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SEC Unveils Strategic Plan With New Focus on Technology Latham & Watkins LLP

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The plan directs officials to develop a robust regulatory framework to prevent market fraud as public comments from SEC officials put technological advances high on the agenda.

On August 25, 2022, the Securities and Exchange Commission (SEC) released its draft Strategic Plan (Plan) for the fiscal years 2022-2026. The plan, according to SEC Chairman Gary Gensler, focuses on his three goals that further his SEC mission to protect investors. Maintain fair, orderly and efficient markets. Promotes capital formation. The plan is open for public comment until September 29, 2022.

The goals of the plan are to:

  1. Protect retail investors from fraud, manipulation and fraud

While investor protection remains a core value of the SEC today, technological innovation remains essential to the SEC’s considerations.

  • The SEC treats all financial activities under consistent and efficient regulation and enforcement, “regardless of technology or business model.”
  • The SEC will continue to focus on accountability and deterring bad actors through its enforcement programs.
  • The SEC will continue to develop and implement faster and more comprehensive ways to use and analyze data to better prevent, detect, and enforce improper conduct.
  • The SEC will continue to build its systemic risk identification capabilities to ensure the maintenance of orderly markets.

Gensler echoed this framework in a recent speech when he said that investor protection remains important “regardless of the underlying technology.”

  1. Implementing a regulatory framework that evolves with innovation

The SEC will focus its agenda on developing a regulatory framework that keeps pace with continued innovation.

  • The SEC updates existing rules and approaches to reflect evolving technologies, business models, and capital markets, ensuring that key regulatory principles are applied in all appropriate circumstances.
  • The SEC will continue to appropriately supervise global entities and coordinate with regulators in other jurisdictions while maintaining appropriate data protection policies.
  • The SEC considers strategies for preparing for and managing systemic and infrastructure risks in the capital markets.
  • The SEC will continue to focus on investor education and outreach that addresses diverse and underserved communities, as well as emerging and popular investment topics.
  1. Supporting employee diversity, equity and inclusion

Technology advancements also stood out as part of the SEC’s efforts to support diversity, equity, inclusion, accessibility, and equal opportunity for our internal workforce, including:

  • To maintain maximum flexibility in responding to market trends and technological innovations, including maximizing telework opportunities to take advantage of telework benefits highlighted during the pandemic, the SEC , facilitate collaboration within and outside the SEC.
  • The SEC will continue to build internal controls and risk management capabilities, focus on data and information security, and optimize system and data controls both internally and across the SEC’s vendors and supply chains.
  • The SEC will pursue its mission by continuing to modernize key systems, innovate new technologies such as machine learning, and enhance the ability of its employees to manage and leverage technology.

A tribute to digital assets

Regarding digital assets, the SEC said in its plans that the rapid growth of digital assets represents an evolutionary risk to securities markets and that the SEC needs to continue to strengthen its expertise in “product markets beyond equities” including digital assets. says that there is

To address emerging risks, the plan states that “the SEC must seek new powers from Congress as appropriate, continue to work effectively with other regulators, and become more actively involved in digitalization initiatives.” I have to,” he argues. However, the plan does not specify the powers the SEC seeks to pursue. Nevertheless, Chairman Gensler recently said, “Over the past five years…the Commission has spoken with a fairly clear voice.” [with respect to the applicability of the securities laws in the crypto space] … Not liking a message is not the same as not receiving it. ”

Digital assets and financial intermediaries that handle them remain high on the SEC agenda

The SEC’s focus on controlling digital assets was confirmed in a series of speeches and public comments during the SEC Lecture Series (September 2022) by SEC Senior Staff, including Chairman Gensler and Executive Director Gerbil Grewal .

These comments are in line with recent proposals that could have a significant impact on the digital asset industry. For example, in June 2022, the SEC released the Agency Rules List (Reg Flex Agenda). It contains two notable entries for the final rule stage.

  • Amending Exchange Act Rule 3b-16 with respect to the definition of “exchange.” Regulated ATS and Regulated SCI for ATS trading US government securities, NMS stocks and other securities.When
  • Further definition of Dealer.

