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SEC Chair Clayton Set Course for Democrats on Crypto, Covid-19

Nov. 18, 2020, 11:31 AM

Democrats at the SEC soon will inherit Chairman Jay Clayton’s playbook for handling the coronavirus, cryptocurrency, and whistleblowers—containing strategies they largely supported.

Clayton, who plans to leave at year’s end, laid the groundwork for the Securities and Exchange Commission’s aggressive enforcement of securities laws to root out potential Covid-19 and cryptocurrency fraud. The Republican-leaning independent also ushered in new rules that clarify the commission’s discretion to set whistleblower awards, while seeing the bounties hit a record $175 million in fiscal 2020.

The SEC under President-elect Joe Biden will have the opportunity to change course, but Democrats generally have supported his leadership in those areas that will remain relevant in the coming years.

“While the pandemic posed challenges for the commission’s enforcement work, it also revealed how applying additional resources to the whistleblower program delivers results. Congratulations on that,” Sen, Sherrod Brown (D-Ohio), the ranking member of the Senate Banking Committee, said Tuesday at an SEC oversight hearing. “By reallocating staff to review whistleblower tips, you managed record results.”

Democratic SEC Commissioners Allison Lee and Caroline Crenshaw, whose terms will continue under Biden, have consistently voted with Clayton to bring cases involving alleged securities violations concerning crypto and Covid-19, according to agency records.

“In addition to advancing his policy priorities, Chairman Clayton has led the agency through difficult times for the markets and our staff,” Lee and Crenshaw said in a joint statement released after Clayton announced his departure Nov. 16.

Lee is among the possible candidates to serve as chair under Biden, Bloomberg News has reported. She declined to comment for this story.

Covid-19 Praise

Clayton generally has received high marks for his handling of the coronavirus at the SEC, where most staffers have worked remotely since March. The commission has offered firms temporary relief on some filing requirements and brought dozens of enforcement actions concerning Covid-19.

More than 30 of the actions were trading suspensions, in which a company’s stock was unable to trade over concerns about alleged Covid-19 tests, N95 respirator stockpiles, and other coronavirus-related business developments, according to the SEC. The commission also brought about a half-dozen cases around false and misleading statements and other fraud connected to Covid-19, according to the agency.

The agency’s enforcement work surrounding Covid-19 will almost certainly continue into the Biden administration. The SEC has about 150 open investigations or inquiries into insider trading, microcap fraud, disclosure misconduct, and other potential securities violations related to the coronavirus, Enforcement Director Stephanie Avakian said this fall.

“I’m pleased to report that while the pandemic significantly impacted how we do our work, it did not negatively impact the work itself,” Clayton said at the Senate hearing. “With respect to Covid-19, the SEC responded quickly.”

Crypto Worries

Covid-19 only has been on Clayton’s radar for the past several months, but crypto has been on his agenda almost since he began in May 2017.

The SEC Enforcement Division in July 2017 released an investigative report into the offer and sale of digital tokens from The DAO, a virtual organization for raising funds. The agency found DAO tokens were securities and subject to applicable U.S. laws. The first-of-its-kind SEC analysis of an initial coin offering kicked off a crypto enforcement drive that led to dozens of cases over illegal securities offerings, investment scams, and other securities violations.

The agency also has issued guidance on whether a digital asset is a security and took other steps to provide more clarity about the emerging technology. But Republican SEC Commissioner Hester Peirce and members of the crypto community have pushed for more.

Luke Cadigan, a Cooley LLP partner in Boston, told Bloomberg Law the commission appears content to regulate through enforcement.

“With the change of administrations, one would hope the SEC might be more willing to reconsider its approach here,” Cadigan said. “However, I do not think it will ultimately do so.”

Cadigan, a former SEC enforcement lawyer, represented Kik Interactive Inc. in the commission’s case over what the agency said was an illegal $100 million initial coin offering by Kik. The company ultimately agreed to pay a $5 million penalty to end the SEC’s litigation this year.

The Kik case was one of the SEC’s many crypto actions in which at least one of the agency’s commissioners on the left sided with Clayton against Peirce. That time it was former Commissioner Robert Jackson, who was the SEC’s only Democratic-leaning independent at the time of the vote.

Commitment to Whistleblowers

Lee and Crenshaw both have applauded Clayton’s commitment to the SEC’s whistleblower program, which was established by the 2010 Dodd-Frank Act, but has ramped up significantly in recent years.

Tipsters who help the SEC get sanctions that exceed $1 million can get 10% to 30% of the penalties. The agency has given more than $720 million to 113 people under the program since its first award in 2012, according to the commission. About $565 million of that came under Clayton’s watch. This includes about $158 million since October, putting the SEC on track for a new award record for fiscal 2021.

But the Democratic commissioners also have raised concerns that the rules the SEC adopted in September will give commissioners the freedom to limit massive awards.

Erika Kelton, a whistleblower lawyer in Washington, told Bloomberg Law she expects the SEC to continue to support a robust award program under Democratic leadership, but hopes the agency will reverse the recent rulemaking.

“Since the two Democrats on the commission vigorously opposed this change, I am cautiously optimistic that the SEC with a Biden appointee as chair will recognize that this so-called ‘clarification’ runs counter to the law, discourages high-value whistleblowers from coming forward and should be thrown out,” said Kelton, a Phillips & Cohen LLP partner.

To contact the reporter on this story: Andrew Ramonas in Washington at

To contact the editors responsible for this story: Michael Ferullo at; Roger Yu at