Securities Regulation

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

By Jimena Rubio, LL.M. Candidate 2018 | Posted on

In the wake of further developments by the SEC, many key players in the industry are currently combining efforts to petition federal authorities to see certain virtual currencies in a “different light.” The Venture Capital Working Group is led by Andreessen Horowitz, which includes another significant VC firm, Union Square Ventures, and lawyers from Cooley LLP, McDermott Will & Emery LLP, and Perkins Coie LLP.

The primary purpose of the Group is to deter regulators from categorizing cryptocurrencies, such as Bitcoin and Ether, as securities. On March 28th, the Group met with the U.S. Securities Exchange and proposed a “safe harbor” for some cryptocurrencies.

The proposal suggests that digital tokens should generally be exempt from securities laws if they achieve “full decentralization” or “full functionality.” It adds that full decentralization could occur under several conditions, including when the token creator no longer has control of the network based on its ability to make unilateral changes to the functionality of the tokens. It can also be used, not just as a speculative investment, but for its intended purpose on a computer network.

The group notes that these definitions are only suggestions, but the “proposed safe harbor has been vetted by, and has the support of, many of the key players in the industry.” People briefed on the meeting said that regulators did not immediately embrace the safe harbor proposal.

Many entrepreneurs and law firms have been creating new ways for virtual currency projects to issue their tokens as securities and some exchanges have talked about getting registered as official securities exchanges. It is still unclear what will happen to tokens that did not register as securities but are later categorized as securities.

Furthermore, on April 26, a congressional hearing with testimony from the SECs Division of Corporation Finance took place to develop more reasonable approaches toward token sales and their classifications. The discussion marked a new attitude amongst SEC members and addressed how certain utility tokens could not be securities if purchased with no investment intention.

In the hearing, the SEC division head, William Hinman, stated:

“They can certainly imagine a token where the holder is buying a token for its utility, not as an investment; especially if it’s a decentralized network where it’s used, and not central actors where there would be information asymmetries where they would know more than token investors.”

Hinman — likely referring to the Venture Capital Working Group — replied that one of the steps that the SEC was taking was “meeting with participants that have these ideas of a token that shouldn’t be regulated as a security” and working with them on how they should be structured. Hinman pointed out that the SEC is heavily engaged with academics and other departments to better explore how everything might work, and that in the long run, the U.S. is “pragmatic” in its support of new technology.

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

In a Sale Gone Awry, A Lesson for Other Deal Makers

By Jacqueline Alas, J.D. Candidate 2017 | Posted on

According to Reuters, GFI Group supported brokerage, trading, and clearing services, and traded technologies to global markets. In 2016, the GFI board sold GFI to CME—a global derivative market focused on trading, clearing, and regulation—even though at the end of the bidding war, CME offered a lower bid of $5.85 per share. Meanwhile, the competing buyer, BGC, a global brokerage company, offered $6.10 cash per share. This sale to CME was approved when the board overruled the decision of a committee of independent directors.

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Morgan Stanley Accused of Facilitating Unethical Sales Contests

By Alexander Baptiste, J.D. Candidate 2018 | Posted on

On October 3, 2016, Morgan Stanley was charged with “dishonest and unethical conduct” by a top Massachusetts securities regulator.

Morgan Stanley is accused of facilitating high-pressured sales contests in Massachusetts and Rhode Island, where brokers had the opportunity to earn thousands of dollars for selling high volumes of securities based loans. Securities based loans allow clients to borrow money against the value of their investment accounts, but are known to involve a non-negligible risk including the bank’s ability to sell securities to repay the loan.

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SEC as Investigator, Prosecutor and Judge: Defendant’s Right to Jury Trial

By Aditya Parolia, LLM Candidate 2016 | Posted on

The New York Times recently ran an article criticizing SEC’s filing of securities cases before its own judges—administrative law judges employed by the SEC. Last year, the Wall Street Journal weighed in against SEC being prosecutor and judge in its own cause. On a practical level, the criticism is that SEC is filing more cases before its judges to side step federal courts where it does not have a successful record of winning. On a doctrinal level, the SEC’s new policy is decried for being constitutionally suspect, being allegedly against the tenets of due process, equal protection and a right to jury trial.

