ABA Meeting: Cryptocurrencies And Private Funds, And A Risk Alert On The Marketing Rule! – Fin Tech

A few notes from the recently held American Bar Association
Business Law Section Annual meeting, where we heard from two key
decision-makers from the Securities and Exchange Commission:

First, last Wednesday, Hester Peirce, a Commissioner from the
U.S. Securities and Exchange Commission spoke at the Blockchain,
Cryptocurrencies and Investment Management Task Force Meeting. I
was impressed with Commissioner Peirce’s broad understanding of
the issues facing lawyers and crypto participants. She clearly
believes everyone would be better off with clear regulatory
frameworks, rather than the current approach of using enforcement
actions as a method of developing the law in this area. However,
she did believe that ultimately many products are likely securities
under
The Howey Test and can (and should) be regulated by the
SEC. In particular, she indicated that most digital lending
products are in this category. However, she thought that the SEC
should be crafting regulations which are more closely tailored to
the type of transactions being pursued.

She stated that some type of rulemaking regarding custody of
digital assets is going to be done soon.

As an aside, and further to Commissioner’s Peirce’s view
on the use of the enforcement actions in this space, on Monday the
SEC filed a federal lawsuit on Monday against crypto influencer Ian
Balina for his failure to register an initial coin offering. While
this is hardly noteworthy on its own, the SEC in the complaint
noted that the ICO was handled over the Ethereum blockchain, whose
“network of nodes . . . are clustered more densely in the
United States than in any other country. As a result, those
transactions took place in the United States.” Read more here:
SEC Claims All of Ethereum Falls Under US
Jurisdiction – Decrypt

At the Investment Adviser, Investment Company and Private
Fund’s Joint Subcommittee meetings, we heard from William
Birdthistle, the Director of Division of Investment Management. As
there has been a tremendous amount of rulemaking in this area
recently, it was great to hear directly from the director of the
division.

On the Investment Company side, he discussed the names rule
(Section 35(d)), which prohibits registered investment companies
from adopting names that the SEC finds materially deceptive or
misleading and requires that the investment fund adopt a policy to
invest at least 80% of the value of its assets in accordance with
its name. The proposed amendments to the Names Rule covers,
(1) the expansion of the current Names Rule to fund names,
suggesting certain investment characteristics; (2) changing various
registration forms to include disclosures that define terms used in
the fund’s name; (3) addressing temporary deviations from the
80% investment requirement; (4) providing guidance on derivative
valuation; (5) restricting fundamental investment policy changes
for unlisted closed-end funds and business development companies;
(6) prohibitions for integration funds; and (7) new bookkeeping
requirements.” In Mr. Birdthistle’s view, this is really
truth in advertising: A fund’s name is important. And if you
say something about your investing style in your name, you should
follow it.

More importantly he addressed the private funds rule, which he said has two main
points (1) additional disclosure; and (2) stricter prohibitions on
certain adviser activities. He thought that the heightened
disclosures were relatively well-received. He acknowledged that
there were more concerns regarding the second prong than the SEC
anticipated.

Unfortunately, we were instructed in advance that he would not
be willing to discuss the SEC’s rulemaking authority in this
area in light of the recent Supreme Court decision in West Virginia vs. EPA – which
could have been a very enlightened conversation…

Needless to say, I’m not sure I’m convinced that this
rule will survive in its current form. However, it is almost
equally certain that the pace of rulemaking in the investment
management area will continue.

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