ENFORCEMENT—8 representatives question SEC’s habit of requesting documents from crypto firms - 18 March 2022

A bipartisan group of congresspersons believe the SEC’s use of investigations to gather information from crypto and blockchain firms could violate the Paperwork Reduction Act.

A group of eight U.S. Representatives—half Republicans, half Democrats—wrote to SEC Chair Gary Gensler to learn more about the agency’s use of document requests to gather information from cryptocurrency and blockchain firms that are not within its jurisdiction. According to the letter, the Division of Enforcement and Division of Examination’s authorities to obtain information are better suited to the notice-and-comment rulemaking process. The congresspersons ask the agency a series of questions about its voluntary document requests to crypto firms, as well as the costs and benefits of those requests.

The letter comes from Tom Emmer (R-Minn), Warren Davidson (R-Ohio), Byron Donalds (R-Fla), Ted Budd (R-NC), Darren Soto (D-Fla), Jake Auchincloss (D-Mass), Josh Gottheimer (D-NJ), and Ritchie Torres (D-NY). In a press release, Emmer said, “Crypto startups must not be weighed down by extra-jurisdictional and burdensome reporting requirements. The SEC must ensure that its information-seeking requests … are not overburdensome, unnecessary, and do not stifle innovation.”

While acknowledging that the SEC can use Forms 1662 and 2866 to request voluntary production of documents, and that these requests may help the staff assess the merits of an investigation, the representatives posit that the practice may run afoul of the Paperwork Reduction Act. This statute requires that “in seeking information from the American public, federal agencies must be good stewards of the public’s time, and not overwhelm them with unnecessary or duplicative requests for information,” they write.

The legislators ask 13 specific questions of the SEC, beginning with how many voluntary document requests it has sent regarding crypto, digital asset, and blockchain firms in the last five years, and the average number of questions per request. The letter also asks how long firms have to respond, what their expected compliance costs are, and whether the SEC has conducted a cost-benefit analysis to determine the fairness and efficacy of its requests.

The letter also asks pointedly about the voluntary nature of the Form 1662 and 2866 requests: Have any firms been penalized for not responding? Does the request make clear that it is voluntary and articulate the indirect consequences of not responding? Does the SEC indicate to the firm whether it has already begun an informal investigation into the company?

Additionally, the representatives ask what proportion of time is spent on crypto- and blockchain-related document requests as compared to all other SEC-interested subject matters. The letter requests specific information about the agency’s process for opening a Matter Under Inquiry, sending a voluntary document request, and informing the recipient of the SEC’s objective and plan for the information. Finally, the legislators ask if there is a limit to the number of requests per year and whether the SEC, during Gensler’s tenure, has tested the collection method of information in the crypto/blockchain industry through a pilot program and if so, what the tests illuminated.

The letter asserts that the responses to these questions will offer an understanding of the SEC’s authority and need for transparency, while ensuring these requests are not unnecessary, overly burdensome, or stifling of innovation. It asks for a response by April 29.

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