Regulation
State Attorneys General Say SEC Has Gone ‘Too Far’ in Regulating Cryptocurrencies | Orrick, Herrington & Sutcliffe LLP
On July 10, the attorneys general (AGs) of Iowa, Arkansas, Indiana, Kansas, Montana, Nebraska, and Oklahoma released a friend of memories in the U.S. District Court for the Northern District of Texas, supporting neither side but instead criticizing the SEC’s rulemaking powers. The state AGs believed the SEC had gone “too far” in its attempt to regulate cryptoassets. The brief alleged that the SEC had engaged in a “scorched earth litigation” campaign instead of engaging in typical notice-and-comment regulation. The AGs argued that the SEC had decided on its own merits, without authorization from Congress and in disregard of the Administrative Procedure Act (APA), which stated that its job was to regulate cryptoassets.
The brief outlined three arguments in support of its criticism. First, the AGs argued that the SEC had improperly asserted its enforcement powers by violating the APA and that its actions threatened to override state laws if the SEC entered into crypto-asset investment contracts under the federal securities law. Second, the AGs argued that crypto-assets were not investment contracts under the Howey test and therefore could not be regulated by SEC rulemaking. The AGs further argued that the SEC lacked clear congressional oversight and that its attempted abuse invoked the principal questions doctrine and the canon of federalism. Finally, the AGs argued that even if Congress had authorized the SEC to regulate crypto-assets, it would have exceeded its constitutional authority by allegedly violating Article I because (i) the Securities Act provided no “intelligible principle” for determining whether or not something was an investment contract; and (ii) the investment in crypto-assets did not involve either foreign or interstate commerce.
The state AGs said they filed the brief to protect consumers from unreasonable regulations “imposed by the whims of a rogue federal agency.” They urged the district court to dismiss the SEC’s enforcement of crypto assets “absent an investment contract.”