Wednesday, November 06, 2019

Peirce favors digital assets safe harbor, suggests improvements to enforcement program

By John Filar Atwood

SEC Commissioner Hester Peirce plans to propose that the Commission create a safe harbor for entities that want to develop digital asset networks. In a keynote address at Practising Law Institute’s conference on securities regulation, Peirce said she envisions a two- to three-year period during which a token issuer would be allowed to develop a network without the force of laws bearing down on them.

Peirce lamented that there is no workable regulatory framework for crypto assets. The SEC should not be dictating whether a digital asset network will be a success because it does not have a framework in place, she said.

She acknowledged that the agency has issued crypto asset guidance, and there have been some instructive enforcement actions. The problem is that they do not offer a way forward for people that want to operate in the digital asset space, she said. An entity that has raised private funds and wants to launch a network cannot issue tokens for fear that they might be securities, she added.

Under Peirce’s proposal, entities that want to start a digital asset network would have to disclose certain basic information, such as a description of the tokens, the number of tokens they plan to issue, and whether the principals have a criminal background. After that, she believes people should be able to transfer tokens back and forth. If the network is fully functional at the end of the initial few years, she proposes that it be allowed to continue to operate without being subject to the federal securities laws.

Peirce intends to propose a non-exclusive safe harbor that network operators do not have to use it they do not want to. She said that she plans to present her proposal to the Commission "soon," but does not know whether it will get the support of the other commissioners.

Enforcement improvements. Peirce also discussed the SEC’s enforcement program and offered four suggestions for how to improve it. First, she said that to strengthen the program the Commission should look for rules that need to be written, rewritten or adjusted.

She cited the example of the advertising rule, which was adopted in 1961, but is scheduled to be updated with proposals released at today’s SEC open meeting. Under the advertising rule, the Commission brought an enforcement action against a radio show host who went off script and expressed his own positive opinion of an investment adviser. Peirce questioned whether the agency should be spending its limited enforcement resources to stop harmless testimonials.

A second recommendation to improve the enforcement program offered by Peirce was to resolve certain problems through the Office of Compliance and Inspections examination process instead of through enforcement referrals. It could assist the ultimate goal of getting better protection for investors, she noted. She admitted that one drawback of this proposal is a lack of transparency since the resolution of the matter might not become widely known.

Peirce also suggested that the SEC could improve the enforcement program by being more sensitive to the far-reaching implications of the actions it takes. Specifically, she does not believe that the consolidated audit trail (CAT) may not be good for investors.

CAT criticism. In her view, the CAT would provide too much information and data to the government. It is a privacy issue, she said, adding that too much gathered information could assist cyber criminals. She noted that in order to be effective, the SEC has to gather some data, but she would rather respect the privacy of investors.

Her final recommendation was for the Commission to acknowledge the valuable role of self-regulation. She clarified that she was not talking about SROs, which she views as quasi-governmental organizations. Peirce would like to see the industry regulate itself where individuals hold colleagues and customers accountable. The industry needs to develop an internal sense of right and wrong, she stated. This is not possible if the SEC micromanages every enforcement issue, she concluded.