SEC Commissioner Uyeda Warns of Government Overreach

In an address before the Council of Institutional Investors, SEC Commissioner Mark T. Uyeda underscored the importance of adhering to statutory limits in the exercise of administrative power and enforcement, and called for a regulatory framework that provides clear, predictable guidelines for market participants.

He argued that "the temptation to be arbitrary in the exercise of administrative power and enforcement can be great," when "a regulator can, without practical limitation, promulgate, interpret, and enforce rules and guidance" (emphasis added.) He raised concerns about the SEC's jurisdictional authority to enact recent rules on private funds, on the expansion of the definition of "Dealer" and on the definition of security as it relates to cryptocurrencies.

The Commissioner cited the following examples:

• Private Fund Adviser Rules. Mr Uyeda argued that the expansive interpretation of IAA Section 211(h) ("Rules, regulations, and orders of Commission") (which gave the SEC the statutory authority to promulgate the "Private Funds Rules") was worrisome. Mr. Uyeda noted that Section 211(h) has three components: (i) sales practices, conflicts of interest and compensation schemes; (ii) investors; and (iii) brokers, dealers and investment advisers.
  • Mr. Uyeda pointed out that "sales practices, conflicts of interest, and compensation schemes" is an area that can be broadly construed as "nearly any form of communication can be deemed a sales practice, and any payment can be part of a compensation scheme."
  • Mr. Uyeda criticized the SEC's stance that Section 211(h) does not differentiate between retail and institutional investors. He argued that the SEC's interpretation suggests that entities like private funds that are exempt from certain regulations under the Investment Company Act may effectively be registered under the Advisers Act. He cautioned that the SEC's approach could result in the imposition of regulation on other types of funds like church plans, collective investment trusts and private pension plans, which are specifically excluded under different sections of the Investment Company Act.
  • Mr. Uyeda argued that Section 211(h) does not differentiate between SEC-registered investment advisers, state-registered investment advisers and investment advisers wholly exempt from registration. He said that this raises questions about the extent to which the SEC can impose regulations on state-registered investment advisers and those advisers who are exempt from registration under provisions of the Act.
• Definition of Dealer. Mr. Uyeda argued that the SEC's recent rule, which expanded the scope of the definition of "dealer" within the securities market, had no limiting principle; as a result, an institutional investor cannot know that it is not a dealer. (See previous coverage.)
• Cryptocurrencies and the Definition of a Security. Mr. Uyeda argued that there is no clear answer on what constitutes a security under the investment contract test in Howey, and thus the questions of when a cryptocurrency may be a security remains unanswered.