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Pay them no mind.
Late last month, the Blockchain Association released a paper and Fortune op-ed outlining a legal case for Securities and Exchange Commission (SEC) Chair Gary Gensler to recuse himself from the agency’s enforcement actions. It’s a nonsensical demand based on a curious reading of the Wells process, which guides most SEC enforcement actions. This sort of half-baked argument should have no place in serious media outlets. It’s a public disservice when editors platform industry voices that simply aim to undermine much needed corporate enforcement.
The Wells Process
Before digging into the Blockchain Association’s bizarre request, let’s break down the Wells Process. After SEC staff have fully completed an investigation into potential wrongdoing and concluded that it is reasonable to make recommendations for enforcement actions to the agency’s commissioners, they inform prospective defendants and provide them an opportunity to state their defense. This communication is called a Wells Notice.
As noted in the SEC enforcement manual, the Wells Notice “informs the person the staff has made a preliminary determination to recommend that the Commission file an action or institute a proceeding against them; identifies the securities law violations that the staff has preliminarily determined to include in the recommendation; and provides notice that the person may make a submission to the Division and the Commission concerning the proposed recommendation.”
Staff must first receive approval from an Associate or Regional Director before issuing a Wells notice. Directors also determine whether staff can recommend an enforcement action without the issuance of a notice. After reviewing a Wells notice recipient’s submission, SEC staff may reject the submission under limited circumstances, which are specified in the agency’s enforcement manual. Accepted submissions are provided to the Commissioners alongside staff’s recommendation for enforcement against the Wells notice recipient.
Although the Wells process allows parties under investigation to provide a written defense, former SEC regional enforcement head Marc Fagel notes that it comes with “significant risk.” To explain this point, Fagel writes that “the enforcement staff handling the investigation is unlikely to change course by the time they have decided to send the Wells notice, and it is unclear how much impact, if any, the submission will have on the Commissioners, who rarely second-guess enforcement staff recommendations.”
It’s clear that the SEC’s enforcement process is a comprehensive team effort that takes into account analyses by lawyers, economists and public policy specialists at the staff and director levels.
The Blockchain Association’s Argument
The Blockchain Association is a trade association which represents over 100 digital asset firms including Digital Currency Group, Genesis, Kraken, Ripple and more. The group has committed to creating a narrative where crypto-related enforcement actions are simply a result of Gensler’s supposed anti-crypto bias.
To illustrate this point, the crypto lobbying group contends that the Wells process is an adjudicatory exercise in which agency commissioners function as judges. They further argue that since Gensler has made statements alluding to the fact most crypto assets are securities since they fit the parameters of the Howey test (the legal test used to determine whether a transaction qualifies as a security), Gensler has already prejudged every potential crypto enforcement case and, as such, must recuse himself.
It’s an argument that completely ignores the fact-finding missions of the Commission’s staff to place a target on Gensler’s back. It’s highly likely that staff is spending a non-trivial amount of time building enforcement cases to present to the Commission. If crypto’s premier lobbying group thinks cases developed by government attorneys who are typically hesitant to take on corporations are without merit, they should state that plainly and clearly.
Additionally, the Blockchain Association acts as if Gensler is alone in voting for these enforcement actions when in fact, there has to be a majority for the Commission to proceed. Lastly, as administrative law expert Todd Phillips notes, the lobbying group’s novel assessment of the law is quite simply wrong. Phillips contends that Wells is a prosecutorial rather than an adjudicatory process, so it does make sense for staff and commissioners to have thoughts on the cases they bring forward.
Why we should pay them no mind
The reason is straightforward. The crypto lobbying group’s goals are obvious: bully Gensler into submission and secure a deadlocked commission, which would forestall any potential enforcement action in the crypto space. The SEC is headed by a bipartisan five-member Commission. Democrats currently have a 3-2 majority.
It’s the same tactic Big Tech has employed against the administration’s top antitrust regulators. Google pushed for Assistant Attorney General Jonathan Kanter to recuse himself from the Department of Justice’s case against the search giant, citing his work as a private-sector attorney advocating for robust enforcement of antitrust law. In a similar vein, Meta has sought to exclude Federal Trade Commission Chair Lina Khan’s input from her agency’s investigations into the company’s anticompetitive practices.
Just last month, FTC ethics official Lorielle Pankey, working under the aegis of corporate-aligned former FTC Commissioner Christine Wilson, recommended Khan recuse herself from the agency’s case against Meta. Pankey didn’t identify any particular conflict of interest; she simply claimed that Khan’s involvement didn’t pass her own personal sniff test. Longstanding Lina Khan haters jumped at the opportunity to once again attack Khan only to be rebuffed by the revelation that Pankey owns somewhere between $15,000 and $50,000 in Meta stock. It’s deeply ironic that Pankey felt comfortable administering Meta-related ethics while holding a significant financial stake in the company, which in all likelihood is a real conflict of interest.
Corporations and their mouthpieces cannot even properly feign serious interest in a strong ethical standard for government officials. I mean, just look at the way the crypto and tech industries have embraced the revolving door. Moreover, note the absence of these tech corporations’ lobbyists from discussions and proposals that actually seek to enhance the federal government’s weak ethics law. These calls for recusal are not about ethics; they are a corporate ploy to silence the public’s defenders.
And they rely on two spurious lines of reasoning: the industry belief that regulators who refuse to grant corporations free rein to break established laws are biased; and policy experts who have thought deeply about an issue area prior to government service or even while serving in government should never engage in regulating the issue.
Now imagine where this leaves us. We can use SEC commissioner Hester Peirce as an example. Affectionately nicknamed “crypto Mom” due to her fondness for the industry, Peirce has sharply criticized her fellow commissioners’ decisions to crack down on crypto’s disdain for the rule of law. Considering that the courts have almost entirely sided with the SEC’s characterizations of the crypto industry’s violations of securities laws on several occasions now, it’s reasonable to assume that Peirce’s consistent dissents and critiques constitute a pro-crypto bias. You don’t have to be a rocket scientist to figure out why the crypto industry doesn’t think ‘bias’ in their favor is a similar cause for concern. (To be clear, we don’t think Peirce should recuse herself from future enforcement actions absent any actual financial or personal conflicts of interest.)
If we were to agree to the industry’s demand that policy experts should be precluded from regulating issues they have spent significant amounts of time developing expertise in, we would be setting a precedent that severely undermines any kind of public-minded enforcement. In fact, banning experts such as Gensler would leave the public with a pool of potential regulators who are either already corporate-aligned or unqualified to adequately opine on pressing issues. That would be incredibly troubling and there’s no reason Gensler should accede to the industry’s demand. It is totally unserious, especially when you consider the fact that the industry rejoiced when Gensler was initially hired because they wrongly believed his knowledge would translate to a pro-crypto SEC.
The job of the SEC chair, commissioners and staff is to dutifully enforce the law. If industry players believe the agency is failing to appropriately do that, they are free to raise a challenge in the courts. Indeed, many have gone down this path. Relying on silly personal attacks and bizarre interpretations of administrative law to secure policy goals and undermine the public’s trust in the federal government is a real waste of everyone’s time. We hope the media denies Gensler’s critics the oxygen they have granted industry aligned figures against Khan and Kanter.
PHOTO CREDIT: “CMI 101: Demystifying Derivatives with CFTC Chairman Gary Gensler” by Third Way is licensed under CC BY-NC-ND 2.0