On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.” The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens. These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018. Continue Reading SEC Divisions’ Issue Public Statement on Digital Assets and ICOs, Echoing Recent Enforcement Actions
Alexis Collins’ practice focuses on litigation, including criminal and regulatory enforcement matters and complex civil and antitrust litigation.
On November 8, the Securities and Exchange Commission (“SEC”) imposed a cease-and-desist order against Zachary Coburn for causing his former company, EtherDelta, to operate as an unregistered securities exchange in violation of Section 5 of the Securities Exchange Act of 1934 (“Exchange Act”). Notably, EtherDelta, a trading platform specializing in digital assets known as Ether and ERC20 tokens, was not operated like a traditional exchange with centralized operations, as there was no ongoing, active management of the platform’s order taking and execution functions. Instead, EtherDelta was “decentralized,” in that it connected buyers and sellers through a pre-established smart contract protocol upon which all operational decisions were carried out.
In the SEC’s view, EtherDelta met Exchange Act Rule 3b-16(a)’s definition of an exchange notwithstanding the lack of ongoing centralized management of order taking and execution. Robert Cohen, the Chief of the SEC’s Cyber Unit within the Division of Enforcement stated after the order’s release, “The focus is not on the label you put on something . . . The focus is on the function . . . whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.” This functional approach echoes prior SEC guidance and enforcement actions in the digital asset securities markets in emphasizing that the Commission will look to the substance and not the form of a market participants’ operations in evaluating their effective compliance with U.S. securities laws. Continue Reading SEC Brings First Enforcement Action Against a Digital Assets Trading Platform for Failure to Register as a Securities Exchange
On November 2, the SEC’s Enforcement Division released its annual report detailing the facts and figures of its enforcement efforts in fiscal year 2018. At first blush, this year’s report looks strikingly similar to those from recent years, as the headline numbers in most categories are nearly indistinguishable from 2015, 2016, and 2017. This consistency may be surprising given that 2018 is the first such report reflecting exclusively the enforcement priorities of the Commission since it was reconstituted under Chair Jay Clayton.
But a closer examination of the report, including the components feeding into the top-line facts and figures and commentary by Division co-directors Stephanie Avakian and Steven Peikin, reveals a clear shift in priorities by the Division. These range from a philosophical shift in its mission to the reallocation of resources during a hiring freeze. We address here the most notable of these subtle but important changes. Continue Reading Retail, Remedies, Resources and Results: Observations From the SEC Enforcement Division 2018 Annual Report
On October 16, 2018, the Securities and Exchange Commission released a Report of Investigation that cautioned public companies to consider cyber threats when designing and implementing internal accounting controls. The report was based on an investigation of nine victims of email cyber-fraud schemes for potentially failing to have adequate internal accounting controls, in violation of the Securities Exchange Act of 1934. The report highlights the need for companies to reassess their controls in light of the current cybersecurity risk environment. By describing the remedial steps taken by the investigated companies, it further provides guidance about the key areas that companies should consider when assessing their own policies and procedures. Continue Reading SEC Investigative Report Urges Public Companies to Guard Against Cyber Threats When Implementing Internal Accounting Controls
On October 15, 2018, the U.S. Department of Health and Human Services, Office for Civil Rights (OCR) announced a $16 million settlement with Anthem, Inc. over alleged violations of federal privacy and security regulations under the Health Insurance Portability and Accountability Act (HIPAA). The settlement resolves an investigation following a data breach that exposed protected health information of nearly 79 million people. According to OCR, the incident is the largest health data breach to date in the United States and Anthem’s payment similarly represents the largest HIPAA settlement to date. The settlement is consistent with OCR’s recent focus on enforcing regulatory requirements to conduct an accurate and thorough risk analysis and maintain appropriate mechanisms to monitor systems that contain protected health information and to control access to that information. It also highlights the agency’s distinct cybersecurity remediation approach. Continue Reading The U.S. Department of Health And Human Services Settles With Anthem for Record $16M Over Alleged HIPAA Violations
On September 27, 2018, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) filed parallel actions in federal court against an internet dealer that sold “contracts for difference” (CFD) based on securities and commodities margined with bitcoin. The actions, which were assisted by the Federal Bureau of Investigation and the Department of Justice, signal continued coordination among federal agencies to police market activity involving financial transactions in cryptocurrencies. Continue Reading The CFTC and SEC Bring Charges Against International Securities Dealer for Bitcoin-Funded Swaps Activity
On September 26, 2018, a federal court in the District of Massachusetts found that virtual currencies are a commodity under the Commodity Exchange Act, 7 U.S.C. § 1 et seq, (“CEA”). This marks the second time that a court has accepted the Commodity Futures Trading Commission’s (“CFTC”) position and upheld the agency’s authority to regulate unleveraged and unmargined spot transactions in virtual currency under the agency’s anti-fraud and manipulation enforcement authority. Most notably, however, the reasoning behind its decision potentially expands the scope of the CFTC’s oversight of the market. Continue Reading Second District Court Determines Virtual Currencies Are Commodities
Over the past year, the U.S. Securities and Exchange Commission (“SEC”) has increasingly scrutinized initial coin offerings (“ICO”) and certain digital assets. On September 20, 2018, the SEC’s Enforcement Division co-Director, Stephanie Avakian, gave a speech in which she addressed the Division’s approach to dealing with these new forms of tradeable assets. This speech came only days after the SEC settled its first case charging an unregistered broker-dealer for facilitating the sale of digital tokens from several ICOs since the 2017 DAO Report. In her speech, Avakian provided three key insights into the Division’s enforcement strategy. Continue Reading SEC Enforcement Division Co-Director Provides Insight Into Commission’s Approach to ICOs and Cryptocurrencies
On Tuesday, September 11, 2018, Judge Raymond J. Dearie of the Eastern District of New York issued a decision holding that Initial Coin Offerings (“ICO”) may qualify as securities offerings and therefore be subject to the criminal federal securities laws. This ruling came as two U.S. regulators—the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”)—announced separate actions under securities laws against companies engaged in the cryptocurrency marketplace, including the sale of digital tokens. As the popularity of cryptocurrencies grows and businesses and entrepreneurs increasingly turn to ICOs to raise capital, these developments may serve as guideposts for how cryptocurrencies and ICOs will be viewed by courts and federal regulators in cases to follow. Continue Reading Federal Court, SEC, and FINRA Scrutinize Cryptocurrencies and ICOs
On June 27, 2018, Equifax Inc., the credit reporting agency, agreed to implement stronger data security measures under a consent order with the New York State Department of Financial Services (“NYDFS”) and seven other state banking regulators. The order imposes detailed duties on Equifax’s Board of Directors in response to criticisms raised by the regulators during an examination of Equifax’s cybersecurity and internal audit functions. The examination followed the company’s massive 2017 data breach, which exposed sensitive personal information of nearly 148 million customers. Equifax agreed to the order without admitting or denying any charges of “unsafe or unsound information security practices.” Continue Reading State Regulators Reach Settlement With Equifax in Connection With Massive Data Breach