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Cadwalader Cabinet: December 29, 2021

 

SEC Considers Approval of Carbon-Neutral Bitcoin ETF

On September 20, 2021, NYSE Arca, Inc. (the "Exchange") filed a proposed rule change to list a Bitcoin trust that would be "carbon neutral." The SEC extended its time to consider the application. The SEC is seeking comments on a list of questions in addition to comments addressing the sufficiency of the Exchange's statements in support of its proposal.

The stated investment objective of the exchange-traded fund ("ETF") is to track the performance of Bitcoin as measured by an index designed to reflect the performance of Bitcoin in U.S. dollars on a carbon-neutral basis. The ETF intends to offset the carbon footprint associated with Bitcoin once a quarter by paying for the instantaneous retirement of voluntary carbon credits equal to the daily estimated carbon emissions associated with the Bitcoins held by the ETF.

Commentary by Steven Lofchie

Last week, the SEC rejected the listing application of two ETFS tracking the performance of Bitcoin based on the view that the ETFs did not satisfy various listing requirements under Section 6 of the Exchange Act that are intended to ensure fair pricing. Given the SEC's objections to those ETFs, it is not clear on what basis the SEC might warm up to a carbon-neutral ETF. 

CFTC Levies Fines for Wash Sales

The CFTC ordered two individuals and their affiliated firms to pay civil monetary penalties for alleged wash sales and noncompetitive trades.

The CFTC alleged that the two individuals intentionally entered into offsetting orders on the same gold futures contracts, and determined that one of the individuals was a beneficial owner of both relevant trading accounts. The CFTC found the individuals to be in violation of the wash sale prohibitions, specifically (i) CEA Section 4c(a)(1) and CEA Section 4c(a)(2) ("Prohibited Transactions"), and (ii) CFTC Rule 1.38(a) ("Execution of Transactions"). The firms were found liable for the violations of their agents under CEA Section 2(a)(1)(B) and CFTC Rule 1.2 ("Liability of Principal for Act of Agent").

The Order stipulated that the respondents (i) pay a $100,000 civil monetary penalty, jointly and severally, and (ii) cease and desist their violative conduct.

The release noted that the investigation was done alongside an inquiry by the CME Group, which issued its own suspensions and fines for the individuals.

FINRA Updates Operational Interpretations to Align with SEA Amendments

FINRA revised and redesignated its Interpretations of the SEA Financial and Operating Rules to make them consistent with recent SEC amendments.

In the regulatory notice, FINRA revised and redesignated financial responsibility and operational rules related to: (i) net capital requirements, (ii) custody, (iii) OTC derivative dealer risk management, (iv) security-based swap transactions and margin, and (v) broker-dealer reporting requirements. FINRA also revised its interpretations relating to recordkeeping requirements under SEA Rule 17a-3(b)(2)/01 (Exchange Market Maker’s Using Clearance Account as Books and Records) and SEA Rule 17a-4(i)/01 (Exchange Market Maker’s Using Clearance Account as Books and Records).

GAO Recommends Changes to Mortgage Appraisal Exemption Process

The GAO recommended changes in the federal review process for granting waivers from the requirement to obtain residential mortgage appraisals.

In a report prepared at the direction of the House Committee on Financial Services, the GAO reviewed appraisal exemptions to determine (i) if they increased risks for lenders and homebuyers, and (ii) if the statutorily created Appraisal Subcommittee ("ASC") - a subcommittee of the Federal Financial Institutions Examination Council- followed the required waiver review process when granting North Dakota a temporary waiver due to "significant delays" in the appraisal process and a "scarcity" of credentialed appraisers. As a result of its analysis of the statute and regulations, the GAO found that the exemptions did not increase overall risks for regulated lenders or homebuyers. The GAO recommended, however, that the ASC explicitly define the terms "significant delay" and "scarcity" to create measurable standards for the waiver process moving forward.

Primary Sources

  1. SEC Release No. 34–93840

  2. CFTC Press Release: CFTC Orders Dubai Traders and Their Firms to Pay $100,000 for Wash Sales

  3. CFTC Order: Aralia Securities Ltd., et al.

  4. FINRA Regulatory Notice 21-45: Update of the Interpretations of Financial and Operational Rules

  5. GAO Report: Most Residential Mortgages Received Appraisals, but Waiver Procedures Need to Be Better Defined

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XI, Number 363
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