WASHINGTON, D.C. – U.S. Representative Ritchie Torres (NY-15), as a member of the House Financial Services Committee, today grilled the Hon. Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), during an oversight hearing about the agency’s regulatory developments, rulemakings, and other activities over the last few years. Additional relevant background can be found here.

VIDEO of Rep. Torres’s five minutes of questioning can be found here.

VIDEO of the full hearing can be found here.

A RUSH TRANSCRIPT of Rep. Torres’s remarks and questioning is below, as delivered:

REP. TORRES: Thank you, Mr. Chair. Mr. Gensler, good morning. I worry that the term investment contract has become so infinitely malleable and manipulable that it means whatever you unilaterally think it ought to be. And I worry that when it comes to crypto, your interpretation of the term investment contract has no limiting principle and therefore is acquitted by arbitrary and capricious enforcement action. So, I want to take a few minutes to explore the concept of investment contracts in greater depth. And I want to start with an obvious definitional question. We know that an investment contract requires any investment. Does an investment contract require a contract?

THE HON. GARY GENSLER, Chairman, U.S. Securities and Exchange Commission (SEC): You know something about this definition, I will quote Thurgood Marshall, “Congress painted with a broad brush.” When Marshall said that he was writing the law of the land. So, we follow this Howey test and how not just martial but other courts interpreted it and it has a four part, four components…

REP. TORRES: Again, I do not go to MIT, but in the Bronx, if I ask whether any investment contract includes a contract, the answer is typically yes or no.

MR. GENSLER: Actually sir, under the Supreme Court law of the land, they do not write that in. They say it’s an investment of money in a common enterprise, and you’re anticipating profits based on the efforts of others. So, I’m, I took an oath to follow the law of the land and that’s the Supreme Court law of the land.

REP. TORRES: So, in Howey the Supreme Court refers to an investment contract as a contract scheme, or transaction. That was the terminology that I saw in the case. And as far as I can tell, there’s nothing in the Supreme Court’s jurisprudence that suggests that a scheme or transaction means the absence of a contract. And so by way of illustration, we’ll consider the landmark case of SEC vs. Howey. In the Howey case, there was not a single contract, but there were two contracts. A land sales contract with the Howey company and a service contract and Howey and the hills, and the court found on the combination of those two contracts the total scheme, the total transaction, the total economic reality was constitutive of an investment contract. And so, a scheme or transaction does not mean the absence of any contract at all. It means as it did in Howey a multiplicity of contracts. In August, there were six law professors from law schools as preeminent as Yale, who came to the following conclusion – “No decision of the Supreme Court has ever found that a scheme that does not involve a contract could qualify as an investment contract.” And so, do you disagree with that statement? And if so, could you please cite the decision of the Supreme Court that has found an investment contract in the absence of an actual contract?

MR. GENSLER: The SEC has been in front of multiple courts and the investment contract has been…

REP. TORRES: What’s the name of the case Mr. Gensler? The Supreme Court case that has found an investment contract in the absence of an actual contract, you’ll need to cite a case…

MR. GENSLER: The SEC over the decades, whether it’s…

REP. TORRES: Can you cite a case?

MR. GENSLER: Whether it’s whiskey caskets, whether it’s crypto, if the public is investing based upon the efforts of others…

REP. TORRES: I find it telling that you cannot cite a single case.

MR. GENSLER: That’s a security.

REP. TORRES: How about a Second Circuit case? Can you cite a single Second Circuit case that found an investment contract in the absence of a contract?

MR. GENSLER: I understand where you’re trying to go. And I’m gonna leave that to the very fine attorneys at the SEC in front of the courts, but I’m saying the core principles that…

REP. TORRES: Mr. Gensler, let me finish. This is, this is a question to which you should know the answer, because the definition of an investment contract is the central issue. That’s what determines the extent of your authority. That’s what determines the applicability of federal securities law to crypto transactions, and your inability to answer that question is baffling to me.

MR. GENSLER: I’m answering it consistent with what the Supreme Court has said which is the law of the land which is a four-part test.

REP. TORRES: And yet you cannot cite a single case that can support your argument.

MR. GENSLER: It’s called Howey, it’s called Reaves, it’s called many cases at the Supreme Courts are eight or nine times it’s been affirmed by the Supreme Court.

REP. TORRES: Suppose I would have purchased a Pokémon card. Would doing so constitute a security transaction?

MR. GENSLER: You could purchase a Pokémon card. I don’t know what the context is, but if you’re just purchasing a Pokémon card…

REP. TORRES: If I purchase a Pokémon card, is that a security transaction?

MR. GENSLER: That’s not as secure…

REP. TORRES: Okay, if I were to purchase a tokenized Pokémon card on a digital exchange via a blockchain? Is that a security transaction?

MR. GENSLER: I’d have to know more.

REP. TORRES: Okay, so for you the process of tokenization is what transforms a non-security transaction into a security transaction?

MR. GENSLER: If the investing public…

REP. TORRES: I thought you were technology neutral.

MR. GENSLER: If the investing public is anticipating profits based upon the efforts of others and they’re exchanging fines. That’s the core of…

REP. TORRES: I see my time has expired.

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