In a panel discussion co-hosted this month by The Texas Lawbook and the Dallas-Fort Worth chapter of the Association of Corporate Counsel, Eric Werner, director of the Fort Worth regional office of the U.S. Securities and Exchange Commission, joined two leading securities experts in private practice, Jessica Magee, a partner in the Dallas office of Holland & Knight, and Rebecca Fike, a partner in the Dallas office of Vinson & Elkins, to discuss what’s changing (or might be) at the agency under the Trump administration.
Magee, who chairs Holland & Knight’s securities enforcement defense team, is a former general counsel and former senior officer in the SEC’s division of enforcement; Fike spent 10 years as a senior counsel in the enforcement division.
Among the topics they touched on are the potential effects of staff cutbacks or departures from the agency atop existing staffing shortages; the benefits to both the government and the private sector of cooperating to address possible violations; the increasing marketing of artificial intelligence by companies to lure investors and customers; and the SEC’s newfound, friendlier approach toward the cryptocurrency industries.
On Jan. 21, the day after President Donald Trump’s inauguration, the SEC’s acting chair, Mark Uyeda, appointed fellow commissioner Hester Peirce, a vocal critic of what she has called overregulation of digital assets, to lead a crypto task force.
The Feb. 5 discussion took place at The Dallas Morning News, a publishing partner of The Lawbook. A video recording of the hourlong session is available at https://vimeo.com/1054552092.
Here are excerpts from the session. They have been edited for brevity and clarity.
On what’s to come. (Who knows?)
Jessica Magee: You can’t swing a dead cat without hearing about the offer to all federal employees to resign. Continuation of a hiring freeze, the likely sweeping rather than backfilling of vacated staff positions, significant changes in specialized units within enforcement, moving head count around, even demotion of certain leadership. And consolidating certain important authorities entrusted to enforcement senior officers, like the issuing of a formal order, which is the document by which the staff has subpoena power, pulling some of that power back up, either into the enforcement front office or even at the commissioner level in D.C. That’s a lot on a punch list.
What does all of that mean about employee morale? Employee headcount? Their ability to do the mission and, from a defense perspective, how we advise our clients on engaging with the staff going forward?
Rebecca Fike: One of my main roles at the firm and with my clients is to answer questions of: What does this mean on the inside, what’s happening at the commission? And, really, up until recently, I’ve always been able to say the core of the job of a staff attorney, the way your day-to-day works, really doesn’t change from administration to administration. I was there for Obama One, Obama Two, Trump One and part of Biden. And while of course there are changes in priorities or rulemaking focus and other things, I didn’t feel like my day-to-day changed very much. And that’s a good thing in my perspective on the defense side, because I can read into and take meaning away from things I am seeing the staff do. Because I was there.
This time feels very different. I feel like we’re already seeing effects.
If I have an active investigation into one of my clients, it is actually not to my benefit for head count to go down and for resources to go down. If that investigation is ongoing, I want it moved through in a productive fashion. I want to be able to work cooperatively with the staff to make that happen, and I can work cooperatively when I know what output comes from my input. And when there’s this much change and uncertainty and, I’m sure, an effect on morale, I do think it makes our job as defense counsel more difficult. I’m sure it makes the SEC’s job more difficult.
Eric Werner: This is a lot to take in at one time. There’s a lot that I don’t know, a lot I can’t comment on, but what is accurate is that there is a lot of change. I don’t know what that will look like here. I take solace in the fact that the incoming chair [Paul Atkins, an SEC commissioner from 2002 to 2008] has deep experience with the SEC.
In terms of the staffing issues, it is a strange time. I don’t know when the dust settles what the staffing of the Fort Worth regional office will look like or the commission or the federal government. It is unprecedented. In some respects, I wish I was on the other side having some popcorn to watch it happen.
I want the best for them [employees of the Fort Worth regional office], whether that means staying at the commission or going somewhere else. I have been incredibly fortunate in my career to have worked with some amazing lawyers, two of whom are sitting next to me. So it is possible to leave the commission and go on to do greater things, but the Fort Worth staff is exceptional. I couldn’t do my job without them. Losing one of them would make me sad. If I lose multiple people, it will be crushing. But our mission is the same. We need to protect investors, we need to make sure there are fair and orderly markets, and we need to help capital formation. Whatever the incoming administration and commission want us to do, we will do.
Commissioners Peirce and Uyeda worked for Atkins when he was a commissioner. So they know each other very well, and whatever they decide to do, my sense is that it will be fairly seamless, that they will hit the ground running and start to put into effect whatever policy changes that they want done.
On short-staffing. (What’s new?)
