SEC announces charges against ten banks and broker-dealers for reporting and record-keeping failures. Among them is Peralla Weinberg, the bank advising the fallen crypto exchange FTX in its complex restructuring. As the SEC cracks down on companies for technical violations, the question of regulatory overreach arises.

The latest enforcement action from the Securities and Exchange Commission (SEC) targets banks, broker-dealers, and investment advisors active in the cryptocurrency markets.

In its quest to crack down on decentralized finance (DeFi) and put companies’ operations under more direct oversight, the SEC has filed charges of “off-channel communications” by companies’ employees.

The SEC Strengthens Supervision of Communications to Banks

The agency announced Friday morning that it had filed charges against ten companies. Among them is Perella Weinberg, the bank advising bankrupt crypto exchange FTX on its restructuring. Other respondents include Interactive Brokers Corp., Robert W. Baird & Co., William Blair & Company, Nuveen Securities and Fifth Third Securities.

Interactive Brokers is very active in the crypto space and offers low commissions and 24/7 trading on their website. The others have varying degrees of exposure to cryptocurrencies. The defendants will not challenge the SEC in court. They have chosen to settle. In addition to paying a total of $79 million in penalties, the companies agreed to adopt new compliance policies.

The SEC took issue with these companies’ use of electronic communications and their failure to maintain complete records. According to the agency, its investigation of these companies uncovered “pervasive and long-lasting out-of-channel communications” across the companies. The companies’ employees used text messages to communicate about business matters, including some related to investment advice, the SEC charged.

In the agency’s view, this conduct was inconsistent with the Securities Act of 1934. The SEC also charged Baird, William Blair, Fifth Third, and Perella Weinberg with violating the recordkeeping provisions of the 1940’s Investment Advisers Act.

The Persistence of SEC Overreach in the “Communications” Case

The SEC has used the “stick” of reporting requirements to bring companies of many sizes and profiles more directly under its supervision.

Last week, the agency announced a $6 million fine against Goldman Sachs. The investment bank had not provided all the required daily information on securities trading or, in business terms, the “blue sheet data.”

It is significant that Goldman is emerging as a player in the crypto markets. The company’s global head of digital assets praised tokenization. And he has laid out a vision for broader engagement with digital currencies.

On Wednesday, SEC Chairman Gary Gensler flatly stated his agency’s right to exert control over companies in the crypto space. He argued that the “vast majority” of cryptographic tokens are classifiable as securities. Gensler nowhere mentioned a landmark ruling that contradicted this view and handed his agency a tough defeat in its lawsuit against Ripple Labs.

SEC Regulatory Clarity May Encourage Greater Crypto Adoption

The US market is huge and has lucrative potential. And some players in the crypto space have drawn valuable lessons from the legal troubles of Ripple, Coinbase, Gemini, FTX and others in the SEC’s crosshairs, argued Danny Okeyan, CEO of Blockfinex:

“The United States has a budding crypto market despite many companies restricting operations or halting them. New exchanges entering the market have learned the lessons that legacy companies face and are taking strategic actions to reduce their risk.”

By Leonardo Pérez


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