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SEC Investor Advisory Committee Meeting

Securities and Exchange Commission

Investor Advisory Committee Meeting

Thursday, December 2, 2021

Panel Discussion Regarding Crypto and Digital Assets: Helping to Ensure Investor Protection and Market Integrity in the Face of New Technologies

Panel 1: Regulatory, Academic and Investor Protection Perspectives:
Moderator: Ted Daniels, Founder and President, Society for Financial Education and Professional Development

Panelists

  • Aaron Wright, Founder/Director, Tech Startup Clinic
  • Angela Dalton, Founder and CEO, Signum Growth Capital
  • Ali Emdad, Founding Director of the Center for the Study of Blockchain and Financial Technology
  • Timothy Massad, Former Chairman of the Commodity Futures Trading Commission (CFTC)
  • Tyrone Ross, CEO, Onramp Invest

Wright provided an overview of blockchain technology and its challenges and unique characteristics, setting the table for the discussion. He also explained smart contracts and emerging blockchain technologies and noted higher degrees of security and potentially privacy as some of the potential benefits. Wright also explained crypto risks including high barriers to entry, use of leverage, runs on liquidity, entropy and complexity, regulatory questions, and growing pains.

Massad’s opening statement discussed ensuring investor protection and market integrity with digital assets, stating that digital assets do not fit neatly into a regulatory framework and that enforcement actions are critical but not sufficient. He also explained the risks and challenges stablecoins pose and what happens if we wait to see how Congress will act. He explained that the Securities and Exchange Commission (SEC) could use their money market mutual fund (MMMF) exemptive authority creatively, adding that the SEC can create a path to new regulatory framework. He then discussed regulating crypto exchanges and how the crypto cash market’s lack of regulation results in crypto exchanges not being subject to investor protection standards. Massad also suggested that the SEC could create standards for the cash market indirectly and condition approval of a bitcoin exchange traded fund (ETF) on prices being derived from exchanges that meet SEC-prescribed standards. He then discussed regulating decentralized finance (DeFi), citing their dramatic growth, stablecoins as a driver of growth, and that DeFi should not be free from regulation. He continued that enforcement actions will be critical but may need to be supplemented and suggested that the SEC should consider facilitating the creation of a new self-regulatory organization (SRO) that can develop standards. Massad concluded by adding that the SEC and CFTC could create a common group or parallel groups.

Emdad discussed the role of the SEC and Historically Black Colleges and Universities (HBCU) in informing and educating investors, specifically efforts at Morgan State University, and Ross discussed investor protection and spoke on behalf of the financial services industry about unified guidance to improve services and making sure the crypto asset economy can thrive. He added that protecting investors requires financial education from kindergarten on, with children’s funds that follow them throughout life. He continued that a financial education should be required to graduate from high school and that investor protection requires a faster payments system. He also said that the financial services industry spends too much on marketing and not enough on education and that there need to be changes to accredited investor laws. He closed by stating that SEC approved products should have a portion of funds dedicated to financial education.

Question & Answer
Innovation and Regulation
J.W. Verret asserted that firms do not trust the SEC not to target them if the firm comes to the SEC with questions and that the SEC is always behind the regulatory curve. He then asked any of the panelists to offer more ideas about what the SEC should include in an exemptive release. Massad said the SEC is always trying to catch up with innovation, and that cannot be cured. He had no ideas to suggest. Dalton said there is an openness to learn about new technologies and that the new technologies remove trust from the equation. Wright said there are points of control in lots of these systems and questioned the merits of additional disclosures.

Regulating DAOs
Brian Hellmer asked Dalton about her suggestions and opportunities as it relates to the decentralized autonomous organizations (DAO) and if bringing them under the existing regulatory framework would accomplish those goals. Dalton said new laws and structures would take way too much time.

Panel 2: Industry, Trading & Policy Perspectives:
Moderator: Cambria Allen-Ratzlaff, Corporate Governance Director, UAW Retiree Medical Benefits Trust

Panelists

  • Alexis Goldstein, Director, Financial Policy, Open Markets Institute
  • Kristin Smith, Executive Director, The Blockchain Association
  • Sydney Schaub, Chief Legal Officer, General Counsel and Corporate Secretary, Gemini

In her opening statement, Smith discussed reasons to invest in new crypto technologies and not treat all digital assets as digital securities. She stated that treating them as securities would act as a ban on trading them and end our nation’s crypto dominance. She closed by discussing unique features of crypto and advocated for a strong policy framework and the need to nurture our budding crypto ecosystem.