Werner: Our staff has been resource-constrained for a while, even before the SEC imposed a hiring freeze over a year ago. Even before that we felt we were understaffed, in 2001, 2002 and 2003. If I quadrupled the enforcement staff right now, we still would have more cases than we could do.
The Fort Worth regional office receives more tips, complaints and referrals than any other office in the SEC, including D.C. We have to touch every single one of those, look at them and decide how to allocate resources. How can we best protect investors with the limited resources that we have? That does not mean bringing every single case that we have. That does not mean going after every person we could, saying, “We’ll look at a $1 million insider trading case exactly like a $100,000 insider trading case.” It includes a lot of different things, from working with other regulators in our region, state regulators, state attorneys general, U.S. attorney’s offices, trying to find someone else who might have an interest, saying, “You know what? Maybe there’s a security here, but maybe there’s not. So why don’t you take it? And if you need us later on, let us know, and we’ll get back involved, but right now we’re going to go look at something else.”
On ‘Crypto 2.0’
Magee: You know, crypto has been a fast and furious enforcement focus over the last few years. Former chair [Gary] Gensler [an appointee of President Joe Biden] referred to it as “the Wild West.” Certainly, it’s no surprise that this commission will take a different approach, through the announcement of what they’re referring to as “Crypto 2.0,” a not-enforcement-led policy and maybe regulatory-clarifying approach, which the market’s been calling for.
Where you think crypto 2.0 is going?
Werner: I wish I had a crystal ball. Ultimately, I work with the head of enforcement in our office and try to figure out where to devote resources. Where does it make sense? Where is the most risk in the market? What are the commission’s priorities? If I knew right now that in a year or two, the SEC wouldn’t have jurisdiction over crypto, or we did but it will be limited, or there were going to be a bunch of rules dictating what a crypto broker-dealer would look like, I would get working on that right now because I want to make sure that we are doing the work as quickly and efficiently as possible.
I think the problem, if we go back in time, was we didn’t really know what crypto was, how pervasive it would be, what the commission wanted. It was in the nascent stages. What is crypto? Is it an investment? Is it pure speculation? Is there value? What is the blockchain?
If something really wasn’t crypto, if that was just all a lie, a façade, a mirage, those are easy cases to bring. They’re simple: I promised you X, and I didn’t have it.
The crypto world has developed significantly. [In the early days] there may have been five or 10 different coins. Now there are thousands. There are exchanges where they’re being traded. There is a discrepancy as to whether some are commodities or securities or something else. What is the status of crypto? Is it a security? That is item number one. That’s incredibly important. Let’s figure out whether it’s a security and whether we have jurisdiction and whether Congress wants us to have jurisdiction. Once we figure that out, then I think we can get to work on all the other pieces. Because right now, it’s still a little bit unknown.
I think Commissioner Peirce is focused on the overall market and not enforcement. She does mention that the commission will not tolerate fraud and that we will go after fraud when it’s there. The commission’s interest is still the same. We want investors to know what they’re investing in and for the promoters and the managers of the companies to tell the truth.
I enforce the laws. Just tell me what you want to do and I will do it. And if crypto’s not on my plate, I will find other things to do. If it is, then I will do the best I can.
Magee: I’ll prognosticate, and we’ll come back in a year, and if I was wrong, we’ll be here. The crypto unit is going to be shrinking. You’re going to have less people whose job it is to ride the range and enforce or investigate. And that, I think, is a visceral reaction to what many people in the market and the government have felt was a land grab by the SEC, to not just enforce on the basis of fraud, which there’s plenty of to go around.
We need to have a game plan going forward. One challenge right now is if, like us, you have crypto actions in pending litigation, where are they going to go? Clients reasonably have a lot of good questions. I just don’t think they’re going to be answered today or tomorrow. It’s going to take a lot of time.
Fike: Basically, we’re agreeing. It’s really hard. Good luck, but thank you.
AI this, AI that
Magee: Let’s talk a little bit about artificial intelligence. AI is being used in the practice of law, AI is being used in every aspect of our life. Your office has been one of the offices to think carefully and investigate [claims of AI usage]. Early AI cases that the SEC brought [involved] AI washing, right? Everyone’s hearing the term washing: It’s saying you’re doing a thing and you’re not really doing it. So we’re raising money or we’re holding investments or touting investments on the notion that we have AI or are deploying AI. And you’re not actually doing it.
Werner: So, I have looked at AI. Like a lot of other areas of new technology, it starts out with the SEC saying: “This is new. Let’s dip our toes in. Let’s see what’s going on. Let’s see what companies are saying. Are people raising money at or around or with this new technology, and does it implicate the federal securities laws?”