While none of this potential rulemaking explicitly targets digital assets, Chairman Gensler’s message is that the SEC’s existing securities framework encompasses securities and crypto market intermediaries. is sufficient for Additionally, Gensler reiterated his earlier remark that the “majority” of his digital tokens were investment contracts (i.e. securities) under his 1946 Howie test of the U.S. Supreme Court.

For example, an amendment to the definition of an exchange in the current version of Exchange Act Rule 3b-16(a) changes the phrase “uses established non-discretionary methods” to “utilizes established non-discretionary methods”. It should be replaced with ‘allows’. This revised definition greatly expands the scope of the rule to include systems that passively provide protocols, or access to such protocols in order to “talk, negotiate and reach agreement” regarding securities transactions. Capture a system that only provides While the exchange’s proposal did not explicitly mention crypto or digital assets, the expansion of the Rule 3b-16 definition would include DeFi protocols, including decentralized exchanges and aggregations that trade digital assets. Online portals that provide access can be considered in scope. type service. (For more information, see Latham’s previous posts here and here.)

The amendment to the definition of dealer, when finalized as proposed, includes individuals and entities that use automated algorithmic trading techniques to execute trades and provide market liquidity. The extent to which they deal with securities.The original proposal called for “rules[s] …applies to securities …includes digital assets that are securities or government securities within the meaning of the Securities Act. (See this previous Latham post for more details). “Given that many crypto tokens are securities, there are many crypto brokerages trading securities that will need to be registered in some way with the SEC,” Gensler said. I’m here. The scope includes centralized or decentralized (DeFi) exchanges, as well as crypto lending platforms that trade securities.

Gensler further said that fragmenting the custody functions of exchanges, broker-dealers, lending and digital asset intermediaries to reduce conflicts of interest and investor risk is not out of the question. . Dual registration with the SEC and the Commodity Futures Trading Commission (CFTC) may also be appropriate, depending on the brokerage offering.

Enforcement and Disclosure

On enforcement, Secretary Grewal said the SEC will continue to be technology agnostic when pursuing enforcement actions and “enforce the laws and regulations on the books fairly for the benefit of investors and the market.” rice field. He also reiterated Gensler’s view that ” Howie When Leves Testing continues to be an important and accurate means of identifying products within the jurisdiction of securities law. The SEC will take action unless it violates securities laws and material disclosures and protections are provided to investors.

Focusing on investor protection, Gensler said in his speech that the SEC’s “fundamental goal is to provide investors with the protections and disclosures they deserve and are required by law.” ‘ said. To that end, the SEC works to prevent fraud, manipulation, front-running, wash sales, and other fraudulent activities in digital asset markets. At the hearing of the Senate Committee on Banking, Housing and Urban Affairs on September 15, 2022, Chairman Gensler said the SEC is considering compliance with investor protection rules essential for cryptocurrencies and their intermediaries. repeated.

At the other end of the aisle, SEC Commissioner Mark Uyeda commented on what many in the industry see as the SEC’s “regulation by enforcement” approach in the digital asset space. Contrary to Chairman Gensler and Director Grewal’s steadfast stance that most digital tokens constitute securities under clear and existing precedent, Commissioner Ueda said market participants expressed “regarding the lack of regulatory guidance in this area”. He stressed his concerns about the lack of predictability and this “lack of predictability”. Regarding our regulation, we may encourage crypto companies to relocate to other jurisdictions. To alleviate these concerns, Commissioner Ueda proposed rules to address unique issues raised by digital assets to take advantage of public comment and reduce uncertainty about which digital assets. and asked the Commission to consider issuing a further interpretive release on how market participants who constitute securities and trade such securities can meet their compliance obligations.

Finally, given the SEC’s strong interest in digital assets, Cicely LaMothe, Acting Deputy Director of Disclosure Practices for the Corporate Finance Division, told the SEC Speaks event that the SEC has created a dedicated digital asset division within the Corporate Finance Division. He said he plans to open an office. Examination of public documents related to digital assets. The SEC has decided to create this new office with both legal and accounting departments to “address the unique and evolving filing review issues associated with crypto assets.” He made a brief reference to disclosure in his speech, hinting that given the nature of digital asset investments, “a flexible application of existing disclosure requirements may be appropriate.”