\n<\/p>\n
Orders requiring the SEC to turn over internal documents related to a 2018 speech on digital assets aren\u2019t just wrong on the law, they are likely to have a chilling affect on policy deliberations throughout the federal government, the agency says.<\/p>\n
The Securities and Exchange Commission is fighting to keep Ripple Labs Inc. from getting documents related to the speech by William Hinman, then the Director of the Division of Corporation Finance. <\/p>\n
Magistrate Judge Sarah Netburn rejected the agency\u2019s objections based on relevance and the deliberative process privilege in a series of discovery orders this spring. The latest order, dated July 12, denied SEC\u2019s motion to claim attorney-client privilege over the documents.<\/p>\n
In its July 27 brief<\/a> asking US District Court for the Southern District of New York Judge Analisa Torres to toss Netburn\u2019s orders, the agency argues that the speech didn\u2019t reflect SEC policy, but rather what advice his division would give the agency.<\/p>\n Although the SEC maintains that it isn\u2019t bound by Hinman\u2019s speech, it says that Hinman\u2019s remarks still provided \u201cmeaningful information\u201d to the public about the division\u2019s approach to regulating digital assets. The communications surrounding the speech therefore ought to be protected by the deliberative process privilege, it says.<\/p>\n In other words, the agency would like to have it both ways, which Netburn has said pointedly<\/a>, more than once<\/a>, that it cannot do. Either the speech was intended to reflect agency policy, or it wasn\u2019t, Netburn said.<\/p>\n In the speech<\/a>, delivered at a Yahoo Finance All Markets Summit in San Francisco on June 14, 2018, Hinman explained, among other things, how the agency might analyze sales of digital tokens as \u201cinvestment contracts\u201d under SEC v. Howey<\/em><\/a>.<\/em> <\/p>\n Hinman also said that, in his view, offers of sales of Ether\u2014a digital token that Ripple has said it understood to be similar to XRP, the digital asset and allegedly unregistered security it developed\u2014weren\u2019t securities transactions, at least \u201cin their present state,\u201d due in part to Ethereum, the decentralized network Ether traded on.<\/p>\n The SEC\u2019s objections characterize Hinman\u2019s remarks as an invitation for industry to consult with SEC staff, rather than a statement of agency policy, but some in the profession didn\u2019t see it that way.<\/p>\n According to Foley & Lardner LLP partner Pat Daugherty, many securities lawyers understood that Hinman\u2019s guidance could be relied upon for advising clients, not as a framework for approaching agency staff. <\/p>\n Daugherty leads the firm\u2019s digital assets practice, but spent time inside the SEC when he served as counsel to former SEC Commissioner Edward Fleischman in Washington.<\/p>\n Informal Procedures<\/strong><\/p>\n Hinman wasn\u2019t conveying official agency policy in his speech because a majority of commissioners had \u201cvoted not to approve its content,\u201d but that doesn\u2019t mean the communications around his speech weren\u2019t agency business, the SEC claims.<\/p>\n Senior agency officials \u201croutinely give speeches that provide meaningful information to the public about staff approaches to legal and policy issues, even if those approaches do not formally bind the agency itself,\u201d the agency argues.<\/p>\n Whether the speech was or wasn\u2019t adopted by the SEC is something that Ripple contests<\/a>.<\/p>\n If the speech in fact reflected agency policy, \u201cthen that really heightens the impact of that speech for Ripple\u2019s fair notice,\u201d Ripple\u2019s counsel argued when it was seeking to take Hinman\u2019s deposition last year.<\/p>\n In 2018, those who practiced in the field \u201cwere desperate for some guidance\u2014any guidance\u2014from the SEC or its staff,\u201d Daugherty told Bloomberg Law.<\/p>\n He said he told an SEC staffer as much while at the Ray Garrett Institute at Northwestern University, held about two months before Hinman\u2019s San Francisco speech.<\/p>\n She replied that he was \u201cworking on a statement that he would be delivering soon, as indeed he did. The plain implication of her comment was that the Bar would have guidance that it could rely upon in advising clients,\u201d he said.<\/p>\n After former SEC Chairman Jay Clayton testified<\/a> on Capitol Hill a couple of weeks later and referred to Hinman\u2019s speech \u201cin a manner that was obviously intended as an endorsement,\u201d lawyers in the field understood that they \u201ccould rely on what the SEC\u2019s Chairman had to say as well as what the Director of Corp Fin had to say,\u201d Daugherty said.<\/p>\n \u201cThere was no daylight between their views,\u201d he said.<\/p>\n Even if not official agency policy, according to Hinman\u2019s deposition testimony, the Division of Corporation Finance \u201cgenerally, but not always\u201d applied the framework he outlined in his speech.<\/p>\n He said there were \u201cother factors that may be relevant that are not in the framework, things that are more derived from the Gary Plastics<\/em> case, for one.\u201d<\/p>\n But Gary Plastic itself was also featured in the speech, with Hinman saying it \u201cteaches us that the instrument can be part of an investment contract that is a security.\u201d<\/p>\n According Daugherty, the bar \u201calways\u201d relies on speeches and other informal communications by SEC officials. \u201cI learned this myself while working at the SEC. It is especially important in areas of the law where the terrain is novel and the precedents scarce, as was the case with digital assets in 2018 and is still the case today,\u201d Daugherty said. <\/p>\n In Daugherty\u2019s view, the \u201cpresent Commission seems intent on keeping the law obscure, so that it can pursue a policy and practice of regulation by enforcement rather than regulation by regulation.\u201d<\/p>\n This feature was adapted from this week\u2019s Bloomberg Law\u2014Litigation newsletter. Bloomberg Law subscribers may sign up <\/em>here<\/em><\/a>.<\/em><\/p>\n<\/div>\n