broader set of prepared remarks during which he warned attorneys not to help “cover up” client deficiencies. As to those regulatory attorneys who counsel clients in the growing cryptocurrency field, Gensler urged attorneys to “come in, get them to register,” instead of crafting potential ways to avoid detection, adding, “I would like this field to be inside the investor protection perimeter, which I think both the laws and the rules are clear on,” and “I’d also like to ask this profession, people listening, to remember you have a greater responsibility than helping some folks sort of take money out of the public’s pocket and try to avoid being underneath these broad laws.” Gensler and the SEC have previously indicated that regulators expect to step up enforcement against cryptocurrency trading and lending platforms over concerns that many operate outside the regulated field of securities laws despite trading tokens that qualify as securities. Depending on the particular cryptocurrency or token and how it is used, it is not always clear whether that cryptocurrency can be considered a “security” and thus regulated by the SEC, leaving ambiguity amongst traders, lawyers, and regulators. However, for many in the cryptocurrency world, this view is an anathema to the ethos and spirit of cryptocurrencies—many of which rose in popularity because of their anonymous, decentralized, and unregulated nature.
Gensler reminded attorneys of the “Howey Test,” articulated by the Supreme Court in Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946), which has been used to determine what constitutes an “investment contract” and thus subject to U.S. securities laws: “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” Id. at 298-99. Gensler opined: “Think about that Supreme Court test, the Howey test, then get [crypto clients] to come in, get them to register…Don’t just advise them, ‘Well, if you set up in this overseas country and set up a foundation here, you can maybe arbitrage the rules for a few months.’” For example, overseas incorporation and maintenance of servers of cryptocurrency companies and exchanges, outside the reach of U.S. regulators, has been a popular go-around for companies seeking to avoid domestic regulation.
Gensler also reminded attorneys that they are often the “first line of defense” in determining if a client has crossed the line into violating securities laws, imploring attorneys, “not to just help paper over cracks, not just to help sort of cover up your client in the ambiguous sort of reading of something when it’s across the line and the spirit of the law.” However, Gensler’s criticism of those attorneys goes to the heart of what attorneys as ‘counselors of law’ do for their clients—keeping them legal, if only to stay within an inch of crossing over the thin line of illegality. But when that line is grey or ambiguous, attorneys keeping their clients legal becomes a much harder line to toe.
When it comes to compliance, Gensler reiterated that the SEC would be taking a much tougher stance on corporate crime and that admissions would serve as a key tool in preventing future corporate crime. “When it comes to accountability, few acts rival admissions of misconduct by wrongdoers,” Gensler said. However, “[w]hen appropriate and when the [context] warrants it, we may seek admissions in certain cases where heightened accountability and acceptance of responsibility are in the public interest.”
Gensler also seconded recent views expressed by U.S. Department of Justice Deputy Attorney General Lisa Monaco as to the importance of cooperation in striking settlements with regulators. Recently Monaco had said the Justice Department would be focusing more on companies’ prior rap sheets and enhancing efforts to bring guilty individuals to justice alongside their companies. Monaco reiterated the importance of self-reporting and cooperation with the government, as the Justice Department would no longer be giving a “free pass” through often-sought deferred prosecution agreements—which are agreements that allow companies to avert formal charges by paying fines and strengthening compliance. This appears to be a priority shift under the Biden administration, with an apparent renewed interface between civil regulators and criminal authorities seeking settlements beyond just a corporate slap on the wrist.
Speaking about the policy shifts within the Justice Department, Gensler said that “[t]hese changes are broadly consistent with my view of how to handle corporate offenders…If you mess up — people do mess up sometimes — please come talk to us. All things being equal, if you work cooperatively to bring wrongdoing to light, you fare better than if you try to mask it.”
Gensler also backed up statements by the SEC’s new Director of Enforcement Gurbir Grewal, who previously served as New Jersey Attorney General, when he said last month said that the agency would put more emphasis on getting defendants to actually admit wrongdoing as part of their settlements.
Ultimately, Gensler’s comments at the Securities Enforcement Forum indicate a tougher, more hands-on SEC, who has made clear it will seek out bad actors—and their attorneys—in the crypto space, while also offering a softer tone encouraging self-reporting and admissions of wrongdoing. Time will tell if this rejuvenated approach will draw cryptocurrency companies further into the orbit of regulation by the SEC or rather push them farther away into the underground, unregulated marketplace as they seek to avoid SEC compliance.
Cryptocurrency investor litigation is a burgeoning new field of law. Lowey Dannenberg is well equipped to investigate and bring litigation on behalf of affected investors. If you wish to speak to a member of Lowey Dannenberg’s cryptocurrency or securities practice groups please feel free to reach out Christian Levis (clevis@lowey.com), Andrea Farah (afarah@lowey.com), or Anthony M. Christina (achristina@lowey.com).