REPUBLICAN ATTORNEYS GENERAL SIDE WITH THE CRYPTO INDUSTRY BY CHALLENING THE SEC’S AUTHORITY OVER CRYPTO TRADING: Kentucky v. SEC, No. 3:24cv69 (E.D. Ky) (filed 11-14-24)
The crypto industry has some new allies in court. On November 14, 2024, a group of 18 Republican attorneys general filed a lawsuit in federal court in the Eastern District of Kentucky challenging the SEC’s position that secondary trading of crypto investment offerings are securities transactions that must comply with the securities laws and take place on registered securities exchanges.
This suit is part of a larger concerted effort by the crypto industry and its allies to fight back against the SEC in court, on the Hill, and even during the election where they singled out candidates for criticism or massive financial support, depending on how they viewed crypto investments. Their goal is to win the right to peddle hugely risky crypto investments to investors, and make huge fortunes for themselves, without providing investors with the protections in the securities laws that have served investors and businesses well for almost 100 years. Without those protections, investors will continue to suffer massive losses as they gamble in crypto markets that are extraordinarily volatile, unpredictable, and rife with manipulation—all without being anchored to any financial product with real value.
In this lawsuit, the AGs seek to challenge, in particular, the SEC’s policy of enforcing the securities laws against secondary trading in crypto assets i.e. when investors can buy and sell crypto assets after their initial offering to investors. The AGs claim that the SEC is exceeding its authority and preempting a number of state laws. The case is just getting started, but we expect to see briefing on dispositive motions before long. See Better Markets’ latest fact sheet on the threats posed by crypto HERE.
THE FATE OF SOME IMPORTANT RULES HANGS IN THE BALANCE IF THE NEW ADMINISTRATION REFUSES TO DEFEND THEM IN COURT.
When a new administration wins an election and appoints new heads at the regulatory agencies, many of the policies and rules previously issued by those agencies are at risk of being weakened or repealed. It can happen in a number of ways. The agencies can rescind guidance, announce a different enforcement policy, or even conduct new rulemakings to roll back prior rules. Yet another way in which rules can be eliminated is through litigation, when the new agency decides to abandon its defense of a rule that has been challenged by the industry in court. And even in enforcement actions, the new agency can decide to drop the case or any appeal where the new agency believes the case is based on an erroneous interpretation of the law.
We expect to see multiple examples of these different strategies for nullifying rules in the months ahead, particularly in court cases where rules have been challenged. In our newsletters and reports, we have tracked, highlighted, and even participated as an amicus in many cases brought by industry to challenge rules issued by the SEC, the DOL, and other agencies. Key examples include helping the SEC defend its climate risk disclosure rule against a slew of legal challenges that are now consolidated in the Eighth Circuit. (See our amicus brief HERE.) That rule requires public companies to disclose material information about the climate risks they face and how they are managing those risks. That’s information that investors want and need to make decisions about where to invest their money and how to vote their proxies.
Another important rule currently under assault in the courts is the DOL’s best interest rule, finalized in April of this year. It requires all financial advisers to act in the best interest of their retirement saver clients, not boost their compensation by recommending over-priced or risky investment products. It was challenged in two federal district courts in Texas, and both of those courts stayed the rule while the litigation unfolds. Now the DOL is challenging the stays in the Fifth Circuit Court of Appeals.
There are many other examples, including attacks on the SEC’s approval of an important board diversity disclosure rule, the SEC’s updated definition of a “dealer” to better protect markets from high frequency traders (see our amicus brief HERE), the SEC’s tick size rule that facilitates trading by retail investors at fairer prices, the SEC’s rule designed to increase transparency into short selling and securities lending, the CFPB’s rule curbing abuses via late payment fees, the CFPB’s rule addressing problems with buy-now-pay later loans, and the CFPB’s effort to combat discrimination in the consumer finance markets through the exercise of its authority to take action against unfair, deceptive, or abusive acts or practices.
We’ll be watching closely to see how the SEC, the DOL, and the CFPB approach these cases once new leadership takes office early next year. Unfortunately, we expect the defense of many of these rules to be abandoned in the courts. That means that fewer restraints on abusive practices and more pain for consumers and investors.
