Regulating Finance and Cryptocurrency with Jina Choi (U.S. Securities and Exchange Commission, San Francisco) | Disrupt SF (Day 1)
12:29AM Sep 6, 2018
federal securities laws
Alright, our next guest I can't tell you how many times and posts were talking about regulatory hurdles with with startups. And our next guest has the inside scoop on all of that, because she is the head of the SEC here in San Francisco. So with that, please welcome to the stage Gina choice. And your moderator? Connie bozos big round of applause.
Hello again. So
I don't think people in Silicon Valley were paying a lot of attention to the SEC until a couple of years ago. And I think that's because they didn't really have two companies were private, they went public, at which point the SEC started paying attention, of course, now much more happens in the life of a company while it's still private. And in some cases, companies are raising, you know, hundreds of millions, if not billions, of dollars. Of course, the SEC cannot ignore that.
We're going to be talking today about the sort of evolution of the SEC developing interest in Silicon Valley and how things work today with Gina. So glad you're here. I'm glad to be here. Thanks so much for inviting me. So is it fair to say that your office has never been busier and I've been with the office since 2000, with a little break
being a federal prosecutor and it is very busy in our office, our office has grown. I think our region is just incredibly busy. Our region covers Silicon Valley covers San Francisco, it covers Portland, Seattle, Idaho, Montana, and Alaska. It's a very diverse region, we could all our resources could go into Silicon Valley on its own, but it is incredibly busy. How many people are working for the agency for your for the agency. So the SEC, as you know, is an agency basis in Washington, DC it has 11 regional offices. And the San Francisco office has generally been smaller to mid sized office. So 4500 people work for the SEC across the nation. In San Francisco, we have a headcount of about 130 of those 130, half of half of the individual. Half of our professionals work in enforcement, which is probably what most of you all are familiar with what we do, that's the more public side of what we do, half of the office works in examinations, and that is kind of inspections role almost like an audit roll over. As you can imagine, financial services is a highly regulated industry. So we, uh, we regulate broker dealers, investment advisers, investment companies, and our examiners have great expertise and kind of going out and learning more about the industry making sure that they are
living up to their regulatory reform. And then the enforcement side of what we do is investigating violations of the federal securities laws. Okay. And sometimes that's easier than others. I would guess
very famously, Elon Musk, maybe three weeks ago now tweeted that he was taking Tesla private said funding was secure Metro spec, maybe not such a great idea.
Can you tell us anything about where that investigation is? I can't I can't tell you about any particular investigation in our office. And I can't confirm or deny the existence of investigations that are in our office, I can say that we are very diligent about covering the issuers in our region and some of the more high profile issuers in our region. We tried to stay on top of that, but that's about all I can say,
Are you seeing more CIOs, though, sort of using social media to communicate with their shareholders, their employees? And is that a terrible idea? I wouldn't
say it's a terrible idea. I do think that that is something that we all are on top of. I think we're all experiencing that just as members as citizens of this country. I think that people are communicating in different ways. A lot of what we investigate is the way that companies communicate with the public and their shareholders were on top of that, I feel like our regulatory regime, our laws, even though they were you know, most of our laws were instituted in the 1930s and 1940, those are when those acts were passed by Congress, even though they are they were kind of created, then I think that those principles, we have a very,
we have a system that we can rely on. And I think that those principles are very strong and that they apply to the communications that exists today. And I think they're flexible that way. So I think that when
when individuals use different forms of communication, I think that
we don't have a problem with that unless they are violating the federal securities laws. I think that communication has developed even over the time that I've been at the SEC and that probably dates me but I think that there were there was a series of cases enforcement actions that came out of our office that involved fax blasts where they were communications that were sent by fax I think that at one point just email was revolutionary and the idea of that form of communication so now we have social media and that's just par for the course is kind of movie on
it. So media at I don't know if this is too broad a question but or false statements enough to prove fraud? Or does it have to be sort of like an accompanying scheme?
I think that generally if you look at our statutes, most of our statutes, when you talk about fraud, you're talking about a state of mind you're talking about a men's Bria, we call it see enter, you have to do something with intentionality. And so the idea of just making a misstatement doesn't necessarily rise to the level of fraud. I think that's what makes our investigation so challenging. I think the idea of trying to understand what people's heads can be very difficult. I think that we do, we tried to do a good job of putting that together. I think that's why email was so revolutionary at one time, because a lot of times you're chronicling your thoughts in your email and sending them to someplace where you don't think anyone's going to discover that. So a lot of our evidence comes in that way. A lot of our evidence comes in through maybe discussions that you had, or maybe it's circumstantial evidence. But when you ask 10 misstatement, I think that that is that can be the first step to fraud. But generally, when we talk about fraud the F word I think we are talking about a state of mind that's a little bit higher than that.
