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From Securities Regulation Daily, November 30, 2018

SEC Chairman Clayton speaks plainly and revisits familiar themes in TimesTalks interview

By Brad Rosen, J.D.

SEC Chairman Jay Clayton told Andrew Ross Sorkin that he was not asked a single question about Bitcoin, blockchain, digital ledger technologies, or Ethereum during his Senate confirmation hearings in early 2017 in a recent TimesTalks interview. During the interim, virtual currencies have been on a roller coaster with Bitcoin surging to $20,000 about a year ago and falling recently to the $4,000 area.

Sorkin, a New York Times columnist and founder and editor at large of New York Times’ DealBook, certainly made up for lost ground in their talk which focused on a gamut of regulatory issues relating to cryptocurrencies and digital ledger technologies. Sorkin also queried Clayton about a number of other hot topics currently facing the SEC, including the precipitous drop in IPOs, Brexit-related disclosures, as well as the desirability of quarterly reporting for public companies.

The chairman is not a swing vote. In response to a query from Sorkin suggesting that he was a swing vote insofar as how cryptocurrency regulations will be adopted, Clayton adamantly rejected that notion, stating that it was not the job of the SEC to vote. Rather, he repeated familiar themes that it is the SEC’s job to provide a level playing field and avoid getting involved in picking winners and losers. Clayton further stated that the lens of the SEC is to protect the interests of small, long-term main street investors.

U.S. rules have stood the test of time. In response to a question from Sorkin about where he has landed regarding the regulation of digital tokens, the chairman observed that the rules concerning the offer and sale of securities and the trading of securities have stood the test of time. In particular, he pointed to the U.S. regulatory regime requiring disclosure and financial statements which has led to preeminent U.S. capital markets and $20 trillion economy.

Clayton also credited the people who had created the securities laws and regulatory framework in the aftermath of the 1929 stock market crash as geniuses. He made clear, "The new technologies should adapt to our rules. We are not going to change the rules."

Digital ecosystems—a question of responsibility. Clayton expressed hope and optimism for the digital ledger technologies and their potential to provide additional layers of trust into the financial system. However, he agreed with Sorkin that in a truly distributed ecosystem there is no judge, jury, arbiter…or party to hold responsible when something goes wrong. "That’s a real problem," he observed.

The Broadway show must go on—when securities law might not apply. Chairman Clayton acknowledged that a digital token can potentially start off as a security and then transform into something else. He pointed to the example of the presale of tickets for a Broadway show. Initially those tickets might satisfy the elements of the Howey test and be deemed a security. However, once the show is up and running and those tickets are no longer controlled by a centralized entity, those tickets might cease being securities, and thus no longer subject to the SEC’s jurisdiction.

Congressional action in the crypto space remains unclear. Clayton noted SEC laws and regulations do well in addressing digital assets, as do the laws and regulations of the CFTC. He also noted a host of other laws also apply to digital assets as well, including the Department of Treasury and the states. However, he was noncommittal regarding the need for further congressional action for the digital asset space, and noted "we’ll have to see."

Companies avoiding IPOs and public company status. Sorkin also queried the chairman about huge drop in companies going public over years and pointed the recent comments of James Freeman, founder of Blue Bottle Coffee, who sold his private company to Nestlé in early 2018. Freeman described his views on going public in a stock offering as "a way of living in hell without dying."

The chairman readily acknowledged the compliance burdens and the significant management resources that public company registration requires. However, he noted the Commission is committed to streamlining processes and reducing burdens in this area that might even result in enhanced public disclosures. Clayton indicated that he thought these issues could be addressed while not compromising investor protections.

Brexit-related company disclosures are inconsistent. In response to Sorkin’s questions about companies disclosing risks associated with Brexit, Chairman Clayton observed that while some companies are being forthright about potential Brexit-related risks, others remain virtually silent. He noted that disclosure obligations are triggered when a particular occurrence might be a material event for the company. He observed that some companies may be impacted significantly and negatively by Brexit, and the risk of a hard Brexit has increased. Accordingly, disclosure obligations are implicated.

Reacting to a Trump tweet—getting companies to think more long-term. Responding to Sorkin identifying a presidential tweet which called for reducing public company financial disclosure to twice a year, the chairman shared his view that running companies from quarter to quarter is not a good thing. However, he also observed that the market has a thirst for that kind of information and many credit agreements call for quarterly financial disclosure. Clayton also noted that disclosure under the U.S. system focuses more on looking backward than forward. He acknowledged that companies are reluctant to look into the future due to the risk of incurring legal liability. The chairman did not have an immediate solution to this problem. When Sorkin pushed him for an answer, Clayton paused for a few moments, and then asked if he could phone a friend. The Commission is currently considering whether to issue a Request for Comment on the nature and content of quarterly reports and earnings releases issued by reporting companies.

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