Term, but he is a well-known speaker on crypto topics, which of course has been a major part of the last three years of the SEC, actually, eight or 10 years of the SEC, really, and certainly bids fair to be relevant for the next four.
Welcome, JW.
Welcome, my friend.
I just want to talk about crypto today, but Wallace says we have to talk about other things too: corporate governance, climate change, all of that.
Yes.
So, you were, let's start talking just about that vital time, the interim chairmanship.
So, there's three or four months.
The last chairman was confirmed in April, the one before that in May.
So, there you got three or four months of one of the commissioners being the interim chairman.
And so, you were counsel and senior advisor to the interim chairman, assistant to the regional manager.
Yes.
But, I mean, that's so interesting to be there and to just have the gavel of power.
Tell me about that.
Tell me about the reach of the interim chair's power, how that transition works, what you can get done during that time of the interim chair, what you got done, what interim chair Allison Lee got done.
Give me the interim chair playbook.
Yeah, it's an exciting time in DC generally.
The whole town is aflutter about this, and certainly securities world is no different from any other.
Taking it back to this is late 2016, after the quite unexpected victory of Donald Trump over Hillary Clinton.
I happened to have an article published in National Affairs magazine that they titled Saving Securities Regulation, in which I had slightly strategically peppered with a few quotes from the sitting Republican chairman or commissioners of the SEC.
Anyway, yada yada yada.
A few days later, I was hired to serve as counsel to Commissioner Pivar, who was a social friend previously.
And my first day in office was actually January 20th, so inauguration day.
I was the second to last employee hired by the SEC before the administration-wide hiring freeze.
So, really, just got into the door before they pulled up the ladder for a few months.
So, you let me get you joined the SEC and they said, that's it, freeze on hiring.
We're closing the cannon.
Yeah, yeah, that's right.
So, very early on, we took over the chairman's quarters on the 10th floor of the SEC.
The last transition, I would say, compared to the current process as I'm seeing it from the outside, was a bit more hectic.
Certainly, it was more of a swirl of activity.
So, in the early days of the administration, one of my first jobs was to call over some friends in the White House Council's office to get the actual designation FedExed over of Commissioner Pivar as the acting chairman.
Now, turning to what you can do in office as acting chairman, it's a pretty simple answer.
Under RE-ORG Plan 10, which is a Truman-era document showing how the governance of the independent agencies would work, the acting chairman of the SEC is simply that.
He's the chairman of the SEC, having plenary authority.
Now, that's obviously circumscribed by political circumstances.
In Commissioner Pivovar's case, we had a one-to-one SEC where he was the sole Republican commissioner at the time, and Commissioner Stein Karistine was the sole Democratic commissioner at the time.
So, that had various quorum-related issues.
In fact, with the two of them, the Sunshine Act, of all things, was a significant barrier because if the two of them were in an elevator together, that was technically a closed meeting of the commission.
And so, we had to keep the commissioners apart, even in the hallways, and certainly not talking about any substance.
While in office, we know that Commissioner Pivovar had the full authority of the acting chairmanship because some of his early acts, like pulling back enforcement delegations, we did a few things with staff interpretations of the Congo conflict mineral rule.
They did a few rulemakings, like the uncontroversial things like T plus one clearing.
Those activities were all well in his hands, but a certain senator, Senator Elizabeth Warren, didn't like it.
And so she actually asked the inspector general of the SEC to look into what the authorities of Commissioner Pieverbar actually were.
And as I recall, the opinion came down that, yeah, the acting chairman is just the chairman.
What I would expect to see in the next few weeks is when Chairman Gensler leaves office, as he said, at noon on January 20th, and Commissioner Lisaraga will be leaving separately on the 17th of January.
That will yield a two-to-one commission with Commissioners Peirce and Dueda on the right and Commissioner Crenshaw on the left.
I would expect one of the two Republicans to be designated by President Trump as the acting chairman.
And I think they would go about things very similarly to the way we did when we were there.
So our next interim chairman is going to be grateful for Senator Warren requesting that opinion from the IG.
So it's something they can rely on.
So thank you, Senator Warren, for that.
We really appreciate that.
I also remember Senator Menendez giving Mike some trouble for using his power as acting chair.
And, you know, now Mike is doing well and Senator Menendez is going in a different direction.
So if you wait by the river long enough, right?