Goldstein’s statement explained the gap between equity market and crypto market investor protection standards and gave examples of past issues in equity markets that we are seeing exacerbated in crypto markets, like concentration concerns. She added that you often need a high amount of money to make money through DeFi and used that dynamic as an example to demonstrate asymmetries of power because the fees to execute the transaction could be more than the return. She concluded that no one knows the size of the DeFi marketplace and that crypto investors deserve the same protections as those in equity markets.

Schaub stated that platforms need to have protections against hacking and illicit financing and sufficient capital for governance and operations. She also discussed the need to give appropriate information to investors in digital assets that are not securities so investors can make informed decisions. Schaub concluded that there is currently no market standard, and regulators and industry should collaborate to tailor a legal framework for crypto assets.

Question and Answer
Developing Regulation
Verret asked how an aggressive approach to Howey is shortsighted and how we can keep negotiation going if the SEC is willing to negotiate in good faith. Goldstein said there is no reason that crypto industry participants would not want to register since they have adequate profit margins and, in turn, posed the additional question of which protections would be appropriate for the industry. Schaub said the industry is willing to support whatever regime springs up, and that the industry agrees there should be tailored information available to investors. Smith said investors need to also know information about the network, which is why the Blockchain Association has liked the work that Commissioner Hester Pierce has done on the safe harbor. She also discussed the commercial challenges of subjecting an exchange to certain requirements and said Department of Financial Services (DFS) regulated trusts are required to have certain protections in place. She also mentioned the challenge of harmonizing disparate regulatory requirements to benefit customers.

Hellmer asked if there is similarity between trading platforms and exchanges in other securities markets so that the regulatory framework in those areas could be easily applied to crypto. Goldstein said that some of those frameworks can be tailored to crypto and that the crypto market is not different enough to require an entirely new regulatory regime. Hellmer also asked if it is easier for the SEC to move forward with one area of discussion than another to create faster change for the investor community. Goldstein said there is no magic bullet and that the SEC will have to move forward on multiple tracks.

Panel Discussion Regarding the SEC’s Potential Role in Addressing Elder Financial Abuse Issues
Moderator: Lori Lucas

Panelists:

  • Paul Greenwood, former Deputy District Attorney and Head of Elder Abuse Team, San Diego County District Attorney’s Office
  • Ronald Long, Head, Aging Client Services Center of Excellence, Wells Fargo
  • Christine Lazaro, Past President of the Public Investors Arbitration Bar Association (PIABA)
  • Kristen Standifer, Chair, NASAA’s Committee on Senior Issues and Diminished Capacity
  • Kathy Stokes, Director, Fraud Prevention Programs, AARP

Greenwood stated that the most effective solution to combat elder financial abuse is for professional agencies and financial institutions to build out and develop teams that will focus on this crime. He discounted the misconceptions that elders make poor witnesses in the court room and that these crimes are hard to prosecute. He said many people run away from these cases when the term “securities fraud” is being used and said it should be called theft.

Long said a big issue is the lack of good data on what is happening to elder investors as it relates to financial abuse. He said it would be ideal to uniformly have a way for financial institutions to submit their data on potential elder financial abuse to allow researchers to “mine” the data while safeguarding personally identifiable information (PII). Long said the Senior Safe Act has been very effective for reporting, but there needs to be a system to advise other firms of a client’s current or likely victimization. He said the industry and society as a whole need to start addressing diminished capacity, meaning some individuals can unintentionally self-harm as a result of their diminished capacity to protect themselves.

Lazaro focused on financial advisors who are not acting in their clients’ best interest, saying these financial advisors will recommend products that give them the most compensation in return. Lazaro also touched on arbitration and said elders just simply need to get paid because they often do not end up getting their money. She concluded that more needs to be done to provide resources to protect elder investors who have been wronged and that investor advocacy clinics need more funding to be able to open in other locations.

Standifer’s recommendations for the Committee were to (1) increase employee training, (2) encourage the identification of a trusted third-party contact on financial accounts, (3) increase regulators’ ability to report and access necessary information on financial exploitation, and (4) support legislation that will allow regulators to work more collaboratively. Standifer noted the Empowering States to Protect Seniors from Bad Actors Act is currently pending in Congress, and she expressed hope that it gets passed.

Question & Answer
Trusted Contact
Lucas asked what can be done to help in the short term for investors. Standifer said promoting use of a trusted contact. Long said to shift the wording of trusted contacts because he worries the word trust deters elder investors.

Education Efforts
Mirabile asked how the SEC can best spend their education efforts. Long said there has been a hesitancy to partner with the private sector. Lazaro said it is important to get information out through trusted individuals the client is doing business with and that oversight and regulation on education materials can help ensure the information is full and complete.

 

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.