ABA Meeting: Cryptocurrencies and Private Funds, and a Risk Alert on the Marketing Rule!

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.

As always, contact me or any of the Rimon Investment Management lawyers if you have any questions.

Attorney Advertising. This document is not intended to be and is not considered to be legal advice. Transmission of this document is not intended to create, and receipt does not establish, an attorney-client relationship.

Geoffrey Perusse counsels businesses in connection with private capital raising, private fund formation, investment activities, securities regulation and compliance matters. Geoff represents sponsors and managers of private funds across asset classes, including real estate, private equity, debt, venture capital and hedge funds, with respect to the structuring, formation and operation of the funds, including regulatory and compliance matters arising under the Investment Advisers Act of 1940, the Securities Act of 1933, and the Investment Company Act of 1940. Read more here.