Yeah, I think one of the key things we did and that one would do in this circumstance, the acting chairman's overriding role is to prepare the decks for the new chairman, whoever he or she may be.
So that may mean supervising the probable exodus of a significant portion of the enforcement staff, given the change in politics, and also dealing with departures of senior officers for a few months, making sure that basic work is tidied up so that when the new chairman hits the ground, he or she can hit the ground running.
The question a lot of crypto lawyers are asking me is what happens during that time?
Can the interim chairman dismiss ongoing litigation?
As you said, this is a unique situation where it's going to, Liz Raga is going to leave, so it's going to be 2-1.
So the interim chair can actually pass things.
So can the commission dismiss ongoing litigation?
Now, realizing that we've got a unique situation here where never before has the SEC spent so much resources on registration-only footfall, no fraud cases where a registration path is not available and where circuit judges have noticed this and kind of gone, this is weird, guys.
So unique situation we've inherited from Ginzler.
Can the interim chair dismiss some of these registration-only no-fraud cases?
Yeah, there's a couple.
There's a couple areas in litigation that I think are critical here.
There's the one you're alluding to, which is the SEC's own enforcement actions that it's brought against various third parties.
Those would have been voted by a closed commission by majority vote.
In many cases, let's just stipulate or assume that they would have been voted on a 3-2 basis by the three Democrats over the two Republicans.
I think in theory, and I'm not a litigator nor an expert on this, but my expectation is that in theory, that could be done, depending upon this particular status of each particular case, yes.
As a practical matter, however, and as a political matter, the Democratic commissioner, Carolyn Crenshaw, would have some ability to play, let's call it charitably quorum games.
She wouldn't be the first, certainly won't be the last.
But the SEC's quorum rules, as I read the other day, I think it's under the Exchange Act.
The quorum rules is that a majority of the full five-man commission is quorum, where there are fewer than three commissioners, as there were, for example, when Commissioner Pivobar was acting chairman, all of the commissioners, whether it be one or two standing in the body together, would be the quorum.
Here, since it's a two-to-one commission, as opposed to the anticipated two-to-two, had Lisa Raga not resigned, absenting oneself from the SEC or going on an extended holiday, in theory, could block controversial moves like that.
The other question I have, and we can maybe come back to this when we talk about regulation, JW, is what is the SEC, particularly the acting chairman, going to do about the pending rule challenges brought, among others, by crypto community, but other private litigants.
By one count, a client of mine, the Committee on Capital Markets Regulation in Cambridge, counted up.
There are about nine rules of the Gensler Chairmanship that have been challenged.
Of those that have been finally litigated to completion, there's about five.
Of those, four have been vacated and remanded.
And a number of important ones remain outstanding.
So, for example, the climate change rule, I don't believe, has been argued yet in the Eighth Circuit.
So, if you're inheriting this commission and a rule that you voted against as a commissioner, what does Commissioner Peirce or Commissioner Ueda do vis-a-vis that Eighth Circuit litigation in that particular controversial case?
Very interesting question.
And I don't know if you have any thoughts on that, JW, but that's another area where.
Yeah, great question.
And another twist on this, I think.
So parties make settlements in litigation all the time.
And usually courts will review the terms of the settlement, but then you'll be bound to the terms of the settlement, including the government.
So what happens?
So one strategy could be potentially, the SEC decides to settle the challenge to the climate change litigation and says, you know what?
You'll have a point.
You have a point.
We did a bad rule.
We admit it.
We admit it.
So as part of the settlement with you, we're going to rescind the rule.
And that's going to be a binding term of this settlement with you.
So when the commission goes back to rescind the rule, someone's going to challenge that, right?
Someone's going to sue the SEC to say, you're not allowed to do that.
And the SEC can rely on doing its own cost analysis of this, reviewing materiality, reviewing issues like the independence of FASB, which was what I argued in a comment letter.
But another thing the SEC will be able to do at that point, if you game out, there's a lot of chess games here, because the SEC can say, well, we're just abiding by the terms of the settlement in private litigation because we knew that we were wrong and we admitted that we were wrong.
I don't think that's ever happened before, but.
I mean, that is an incredible and Machiavellian device that I could only see leaping forth from the brain of JW Veray.
That is wonderful.
Other options, you know, you can't, I can't anticipate that the SEC would just simply take a dive like a boxer in the litigation, right?
