Coinbase and SEC Argue Agency's Authority to Regulate Listed Crypto Tokens

Coinbase and SEC Dig in With U.S. Judge on Whether Securities Law Applies to Listings

The U.S. Securities and Exchange Commission (SEC) case against Coinbase delves into a ton of complexity, but before anything else, a judge has to decide whether transactions in about a dozen tokens traded on the U.S. exchange were securities.

Both sides – the SEC and Coinbase – agreed in a Wednesday court hearing that the tokens themselves aren’t securities. The SEC lawyers argued that each trade amounted to an investor buying into a token ecosystem in which the purchaser is hoping to share in its gains, and as long as a single one of those transactions could be considered an investment contract, Coinbase has broken securities law. But the company said these are secondary-market trades in which no contract is in place, so they can’t be securities.

JPMorgan’s ‘Eye-Opening’ Penalty Signals SEC Whistleblower Focus

The settlement Tuesday with J.P. Morgan Securities LLC is among the first to target agreements with customers, adding a new layer to the SEC’s recent efforts. And the penalty—the largest of its kind—serves as a warning to other companies.

“I’m sure there are firms across the country now that are going to see this and look back at all the contracts that they have, with any party, and try to make sure they don’t trip up this regulation,” John Berry, a Munger, Tolles & Olson LLP partner and former SEC attorney, said.

The size of the fine could also encourage more people to bring questionable contracts to the SEC’s attention.

NDAs

But the SEC actually interprets this rule more broadly: They’re not allowed to even have the NDA. After all, if you sign an NDA saying “I will not disclose the company’s secret information,” that might deter you from reporting fraud to the SEC. You might think to yourself “uh oh, I signed an NDA, I can’t tell the SEC about this fraud, it’s secret, and I’m not allowed to disclose the company’s secrets.” So you won’t report the fraud. Nobody has explicitly threatened to sue you, but the NDA itself serves as that threat: You signed a legal document promising not to disclose stuff, which might scare you into not disclosing it to the SEC.

If the NDA explicitly says “I will not disclose the company’s secret information, except, to be clear, I am allowed to say anything I want to the SEC or any other regulator,” then that’s fine. (Not legal advice!) But if the NDA doesn’t say that — even if it says something pretty close to that — then the SEC might take the view that it is an illegal threat to deter whistleblowing.

So yesterday JPMorgan Chase & Co.’s J.P. Morgan Securities division agreed to pay $18 million for writing its client NDAs wrong….

SEC Scrutiny of Executive Perks Brings Pitfalls for Companies

Over the last decade, the Securities and Exchange Commission has brought 20 enforcement cases against public companies for not properly disclosing perks provided to executives—including two last year.

The SEC’s expansive view of what constitutes a perk—and the low-dollar thresholds for disclosure—can make it challenging for companies to identify, quantify, and fully describe them. But failing to disclose perks can be expensive, as companies may face significant costs to investigate, defend, and remediate problematic disclosures and internal controls. And the SEC often imposes sizable financial sanctions when faulty disclosures come to light.

To help reduce the risk of undisclosed executive perks, we’ve identified those that most often lead to SEC enforcement actions, as well as practical steps companies can take to strengthen relevant internal financial and disclosure controls.

The SEC Is at the Mercy of the Courts at a Perilous Moment

In November, the Supreme Court held oral argument inSEC v. Jarkesy. The case deals with whether the agency’s adjudication of fraud claims using its own administrative law judges deprives individuals of their Seventh Amendment right to a jury trial. The justices were all somewhat aligned in skepticism against the SEC’s in-house enforcement practice, with Chief Justice John Roberts coming close to questioning whether the very existence of the SEC enforcement tribunal serves to undermine the Seventh Amendment. That doesn’t bode well for the agency.

A loss in Jarkesy would force the SEC out of its own backyard and into federal court more frequently—a considerably more expensive, time-consuming, and uncertain enforcement process. And while Jarkesy directly threatens the SEC’s authority to enforce, another case on the Court’s docket—set for oral argument on Wednesday—threatens the agency’s basic ability to function as it pleases.

Bitcoin Bashed by JPMorgan CEO Jamie Dimon

JPMorgan CEO Jamie Dimon took another opportunity to publicly air his criticism about Bitcoin (BTC), saying his personal advice is to not get involved.

The use cases for Bitcoin are “AML, fraud, sex trafficking and tax avoidance,” said Dimon, holding court Wednesday on CNBC from Davos. “I defend your right to do Bitcoin,” continued Dimon, who one month ago in Congressional testimony urged Senator Elizabeth Warren to “close it down.”

“I don’t want to tell you what to do,” added Dimon this morning. “My personal advice is don’t get involved.”

He also said the cryptocurrency is like a “pet rock” that “does nothing.”

SEC’s Bitcoin ETF Approval Fails to Protect Investors

Even so, Gensler should’ve tried to use this opportunity to force some investor protections on the spot trading platforms. Instead of issuing blanket accelerated approvals, the SEC could’ve made approval conditional on the ETFs deriving prices from platforms that meet the standards of regulated securities exchanges, such as adequate segregation of customer assets….

It’s possible that Gensler didn’t think such a conditional approval would pass muster with the courts. And perhaps he thinks the ETF sponsors — major financial institutions including BlackRock Inc., Fidelity and Ark Investment Management LLC — have enough leverage on entities like Coinbase to push through reforms anyway. Or maybe the hope is that existing investor-protection and risk-disclosure rules will be enough to keep these markets in check.

If so, that’s a risky bet. In the meantime, despite warning about “myriad risks,” Gensler has sent investors a signal that the SEC is comfortable with a new asset class that more than doubled in value last year and that’s sure to be aggressively marketed to them as a sexy alternative to stocks and bonds and mutual funds. He could have served them better.