Well, I don't know what
the Elizabeth Holmes state of mind was. But another famous case of yours was around Thera nose homes being the co founder and CEO and the longtime president Sonny bolani, you filed massive fraud charges against them back in March. And I think people in Silicon Valley sort of cheered that decision. But I think they also wondered a little bit why that took so long.
And is that what you're asking me? Why yes?
So I feel like there were sort of whispers at the SEC, he was looking into this, you know, as early as 2016. So, and I think I think that's I guess that's a fair question. And I think that's one that I'd love to kind of educate people on and tell you about our investigations. I think that our investigations are pretty resource intensive, as you can imagine, the facts that we develop their have a higher standard than I don't know, like a journalist would develop, and you can understand why that is a journalist writes a story. And that's what it is, it's a story that people read, when we speak, we have to file a document in court, and we are we are going to be held to the standard to be able to prove the things in that document by preponderance of the evidence, we need to go into court and we need to be able to prove it. And that's one of our big stakeholders is the court system. So the idea that we we might know it, we might think that we can, allegedly, this we actually need to have admissible evidence in order to move to that to that level. And I think it's really important that people understand that what we do we take really seriously the people that's to to file in court to be sued by your government. That's a really that's a really serious proposition. And it's something that I think everyone in our office takes really seriously. So the idea that we're collecting evidence, I think it would trouble then there's always that tension. And I think you kind of alluded to it this idea, oh, well, it must be a fraud, you should be acting very quickly. We do believe in Swift enforcement action, I think, in order to really deter conduct to deter bad conduct, it needs to happen close in time, any parent knows this, and a pet owner probably knows this in order to really deter bad conduct. I think it has to happen close in time. But then there is that tension of what can you prove, and I think as people who are
citizens and just members of society, I think that that's also important that you realize that we are investigating, and that we are, we take our burden of proof pretty seriously.
In this case, the Wall Street Journal had done an amazing job investigating the story and sort of talking about where things may have gone off the rails, which I'm sure was helpful to you. I'm just wondering how much of your sort of work comes from sort of picking up things in the press how you get other tips, I know, the SEC has a whistleblower program, I don't know if those things sort of find their way to you. They do,
I think that I'm glad you brought up the whistleblower program, when it comes to different investigations, they have many routes, a lot of times, you know, we will, you know, people in our office will are very attuned to what is happening. And so they are kind of making sure that we're on top of what's in the press, and that can be a source. Another source is our whistleblower program. I think that the whistleblower program has existed really in the state it's in since 2010, with the change in the law. And I think that it's it's that we have incentivize people to come and tell us about potential federal securities laws violation, I don't think it'll surprise anybody in this audience to know that the most number of whistleblower complaints come from the state of California. And I think that that can be a very fruitful source of where potential securities laws violations. I think that's been a bit of a game changer for us. But I also think that having the whistleblower program there has also incentivize companies and executives to kind of come forward and self report that is a another large source of our investigations. I go out and speak all the time and talk to people about the advantage of self reporting of cooperating with your regulator of letting us know about potential violations. And I think that that that's another way our exam program is another way that sometimes the source of our investigations because the examiners are out in a highly regulated industry, in investment advisors in broker dealers. I think that's another way that we get cases.
But I think that we do our best to really kind of cover our region cover our area and make sure we're kind of on top of things.
I'm not sure where this case originated. But another sort of high profile case that was sort of resolve very recently was the case of a berry, a venture capitalist named Mike Rothenberg, you alleged that he had misappropriated millions of dollars as investors money, Rothenberg didn't admit to any wrongdoing. But he's now been barred from the industry. He agreed to a bar I guess of five years from the investment advisory brokerage business.