Any court would say, look, if the SEC is not going to defend the rule, sort of similar to what the Obama administration did in ordering the Solicitor General not to defend the RIFRA statute of which they, the Religious Freedom Restoration Act, of which they were not fond as a substantive matter, you could see something like that happening here, I guess.
I think the concern would be that a court would appoint another party in interest, for example, the Sierra Club or the National Resource Defense Council or something, to defend the rule.
And then depending upon the outcome of the case, the SEC would have its hands bound in ways that it doesn't like.
So, I think participating in the litigation, settling the litigation, maybe changing the strategy of the briefs in important ways, those are all on the table.
And I think it's going to be one of the most fascinating things over the next several months.
And I think it's going to be something that falls very just given the briefing timetables very squarely on the acting chairman's shoulders, gentlemen.
And maybe the settlement, I take your point.
So, maybe the settlement, the better strategy, is a settlement that is not throwing the fight, but that is more like, okay, we promised we'll redo the rule, more focused on materiality boundaries, more focused on permissive disclosure that you can opt out of, things like that, kind of modify the rule.
Okay, so another thing I want to ask you, just one more question about this interim chairman's period.
So, my friend and policy opponent, Allison Lee, was the interim chair for a while.
I studied what she achieved when she was interim chair.
She was very focused on the climate change project.
She did a lot with it as interim chair.
She had roundtables, she had a request for comments, she had a concept release.
She achieved a ton to kind of get momentum under the new confirmed chairman.
Can our interim chair do that with crypto?
Can we do roundtables?
Can we do requests for comment?
Can we basically wrap up all the good ideas that we're going to talk about when we get to crypto, regex, you know, disclosure from a Siddley project, the stuff in FIT21?
Can we put all that in a document, SEC throw it out, and say, world, start commenting before we do a proposed rule and do a bunch of roundtables with some cypherpunks, some die-hard, you know, cypherpunk lawyers.
Can we do all that in the next three, four months?
That could be a fun way to start the new year.
I think it would be, and they can, and they should.
I think there's a lot of interest in the subject matter.
The acting chairman, whether it's Hester Purse or Mark Aritta, can certainly direct the SEC staff even to begin work on revised rulemakings.
My guess is just because of the quorum issue I alluded to earlier and the general desire to see that the new chairman have a free hand in putting his or her stamp on any new rule.
I would think that final rules would only be promulgated subsequent to the confirmation of the new chairman.
But yeah, I mean, there's no time like the present.
I think they should certainly hit the ground running.
The peculiarity of the independent agencies is that their confirmations of their heads tend to fall in the calendar much behind the executive departments, right?
So you can see situations even historically where, if I'm not mistaken, you know, Secretary of State Colin Powell was nominated and appointed before President Bush even took office, right?
You can see things like that.
You know, after the financial crisis, Mary Shapiro was boom, boom, confirmed very shortly after the inauguration.
But what's normal is a four or five month period where the rest of the executive agencies go through the Senate calendar and then the SEC comes.
And the side effect of this is that you kind of lose that 100 days metaphor, right?
Or not metaphor, the 100 days of the administration you lose at the SEC.
And so I think that one thing that one of those two, Esther or Mark, could focus on is, yeah, let's hit the ground running.
Let's try to use the energy newly in town from the inauguration to get something done so that the new chairman is drafting off of that when he or she comes into office.
Cool.
Another thing Acting Chair Lee did was she appointed, because you can hire people, she appointed John Coates to be director of Corpor Finn.
Yeah, I wouldn't do that.
No, I wouldn't do that either.
He was my BA professor, and we have been opponents in just about every issue since then.
But, you know, do the opposite of that.
Put Wallace as director of Corpor Finn.
Can you replace staff as they leave and get started?
How does that all work?
It's maybe a bit aggressive, but it's been done before.
There's precedent now for it.
Yeah, I mean, it's aggressive, but the government can't cease to operate for the period of six months, waiting for the vagaries of the appointment process.
It depends upon the subject matter.
Now, what is peculiar about that period, the last transition, namely the transition from Trump to Biden, is that unlike, say, 2008, 2009, there was no grand crisis afoot in the land.
There was no market in free fall.
There is no particular reason why this day and not tomorrow and not next week is the day when we need to adopt climate disclosure rules that are novel interpretations of the Exchange Act and Securities Act.
