Lawmakers talk SEC enforcement in House hearing

Lawmakers and experts on May 7 examined the Securities and Exchange Commission’s enforcement practices with a bulk of the discussion centered around cryptocurrency.

“Our capital markets benefit from an enforcement division that is equipped with the tools to detect, punish and prevent fraud,” said Rep. Ann Wagner, R-Mo., chair of the House Financial Services Capital Markets Subcommittee, at the hearing. “But the division’s current trend of regulation by enforcement harms market participants specifically by implementing policy changes that are not subject to the Administrative Procedure Act’s notice and comment requirements.”

Wagner and other Republicans on the subcommittee criticized the SEC for issuing penalties against crypto firms without first promulgating regulations.

SEC Chair Gary Gensler, who has often criticized the crypto space during his tenure, has said there are already sufficient crypto rules in place under laws governing securities, commodities, money laundering and sanctions.

Rep. Brad Sherman, Calif., the top Democrat on the subcommittee, said he’d like to see crypto regulation from SEC, but the main opposition is the crypto industry itself not wanting to adhere to tougher standards.

“The crypto industry will tell us that Sam Bankman-Fried is a single snake in a garden of crypto Eden when in fact crypto is a garden of snakes,” Sherman said.

One of the witnesses before the subcommittee, John Reed Stark, president of John Reed Stark Consulting and former SEC enforcement division staffer, said the crypto industry’s claim of SEC regulation by enforcement is simply an effort to operate free from the constraints that apply to traditional financial institutions.

“By enforcing the effective, proven and evolving U.S. securities law framework, be it in the crypto-verse or elsewhere, the SEC has not gone rogue, but is instead simply doing its job,” Stark said.

The SEC in recent years has levied many enforcement actions against crypto firms and platforms. Notably, in June the SEC sued crypto exchange Coinbase alleging that the firm was acting as an unregistered broker and exchange. In March, a federal judge ruled that the SEC’s lawsuit can proceed.

Separately, some witnesses, like Andrew N. Vollmer, a senior affiliated scholar with the Mercatus Center at George Mason University and former SEC deputy general counsel, said that current SEC statutes do not set a workable standard for determining penalty amounts, and neither the courts nor the SEC interpret the law to set consistent and predictable legal standards. Also, the penalties the SEC seek are often excessive, unpredictable, inconsistent, and disproportionate to a reasonable assessment of the severity of a violation.

Vollmer called on Congress to fix both those “defects.”

Overall, the SEC filed more than 780 enforcement actions and obtained judgments and orders totaling $5 billion in fiscal year 2023.