On July 19, the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets held a hearing to conduct oversight of the SEC’s Division of Enforcement. Several Members of Congress raised the dealer issue directly, and others hammered Enforcement Director Gurbir Grewal on the SEC’s burdensome and broad enforcement actions and proposed rules that are impacting capital formation.
Transcripts of noteworthy exchanges are below. The hearing can be viewed here.
Ranking Member Bill Huizenga (R-MI): “Director Grewal, concerned about a couple of things and I’m going to try to hit this quickly: Unprecedented attempts by the SEC to slip drastic market changing interpretation of securities laws into otherwise routine enforcement cases and two, a lack of internal consistency when it comes to the SEC’s own ideas about basic, foundational elements of market regulation. In a recent case, the SEC, rather than relying on decades of existing caselaw and legal precedent, presented a case in which it defined a ‘dealer’ as ‘any business that purchases and sells securities for its own account.’ So if I’m interpreting this correctly, it quite literally means that every market participant in the country, which means under the SEC definition regardless of business model or current regulatory regime, they would somehow now be subject to a wildly different, and inappropriate in my opinion, regulatory framework. That quickly. Overnight. And that’s not all. At the same time, in the same SEC, there’s a controversial proposal underway in which the SEC is attempting to dramatically expand the definition of this core term, dealer, but this time in a wholly different manner than how your enforcement team defined the term. So two different definitions, being presented by the same SEC, are in fact wholly inconsistent with each other. So it seems to me that the SEC is, frankly, brazen about it and thinks that it can rewrite the most basic elements of securities law whenever it wants to fit whatever purpose it needs at the current moment, with no regard to the effect on markets or the economy or even internal consistency.
“I’m a guy from Michigan. So I think in car terms. This is a little like we’re asking people to build a car but we won’t tell them what the speed limit is going to be, we won’t tell them what the car should or shouldn’t do, what the safety products ought to be on it, but we’re going to determine that later. And we’re just going to mail you a ticket for speeding. We’ve got a responsibility to set speed limits, and/or then to make sure that there’s a consistent approach and application of that. So please, illuminate me. What is this approach?”
- Grewal: “Thank you for that question Ranking Member. With respect to the enforcement action you referenced, that’s a litigated matter, and we’re confident that our position will survive scrutiny in that litigation. We’ve succeeded in other…[Huizenga interject: “how about the inconsistency of it?”] I can’t speak to the rulemaking that’s being done by the rulemaking division and I think its in a different context so I’d refer you to my colleagues in those divisions who are responsible for that rulemaking.”
Rep. Bryan Steil (R-WI): “I want to echo my colleague Mr. Huizenga’s comments regarding the Division of Enforcement adopting [sic] a historically broad understanding of what the term ‘dealer’ means. I listened to your answers and so I won’t ask you my questions but I just would note, and I think I echo my colleague here, that I want to caution that these broad definitions and aggressive enforcement approaches come with a real cost. Specifically, classifying everyone as a dealer could chill investment, in particular in small public companies. My concern is that will hurt innovation and competition. So I won’t ask you a question because it was covered previously and I know there’s ongoing litigation in that space.”
Other highlights:
Rep. Tom Emmer (R-MN): “Mr. Grewal, you frequently acknowledge that public trust and confidence in our capital markets has eroded. In fact, on October 13, 2021 you stated, ‘The decline in trust undermines the investor confidence needed for the fair, efficient, and orderly of our capital markets. Put simply, if the public doesn’t think the system is fair, they are not going to invest their hard-earned money.’ I agree. But time and time again, you place the cause of blame for this erosion of trust squarely on the shoulders of industry participants and companies. Mr. Grewal, the SEC is in no way blameless here. Chair Gensler’s political regime at the SEC carried out by its Division of Enforcement has been characterized by a focus of using enforcement to expand SEC jurisdiction at the expense of public resources, public investment in our country, and public trust in our markets. It seems clear to everyone, except maybe those at the commission, that the SEC is not regulating in good faith.”
Huizenga followed up at the end of the hearing to denounce Grewal for refusing to answer his and others’ questions by deferring to other departments or declining to comment altogether. “We better start getting some answers.”