That said, appointing someone to a temporary role like Professor Coates was certainly makes sense to have somebody in there.
The only concern I would have, and I presume without knowing that this was negotiated and understood at the time, you do want to make sure that the new chairman has a free hand to appoint whomever he or she wishes.
So I think if the assumption is that the appointment to one of the senior officer roles is temporary, then have at it as far as I'm concerned, yes.
And you probably got it.
One of the things about doing too much is if you're coordinating with the incoming chairman before they're confirmed, then somebody might feel like you're being too presumptuous.
The Senate's very careful about prerogatives.
You raised another point about quorum as a strategic tool for the minority.
So is it one of the counterweights to that, a reason to not excessively use that strategy, is that if you're not showing up for meetings, you give the president the ability to remove your for call.
Defy it.
Yeah, right.
So, I mean, again, another untested proposition, but non-feasance, whether your view of the Exchange Act is that the president has four cause-only dismissal powers or plenary dismissal powers, as any sensible FedSOC member would say.
I believe in the unitary executive.
So I once had an argument with someone on the 10th floor that the president could fire me from Commissioner Petovar's staff if he so desired.
So I have an extreme view on that point.
But yeah, I think non-feasance of the job would run a certain risk.
Now, whether the president would pull the trigger on a firing under those circumstances is, you know, with the president's discretion, if that's a fight that he would choose to have, I don't know.
But of presidents, this was perhaps one of the ones that I would least be inclined to test if I were in the position to do so, shall we say?
Yeah.
Shall we talk a little bit about JW, the climate disclosure more specifically?
And I think there's an interesting issue here.
Let's set aside the question of the litigation and how that comes out.
Let's say that there's a continuance asked for by the SEC pending further rulemaking activity, for example.
What do you think the prospects would be for uprooting the law through notice and comment rulemaking by the SEC?
And are there any challenges that you would anticipate in doing that?
Well, the precedent for this is Gensler's move on just complete 180 on proxy disclosure, proxy advisor conflict disclosure, which is a pretty straightforward rule, very similar to credit rating agency guidance that progressives at pension funds supported.
But when it came to their ally at the proxy funds, they didn't like the application of those conflict disclosures.
So they wanted to stop it.
So Gensler came in right after a new rule was promulgated, adopted, and just first said, I'm not going to enforce it.
I won't enforce the rule.
Sorry.
I know you adopted a rule in the last administration, but I'm just not going to enforce it.
And then he said about undoing it.
And they were cross-lawsuits in that.
I don't know what the final resolution was of that.
Do you know what the final resolution was of those suits?
No, I can't recall.
So that's probably the precedent for doing something like that.
You know, it's hard for me to be objective about that conversation about that rule because I did maybe a 30-page comment letter on it.
And I just felt like the rule cited more to, in order to demonstrate materiality, it cited to a lot of international climate accords and international climate policymaking bodies, which just has no relevance for the concept of materiality in the federal securities laws.
I mean, I'm sorry, I just can't pretend the emperor has no clothes, has clothes on.
I think I've said that like 10 times in my letter.
And also, I felt like it really threatened and was disrespectful to the good folks at FASB, who I've admired very much.
My work with the Advisory Committee.
So I'm just such a hard critic that I can't really be objective about that rule and for lighting it on fire and letting it die.
But I'm sure that there are more nuanced approaches, like, you know, what we'll rescind this, but we'll do some version of Chair Shapiro's concept release, but with more substance to it instead, to say these situations might be material, but generally speaking, materiality is an important constraint.
Nothing, I mean, just what has the thought was to harmonize with Europe's approach on scope two and scope three disclosures.
And I'm sorry, but the federal, the 33 and 34 Acts are not compatible with scope two and scope three disclosures, and they never will be.
So I just don't think we can have anything like that.
So it's either kill it or it's some sort of a materiality in the context of environmental issues interpretive release to expand upon the risk disclosures that are already there and the environmental liability stuff in GAAP that's already there.
You can do that instead, perhaps.
Yeah, I can't disagree with anything you've said there.
I think there's a further concern that I might have.
There are certain late Clayton era rules.
I thought there was an accredited investor one, maybe the proxy rule you're talking about here, proxy advisor rule is another, where the commission did a 180, as you say, during the early Gensler period.
