Regulators Discuss Whether Cryptocurrency Ether Is a Security
According to a Wall Street Journal article published on May 1, 2018, a group which includes senior SEC and CFTC officials is scheduled to meet and discuss whether cryptocurrency ether meets the definition of “security” under federal securities laws.
Whether a non-traditional asset, such as ether is an investment contract, and therefore a security, is usually determined under the so-called “Howey Test”, named after a 1946 Supreme Court decision. Briefly, the Howey Test has been described by the SEC as defining an investment contract to be “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
The main question to be addressed here is whether, and, if so, to what extent, the “efforts of others” are responsible for the expectation of profits by ether investors. Unlike bitcoin, which has always been a decentralized cryptocurrency, ether was created in 2014 and sold to the public by its creators through a crowdfunding campaign. According to the article, regulators are considering the influence that central actors, such as the Ethereum Foundation, exert on the price of ether. Additionally, there is a question as to whether the initial offering of ether was an improper unregistered security offering.
Currently, unlike ICOs which have been increasingly considered securities by the SEC, the industry belief is that cryptocurrencies such as bitcoin and ether are commodities under CFTC and SEC rules, and therefore subject to CFTC regulation. Any decisions that come out of the meeting of regulators regarding this issue, may have a significant effect on the price and trading of ether and other similar cryptocurrencies.
FINRA – Regulatory Matters at a Glance
Please click here to view a summary of the regulatory notices, rule filings, guidance and the like published by the Financial Industry Regulatory Authority (“FINRA”) during the previous month.
Banking Agency Developments
Appraisals for Commercial Real Estate Transactions
On May 2nd, the Office of the Comptroller of the Currency (“OCC”) announced that it has adopted a final rule, jointly with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (“FDIC”) to increase the appraisal threshold for commercial real estate (“CRE”) transactions from $250,000 to $500,000. The final rule also amends the appraisal rules to reflect the higher CRE appraisal threshold as it relates to evaluations and the use of certified appraisers. The final rule became effective on April 9, 2018.
Federal Reserve issues FOMC statement
On May 2nd, the Federal Reserve issued a Federal Open Market Committee (“FOMC”) statement.
Treasury Department Developments
Report to the Secretary of the Treasury from SIFMA’s Treasury Borrowing Advisory Committee
On May 2nd, the U.S. Department of the Treasury published its report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association (“SIFMA”).
Economy Statement for SIFMA’s Treasury Borrowing Advisory Committee
On April 30th, the Treasury Department published its “Economy Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association (“SIFMA”).”
Report On Foreign Portfolio Holdings of U.S. Securities
On April 30th, the Treasury Department announced the release of the final results from the annual survey of foreign portfolio holdings of U.S. securities at the end of June 2017. The survey was undertaken jointly by Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System. The next survey will cover holdings at the end of June 2018; preliminary data are expected to be released by February 28, 2019.
Securities and Exchange Commission
SEC Proposes Changes to Auditor Independence Rules
On May 2nd, the SEC requested comments on proposed amendments to its auditor independence rules that would modify the analysis that determines whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client during an audit or professional engagement period. Among other things, the proposed amendments would focus the analysis solely on beneficial ownership; replace the existing 10 percent bright-line shareholder ownership test with a “significant influence” test; add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities; and amend the definition of “audit client” for a fund under audit to exclude funds that otherwise would be considered affiliates of the audit client. Comments should be submitted within 60 days of publication in the Federal Register.
Enforcement Division Issues FAQs for Share Class Selection Disclosure Initiative