SEC commissioner Crenshaw rips the agency’s ‘regulatory Jenga’

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Caroline Crenshaw, the sole Democratic commissioner left on the US Securities and Exchange Commission, is probably leaving at the end of the year. But she seems determined to go out fighting.

Her speech at the “SEC Speaks” conference yesterday couldn’t be any more different from the crowing comments from Republicans Hester Peirce Mark Uyeda and newly confirmed chair Paul Atkins.

While Uyeda argued that the SEC had “strayed mightily from its historical path”, Pierce celebrated a “new paradigm” for crypto and Atkins promised that the SEC would be “promoting, rather than stifling, innovation”, Crenshaw pretty much went postal.

The US regulatory architecture is being dismantled piece by piece like a Jenga tower, she argued, while the SEC blithely ignores “significant risks” building up in areas like crypto:

This is a dangerous game. We are pulling apart our own regulatory foundation — block by block, case by case, and rule by rule. It feels all too familiar to those of who have lived through 2008. And this approach comes in a moment when the agency has just experienced an unprecedented blow to our staff. If we continue down this path, eventually, the carefully constructed tower of regulatory blocks will tumble — leaving the door open to the same types of misconduct that we have spent decades eradicating.

There are several separate “foundational” Jenga pieces that Crenshaw thinks are now being casually yanked out of the structure with little regard for its integrity.

The commissioner has already dissented very loudly with the SEC’s decision to settle with Ripple, and sees that as a symptom of a new unwillingness by the agency to “faithfully and even-handedly enforce even laws that have been on the books for decades” — in practice thumbing its nose at the courts:

Our agency was criticised for purportedly engaging in ‘regulation by enforcement,’ but this was a total misnomer. None of our litigations tried to create laws or regulate in a new way. These actions applied decades-old precedent to address violations of the existing securities laws. This is what our mandate is and always has been. The real complaint was not that the Commission wasn’t applying the facts to the law, it was that the crypto industry didn’t like the law and wanted new rules. And we’ve now shut down our enforcement programme, abandoning our duty to enforce existing law, in anticipation of creating new crypto-friendly rules. This is properly criticised as regulation by non-enforcement.

Given that, I am deeply troubled by the Commission’s abandonment of swaths of our enforcement programme. As I have said before, these cases were thoroughly investigated by the staff and considered by a prior Commission. Some even involve court orders that we now toss aside with no respect for the court’s decision.

The second Jenga piece Crenshaw highlighted was the refashioned SEC’s willingness to dilute or de facto rescind previous rules with seemingly no concern for “due consideration of the costs, benefits, or public feedback”. As a result, even “final” rules passed in previous SEC eras now don’t feel final.

SEC rules are often tweaked, but it now happens before they’ve even gone into effect. This doesn’t exactly encourage the finance industry to treat SEC rules with a lot of deference, undermining the agency’s authority and credibility.

However, according to Crenshaw, the biggest Jenga piece is the exodus of SEC staff. She estimates that nearly 15 per cent of them have exited recently from a combination of retirement, resignations or “simply the spectre of random firings”.

The SEC is, and has been, comprised of dedicated public servants who are responsible for implementing and upholding a careful mosaic of laws, which have matured gradually and deliberately over decades. Their knowledge base reflects a regulatory regime that is highly technical, and their expertise has been sharpened by lessons learned from crises past. The industry’s success, in many ways, depends upon the agency maintaining a deep well of institutional knowledge.

Our well has taken a substantial and sudden hit.

The problem is that all this is happening at a time when markets are becoming more complex, more volatile and more opaque, and the SEC is “ignoring significant risks”, according to Crenshaw.

The Democratic commissioner’s anti-crypto bona fides are undisputed so this is naturally one of her main concerns, but she also highlights the madcap rush to sell private assets at extraordinary fees in untested structures to ordinary investors:

Of course, in Jenga, the tower remains standing when you pull out a block or two here and there. But, how many blocks can you pull before the tower gives way? When it comes to the stability of our markets, how far are we willing to take our dangerous game? Who would ultimately be the loser when the foundation gives way? I worry, as we all should, that those losing the most won’t be the influential, monied interests; rather, it will be the Main Street Americans — the investors and small business owners who can least afford the greatest loss.

It’s probably no surprise to longtime Alphaville readers that we are sympathetic to her stance on crypto. Our expectations for the CFTC are sub-zero, but seeing America’s premier financial watchdog roll out the red carpet for something whose only popular use cases so far are criminality and gambling is a little worrisome.

But we’re sure that the Trump administration will appoint sensible Democratic commissioners to replace Crenshaw and the already-departed Jaime Lizarraga. Right? Right?

Further reading:
— The loyal opposition inside the SEC (NYT)