The clamor against SEC’s new policy comes in the wake of numerous lawsuits pending before federal courts challenging the constitutional validity of adjudication by SEC judges. The criticisms seem to carry water in the light of the fact that SEC rarely loses before its judges. However, the arguments against adjudication by SEC judges have not withstood doctrinal scrutiny. It behooves us to ask: does the SEC have the power to file cases before its judges?

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SEC Cracks Down on Hidden Mutual Fund Fees

By Sean Pinckney, J.D. Candidate 2018 | Posted on

In what could be the tip of a legal iceberg, the Securities Exchange Commission (“SEC”) filed proceedings on September 21st against First Eagle Investment Management, a $100 billion asset manager. The SEC alleged that First Eagle illicitly charged its investors nearly $25 million more in marketing fees beyond the limits allowed by the firm’s 12b-1 plan. The action against First Eagle is the first case of its kind arising under the SEC’s “Distribution-in-Guise Initiative,” an investigation into whether mutual fund managers are improperly disguising certain expenses as those that should be borne by investors and not the funds themselves. First Eagle reached a settlement with the SEC for over $40 million without admitting or denying the findings and will be returning the unlawfully charged fees to affected investors.

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Insider Trading: Is the Benefit to the Tipper Tangible?

By Erika K. Solanki, J.D. Candidate 2017 | Posted on

In December of 2014, a federal appeals court in Manhattan reversed the convictions of two hedge fund managers for insider trading in United States v. Newman. The court held the evidence was insufficient to sustain a guilty verdict for two reasons. First, the Government provided insufficient evidence of any personal benefit received by the alleged insiders, meaning there was not enough evidence to “establish the tipper liability from which defendants’ purported tippee liability would derive.” Second, the Government did not provide any evidence that “the defendants knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.” (more…)

Money Market Reform

By JP Walsh, CFA, LL.M. Candidate 2015 | Posted on

Money market funds (“MMFs”) act as a secure and liquid cash management vehicle for retail and institutional investors. MMFs enable investors to gain access to higher returns than interest-bearing bank accounts while providing principal stability and liquidity. They have proven to be very popular amongst investors, garnering over $2.5 trillion in assets.

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Constitutionality of the SEC’s Growing Administrative Forum

By Shea Bettwy, J.D. Candidate 2016 | Posted on

The Securities and Exchange Commission (“SEC”) is increasingly favoring the administrative process over the court system for prosecuting securities cases, likely as a result of expanded powers included in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. For example, in the administrative forum, the SEC now has the authority to prosecute all individuals – even those not associated with regulated entities – and can impose more fines than it could before. Russell Ryan, a partner at King & Spalding in Washington, pointed out that the SEC obtained a record $3.4 billion in monetary sanctions in 2013 and continues to bring multi-million dollar actions. Notably, the SEC recently added two administrative law judges to its staff, increasing the number of judges from three to five. Furthermore, in June, Enforcement Director Andrew Ceresney announced that the SEC will bring more insider trading actions through administrative proceedings.

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SEC Adopts Security-Based Swap Cross-Border Definitional Rule

By Davis Polk & Wardwell LLP | Posted on

 On June 25, the SEC adopted the first in a series of rules governing the cross-border reach of its security-based swap regulatory regime. The rules define the term “U.S. person” and provide the test for counting cross-border security-based swap transactions to determine whether a firm must register as a security-based swap dealer or a major security-based swap participant. The final rules also provide a process by which market participants or non-U.S. regulators can request that the SEC make a determination that a foreign regime’s security-based swap rules are comparable to the SEC’s, thereby permitting market participants in that jurisdiction to meet SEC rules through compliance with local law. Finally, the rules provide clarification of the SEC’s view of the cross-border application of its anti-fraud authority for all securities.

Read the rest of the article here.

SEC Adopts Security-Based Swap Cross-Border Definitional Rule

By Davis Polk | Posted on

On June 25, the SEC adopted the first in a series of rules governing the cross-border reach of its security-based swap regulatory regime. The rules define the term “U.S. person” and provide the test for counting cross-border security-based swap transactions to determine whether a firm must register as a security-based swap dealer or a major security-based swap participant. The final rules also provide a process by which market participants or non-U.S. regulators can request that the SEC make a determination that a foreign regime’s security-based swap rules are comparable to the SEC’s, thereby permitting market participants in that jurisdiction to meet SEC rules through compliance with local law. Finally, the rules provide clarification of the SEC’s view of the cross-border application of its anti-fraud authority for all securities.

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