Important Notes on Gurbir Grewal’s Recent Speech

Gurbir Grewal, Director of the SEC's Division of Enforcement, recently spoke at the William & Mary Business Law Review symposium, the director’s alma mater. Grewal emphasized the importance of public trust in financial institutions, the adaptability of securities laws, and the urgent need to protect investors, especially in the evolving crypto/digital assets markets. 

Adapting Securities Laws to Modern Challenges

Director Grewal spoke on the theme of the symposium, "Regulating Finance in a Changing Administrative State." He asserted that the principles underlying securities laws are still relevant today, despite technological advancements, and claimed that he disagreed with many of the ideas discussed at the symposium. He argued against the notion that new rules are necessary for emerging financial products like crypto assets because the existing framework of securities laws is sufficiently flexible to provide fitting solutions for modern issues.

Instead, historical data supports the contention that existing laws may be applied to ever-evolving investment asset categories.  Specifically, the Securities Act of 1933 and the Securities Exchange Act of 1934 were passed ninety years ago to protect investors and maintain market integrity with respect to any asset class identified as a “security”. These laws were designed to be broad and adaptable enough to cover problems outside the technological scope of the time, as demonstrated by the Supreme Court's 1946 Howey decision and other more recent cases applying the age-old definition of security to new and evolving products. 

In fact, the SEC's enforcement actions against unregistered and fraudulent crypto offerings, including Ponzi schemes, affinity frauds, and scams masquerading as decentralized finance (DeFi) products resemble schemes that have been challenged for decades.  The SEC has taken over 100 crypto-related enforcement actions in the past decade, consistently applying little more than the Howey test to demonstrate the characteristics of the securities at issue. Courts have largely agreed with the SEC's stance, finding many cryptocurrencies and digital assets as securities subject to the same rules as common stock and notes.

Balancing Innovation and Compliance; Public Trust

During his speech, Director Grewal stressed that compliance with securities laws is not incompatible with innovation. As an example, he highlighted the importance of mandatory disclosures for informed investment decisions and the need for separate entities to handle different financial functions to avoid conflicts of interest. 

He also noted that public trust in financial markets is paramount, especially among minority and marginalized communities. To address this, the SEC's Enforcement Division follows a strategy focused on robust enforcement, seeking adequate penalties, and promoting a culture of compliance. The SEC must also continue to guard against "predatory inclusion" tactics in the crypto industry, where marginalized communities are targeted with false promises of financial upliftment. Despite the downturn in crypto markets, distrust in traditional finance still drives some investors toward crypto, exacerbating their financial woes.

Conclusion

Director Grewal concluded his speech by reiterating the importance of looking beyond labels and ensuring compliance with securities laws, regardless of the technology involved. His speech is yet another example of the SEC’s policy to police crypto and digital asset offerings as securities under existing laws, which require registration or applicable exemption, and comprehensive disclosure and licensure of professionals dealing in such investment products.

For broker-dealers and registered investment advisers seeking to assist customers in holding digital assets, such as cryptocurrencies and Non-fungible Tokens (NFTs), firms must be cognizant of the possibility that these assets constitute unregistered securities, which will be policed like any other unregistered security offering and holding.

Visit the resources section of our website for recent updates on SEC enforcement actions involving cryptocurrencies and digital assets.