What you know, I think some people thought that was onerous. I think other people thought that wasn't going far enough. How do you decide on a settlement? I think that's it's a great question. And it's an interesting tension that we have. So I would say first, I would say I would look at our kind of regulatory scheme. And I would look at the types of cases that we bring mostly the cases that we bring we file settled. When I first started at the commission, we filed 90 to 95% of our cases in a settled posture. We're a civil law enforcement agency. So that means that we're we don't have the power to take away people's liberties. We can't put people in jail, we can assess penalties we can, but I think one of our most impactful remedies is a bar to bar people from the profession that they've spent time trying it spent time resources investing in to become a investment advisor or a broker dealer, or a public company CEO, or CFO or section 16 officer or a board member, it's those things that usually prevent settlement A lot of times when we're trying to negotiate something our settlements are generally neither admit nor deny settlements, we all will get an injunction from the court saying that you can't violate this section of the federal securities laws I think that for a lot of people that is a warning that is a that is a significant and courts will fire courts find that that is a significant act to ensure join a person but I also think that the bars are very impactful and that's where people when they negotiate with us a lot of times they'll they'll feel like I can pay a bigger penalty I'll pay you more money just don't bother me from this industry and I think that that's where we have a tough negotiation because I think that's where we can have our greatest impact is through our bars so that's I think that'll give you a good idea of
what a remedies are well I know the audience would kill me if I didn't ask you a little bit about Icos initial coin offerings is the SEC going to regulate them.
I think that we have brought significant enforcement actions in this space. I think that
you know, out of our office just in the last week, week and a half, we brought a great Ico uh. Well, I think of it as a great Ico case but impactful IC okays. I think that we've been strategic about the types of Icos that we will bring enforcement action against I think some of what you're you're seeing I saw your last panel a little bit of your last panel about Icos and it's interesting to me that some people are not considering that as effective a capital a capital formation instrument as maybe they had even a year ago I think that what's been great I think in this space is we have a chairman I think Jay Clayton who is formerly a capital markets lawyer and I actually think that he's kind of the perfect person to assess what's been going on in that Ico space I think that
bill Hinman our head of Corp, Corporation Finance also is very thoughtful about this area. And I think that it's it's one where
we've taken a lot of it's just been in the news a lot and I know that my colleague, Valerie's to panic is talking about that on another stage. But I do think it's an area that we've approached very thoughtfully. If you go to our website, sec.gov I know that the chairman and Bill Hinman just spoke recently about kind of how they assess Icos as well, as well.
I was interested I saw something he said in April. So my understanding the beginning here. I mean, I do think the SEC has had a very much a chilling effect but it sounded like they were going to be where you were going to be regulating all sort of tokens as securities and then he built him and came out and said we can sort of see you know, some of them as utility tokens as they were sort of designed to be and then we have you know these sort of tokens securities on the other hand so I mean I feel like that's still not terribly clear will that be clear over time or I don't know that
it's not clear I think it's I think if you look at the Hinman speech in June, I think it's pretty clear what he's saying that there is and I guess I would hesitate to say that it's really any sort of standard that bills really set forth but more the idea of that at all roots back to how we the holly test of what in what an investment contractors and what is security is under the federal securities laws and that's really court You know, that's a court decision is supreme court decision. But I think the idea that a lot of these if if this is really an enterprise that you're that you're not really kind of involved in
it, you know, if you're a kind of a passive investor in this space and you're you have an expectation of profit, I think that it's pretty clear that those are securities and I think that most of the
guys we've seen great, most people are sort of counting of them. Right.
But speaking of jQuery, so you've got Icos and cryptocurrencies you have read, you know, run of the mill fraud. And then the week before last, I think he said that the agency is much more interested in letting private investors access private deals, or what did I just say mainstream sort of investors access private deals? That's a lot
before you go, can you just sort of maybe tell us what the priority is there and how you sort of i do i think that that is that's also a speech that's on the website that I encourage you if you're interested in this space to to read and access. That was a speech that he gave in Nashville, just like 10 days, and it was I think you were referring to I think the idea that that there has been a decline in IPOs, I think we've gotten all acknowledge that I think the reasons for it, I think are debatable, but I think that this is an area that he feels very strongly
if mainstream investors aren't allowed to kind of have the upside that they've had in the past of investing early in kind of growth stage companies. I think that really and if it's all just private equity, and if it's all wealthy people who are the only ones who are able to access and to get that upside that comes with that growth, is that really the society that you want to have, especially when you think about we've really put a lot on individual investors to prepare for their retirement and it's really kind of up to you. It's not about getting a pension anymore, it's about your investments. And if you don't have those opportunities, you know, is that really fair to individual mainstream investors? Right. Well,
you clearly have a lot on your plate. I thank you for coming. I hope we can do this again. Oh, thanks so much, Connie. Thanks a lot.