I have been part of several investigations that we opened, kicked the tires on and ultimately closed because we didn’t see any violations of the securities laws.
I have always tried to take a step back and say: “Is this the right place for the SEC? Is this the right place for the enforcement division? There may be another division within the SEC that’s better suited for the issues du jour. But going back, always, to: Is someone selling something to investors and lying about it?”
Our statute book is 3,000 pages, and there are technical violations and rules that, even after my long career, I’ve never even seen before. We have experts on those, and maybe they will impact AI at some point.
We have incredible entrepreneurial staff in our office who come to me regularly with,
“Hey, did you see this article? What do you think about it? Do you want to kick the tires on this? Because I think it could be X, Y or Z.”
I don’t want to just open up an investigation willy-nilly. I want to make sure that there’s potential substance there. So a lot of times it’s, no, let’s not open an investigation but let’s do some more research. Let’s look at some articles. See if there are experts in the field who can get us up to speed so that when we circle back around, we’ll understand this a little better and have a better sense of whether opening an investigation and devoting resources makes sense.
Fike: AI to me is sort of a catchy, flashy thing with robots that has been used in marketing because it sounds like something: “Oh, I should get in on that.” And so it flags that at-risk area. Here the commission and enforcement can stand on very firm ground. You can’t make misstatements to people when you’re asking them for money. And when you’re making disclosures about an investment, they have to be accurate and full.
On corporate cooperation:
Magee: Here’s my TED Talk on cooperation that nobody asked for.
The Department of Justice has historically done a far superior job than the SEC in telling the marketplace, “Here is what cooperation means and here’s how we credit it and here is how you can measure it, so you and your clients can make an informed decision.”
The SEC has taken notable strides in recent years. I would credit the Fort Worth office as being a pacesetter there in doing what it can to message: “Here’s what we mean by cooperation. It doesn’t mean responding when you get a subpoena — like, that’s just the law, bro. It doesn’t mean patting yourself on the back because you responded to a voluntary request. Guess what? If you don’t, you’re getting a subpoena, bro.”
True cooperation is not always self-reporting. Self-reporting is the platinum standard, but sometimes you just can’t do it. I’m not going to pretend that companies don’t go to bed at night hoping they can just whistle past the graveyard and this won’t come back to bite them.
But if our clients don’t self-report, should we still cooperate? Yeah. Strategically, cooperation means complying, following the law, but it’s Rebecca’s job, it’s my job, to tell the [SEC] staff, here’s how we are cooperating, put that in your notes. We’re making your job easier. We are preparing binders, we’re facilitating interviews, we’re translating foreign documents, we are giving PowerPoint presentations. We are making the staff’s job easier.
Now, why is that important? There are going to be fewer staff to do the same job. The incentives for ne’er-do-well wrongdoers increase because the risk of detection and the risk of enforcement if detected are far lower. So I would say the job of the Fort Worth division of enforcement and other staff around federal government and in the SEC is going to be harder, not easier. I would submit, you’ll have no choice but to make cooperation more of a two-way road, to move your dockets and to get to the right result for investors.
Werner: I have several examples of how our office has approached this and why we think not only has it been effective and meaningful, but why I think it works with the incoming commission.
Cooperation credit is real. The biggest problem is when we give it, we are oftentimes limited in saying what’s the credit. If we give full credit and we don’t bring an investigation or enforcement action, no one hears. If a tree falls in the forest. …
What I have been trying to advocate is, if we’re giving you credit and you think that you got a good deal for your client and you think you were dealt with respectfully and properly, go tell your colleagues, go tell people in the defense bar. If not, tell them that, too. But if it happens, go out and tell them, because it is real.
There is fraud going on all across the region. We don’t have the resources to cover it, but I want folks to know that we are looking.
And sometimes it includes me or other members of our staff picking up the phone and calling the general counsel or CEO of a company and saying: “Hey, I came across these facts. I’d like to talk to you about it, but I need you to be willing to talk to me about it. I don’t have an enforcement investigation open, but I’d like to get a little bit better sense of what’s going on. If I’m comfortable that you are taking the right steps or have taken them, I’m going to move on and go somewhere else. Send me your policies and procedures, send me your insider trading training.”
If I get the sense that the company has done everything that it can and has one bad apple, does it make sense for me to pursue an enforcement action? Or does it make sense to say: “Thank you for what you’re doing. Go back and revisit your policies and procedures. Maybe hire outside counsel to give it a second look. But know that if we see this again, the result might be different.”
And then I can move on to something else.