And this was when those rules had not yet even gone into effect.
There certainly was no change to the economic record in response to those.
So there was no real evidentiary basis built in order to do that.
And in order to uproot those rules, as those in our audience who are not specialists in administrative law, they need to pay attention to, to regulate under the Administrative Procedure Act is substantially the same process as to deregulate.
So if you want to pull down a rule, you have the SEC's Division of Economic and Risk Analysis must come out with an economic cost-benefit analysis of the change in the rulemaking baseline.
Early on in the Gensler administration, there are some incredibly beautifully written but scathing dissents by Commissioner Peirce in particular, faulting the SEC.
And this is a commissioner who has regularly, and in my view, quite rightly said, we need to have an automatic look back every five years periodically on all SEC rulemakings, even uncontroversial ones, to see how they're working.
To turn around with respect to the climate change disclosure rule, which has not yet gone into effect, which is still subject to litigation, and simply uprooted without having the requisite economic basis to do so, would be a difficult and uncomfortable position to be in.
At the same time, discomfort about making the argument probably is outweighed by the costs of what is reputed to be the most costly of all SEC regulations.
So, I certainly would like to see it uprooted, but I'm curious to see how they will handle that issue as well.
It's fair.
The record is voluminous.
So, you can use the old will return the rule.
Yes, but the staff members who are writing the cost-benefit analysis haven't changed, presumably, in the six months since the last one was promulgated.
So, I think there is an awkwardness to this conversation, given the permanence of the SEC staff and the impermanence of our political arrangements.
That is a fascinating issue.
Now, another topic now, I think we have delighted our audience long enough with the generic admin law discussions.
I think we should give the people what they want and a discussion of digital assets and crypto in particular.
And I think we have the right man to do that here in Professor Verret.
So, we talked a little bit about what the new chairman, what the new acting chairman might do.
There's going to be roundtables, presumably, on market structure reform, DeFi, CeFi, et cetera.
Give me a few minutes of JW Varette is a roving advisor to the acting chairman or the chairman of the SEC.
He's a vocal member of these roundtables.
What do we need to do to resolve not only what's gone on the past four years under the against the regime, but arguably, I think the crypto community is not so hot on what was done in the previous regime where I was there in Corp Finn covering Corp Finn for Commissioner Pivovar in the Clayton era?
So, what do we need to do to get to set the ship aright?
The first thing is open source the process as much as possible.
Learn from the open source ethos of blockchain development to open source the development of regulations within the blockchain financial sphere.
And in doing so, tap the genius of the crypto law community that have been ignored for four years and have, I mean, talk about pent up energy.
We're talking about megawatts of electricity in the crypto law community.
And these folks are the kinds of backgrounds that SEC staff are familiar with and respect.
There's a lot of former SEC people who made the jump into DeFi, who are really excited about DeFi.
I know three or four people, and I would say maybe at least two or 300 lawyers who work in crypto, who have big law experience, some SEC experience, or other Treasury or banking regulators who are working in DeFi and crypto and have ideas.
They have a lot of ideas.
So, open source and tap that knowledge base, and you're going to, you're going to, we can fix this.
They are ready to go.
And so, you had mentioned, you know, one of the concerns being potentially a staff not ready to get their heads around change from the last four years.
You know, there might be some of that, particularly in the enforcement, I mean, an enforcement group devoted to the crypto cases that are out there now, the non-fraud cases.
I could see, I certainly see that.
At Corp Finn, though, I don't know.
You know, I know some folks in crypto who've gone to Corp Finn and had great conversations looking for no action relief and very productive conversations.
And all of a sudden, once it gets the 10th floor, it dies.
That's where good ideas go to die for the last four years.
So, the first thing is just tap that community because they know what they're doing.
And there's some good ideas already that have gone in the SEC.
So I did a request for rulemaking back maybe almost three years ago on crypto after I addressed some of my concerns directly to Mr. Gensler when I retired from the Investor Advisory Committee.
And then six months later, I think Coinbase got the idea from me because they did a request for willmaking on crypto, but that was much better than mine.
I mean, their team had developed something much more useful in their requests for willmaking that they've now used in litigation and that's going to the Third Circuit and got an interested discussion among the Third Circuit panel.
They saw the hypocrisy.
I don't think never before has a defendant requested regulation a year before they were charged.