To see a prominent representative from one regulator accuse another of “regulation by enforcement” might raise the eyebrow of some observers. But it shouldn’t—not when that’s the other regulator’s stated strategy.
As far back as November 2021, Gary Gensler tipped his hand regarding how his Securities and Exchange Commission (SEC) would pursue what he termed “high-impact cases.” Making an example of one company prompts the compliance departments, lawyers, and accountants of others to change their internal procedures, he said in a speech, thus sending a message on where the agency’s tolerance lines are drawn.
“Some market participants may call this ‘regulation by enforcement,’” acknowledged Gensler. “I just call it ‘enforcement.’”
So when Caroline Pham, a new Republican commissioner at the Commodity Futures Trading Commission, accused the SEC of “regulation by enforcement” in a recent cryptocurrency case, it likely did little to faze Gensler. Neither will threats from Republicans forecasting an investigation into the agency’s authority should they win the House following mid-term elections in November.
Politics aside, regulation by enforcement is a dangerous approach for any agency, eroding the two-way trust loop necessary for compliance efforts to prevail. Lack of clarity leads to frustration at companies, which halts any possibility of meaningful discussions between the two sides.
This is playing out most prominent in the cryptocurrency industry, where the SEC has so far refused to issue clear guidelines on what it deems a security. Amid uproar regarding a handful of token securities rulings included in an insider trading lawsuit against an individual at Coinbase in July, Gensler, in an op-ed for the Wall Street Journal, repeated his encouragement that crypto platforms “come in and talk to SEC staff.”
Some good that will do when one side isn’t willing to address the concerns of the other. Indeed, Coinbase Chief Legal Officer Paul Grewal wrote in a blog post responding to the agency’s token securities rulings, “Instead of having a dialogue with us about the … assets on our platform, the SEC jumped directly to litigation.”
While the matters of crypto firms might mean little to some, the SEC’s approach to chief compliance officer liability should be front of mind to all in the compliance profession. There, one could argue regulation by enforcement is also playing out, with the agency acting against CCOs it deems to have violated its rules despite not putting forward a liability framework that defines where those thresholds exist.
The result is gatekeepers—whom the SEC often describes as partners to its regulatory mission —work in fear of whether they’ll be the next individual made an example of for the benefit of others. No compliance officer wants to see their counterpart “take one for the team” so they can sleep better at night.
Such is the reality of the regulation-by-enforcement approach: There is no progress until someone pays the price. And when they do, questions often remain that go unaddressed, which might lead to the next person making the same mistake and paying an even greater price for not learning from the mistakes of their predecessor.
It’s an unproductive loop where nobody wins—even the SEC. Gensler will find the table lonely when nobody is willing to meet him at the other end of it.
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