By Rodney F. Tonkovic, J.D.
The North American Securities Administrator Association has written Congress in support of its efforts to uncover what led to the FTX bankruptcy. Addressed to the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, the letter urges the Committee and Congress to take the "right lessons" from FTX's collapse. To that end, the letter, sent on the date of a Committee hearing into the matter, argues for the need to: (1) maintain strong state regulatory authority, (2) strengthen the disclosures and corporate governance of large private companies, and (3) strengthen coordination among regulators.
State authority. First, the letter recommends that Congress preserve the authority of state securities regulators. State regulators have a record of protection and education concerning digital assets, and NASAA itself began warning investors about digital asset scams a decade ago. Operation Cryptosweep, a task force of U.S. and Canadian NASAA members has produced significant enforcement results, said state regulators. The FTX implosion serves as a reminder that state securities regulators have long investigated alleged violations of the law in the digital assets space, and the extent of the harm in that space would be worse if the federal government alone had authority to act.
Market oversight. The letter next urges Congress to restore additional oversight and transparency to the private securities markets. NASAA believes that the FTX matter " should remind all of us of the importance of ensuring that no private company can hide fraud or other misconduct from legislators, regulators, or investors." The law governing private securities disclosures is weak, however, as are the laws governing periodic reporting by large private companies.
In FTX's case, NASAA says, stronger disclosure and corporate governance requirements in the private securities markets would have made it easier to detect or stop the alleged fraud earlier. Under current law, FTX only had to disclose basic information, and more timely and fulsome disclosure could have tipped off market watchers about gaps in FTX's corporate governance earlier. Plus, FTX was not required to submit Exchange Act reports such as a Form 10-K. If that were required, the government and other market watchers would have had access to its financial statements and a senior executive at FTX would have had to be identified to serve as CFO.
Regulator coordination. As a state regulator, NASAA works with the SEC, CFTC, and other federal agencies. Despite this existing coordination, NASAA believes that one lesson of FTX is to find new and better ways to work together. Currently, the processes for regulators to exchange information provided by market participants is limited, and some of these participants can take advantage of these challenges to secure better outcomes for themselves. The letter invites Congress to improve communications by passing legislation requiring federal agencies to invite state regulators to participate in any federal advisory council or similar working group convened to examine some aspect of the securities regulatory framework.