Financial Firms Push Back Fiercely Against SEC's Proposed AI Rulemaking

SEC faces fierce pushback on plan to police AI investment advice

Brokers, hedge funds and investment advisers are pushing back hard against attempts by the main US markets regulator to manage how artificial intelligence is used to give financial advice to investors.

Rules proposed by the Securities and Exchange Commission in July would force banks and fund managers to neutralise or eliminate any conflict of interest involving almost any form of technology when they advise clients.

Comments have continued to flow in to the SEC well past the October 10 deadline, most of which have blasted the plans for their sweeping reach and what one industry group called the regulator’s “arbitrary and capricious” rulemaking style.

“I haven’t seen in a long time — or ever really — such a line of opposition,” said Jesse Forster, equity market structure specialist at research group Coalition Greenwich.

U.S. House’s Spending Bill Aims to Hamstring SEC’s Gensler Amid His Crypto Crackdown

As the U.S. House of Representatives weighs legislation on next year’s spending, a provision was added on Wednesday that would deprive funding from U.S. Securities and Exchange Commission (SEC) enforcement actions against crypto businesses.

The move – authored by Majority Whip Tom Emmer (R-Minn.), one of the industry’s closest allies on Capitol Hill – was targeted at SEC Chair Gary Gensler, who Emmer criticized Wednesday as trying to steer the crypto industry with enforcement actions rather than policy.

Target seeks to toss shareholder lawsuit over Pride backlash

Target asked a Florida judge to dismiss a shareholder lawsuit that alleged the retailer ignored risks of offering LGBTQ-themed merchandise for Pride Month, saying the case has no basis.

The U.S. retailer said in court papers filed Tuesday that investor Brian Craig merely disagrees with Target’s business decisions, and has no evidence the company misled investors about its approach to social and political risks.

“The securities laws protect investors against being defrauded; they are neither vehicles for expressing disapproval, nor do they insure investors against ordinary market losses,” Target said.

Will the SEC’s shadow trading theory fall to SCOTUS’s major questions doctrine?

In August 2021, the SEC filed a complaint in the U.S. District Court charging Matthew Panuwat, a former employee of Medivation Inc., an oncology-focused biopharma, with insider trading in advance of Medivation’s announcement that it would be acquired by a big pharma company. But it wasn’t your average run-of-the-mill insider trading case. Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, according to the SEC, he engaged in what has been referred to as “shadow trading”; he used the information about his employer’s acquisition to purchase call options on another biopharma, which the SEC claimed was comparable to Medivation. (See this PubCo post.) Since then, we’ve seen the usual moves on the chess board (discussed briefly below). But what’s particularly interesting, as Alison Frankel pointed out in Reuters, is the amicus brief filed by the Investor Choice Advocates Network, a self-described “nonprofit, public interest organization focused on expanding access to markets by underrepresented investors and entrepreneurs.” In its brief, ICAN contended that the SEC’s invocation of the novel “shadow-trading” theory made this a “major questions” case—a judicial torpedo that we might begin to see fired with some regularity.

U.S. SEC Said to Open Talks with Grayscale on Spot Bitcoin ETF Push

The U.S. Securities and Exchange Commission (SEC) has opened talks with Grayscale Investments on the details of the company’s application to convert its trust product GBTC to a spot bitcoin exchange traded product (ETF), according to a person familiar with the back-and-forth, which could have momentous implications for the crypto industry.

An SEC approval of one or more ETF applications is keenly awaited by the sector, which sees that moment as a milestone that could ease everyday investors’ path into digital assets. Grayscale has been in contact with both the SEC’s Division of Trading and Markets and the Division of Corporation Finance since winning its court fight, said the person, who requested anonymity because the talks remain private.

SEC’s Gensler says rebooted FTX is possible if done ‘within the law’

A revived FTX could work if new leadership does so with a clear understanding of the law, SEC chair Gary Gensler told CNBC on the sidelines of DC Fintech Week.

Gensler was referring to reports that Tom Farley, a former president of the New York Stock Exchange, is among a short list of three bidders vying to buy what remains of the bankrupt crypto exchange. Farley launched his own digital asset exchange in May called Bullish, which is reportedly one of the final contenders in the bankruptcy auction.

“If Tom or anybody else wanted to be in this field, I would say, ‘Do it within the law,’” Gensler said on Wednesday. “Build the trust of investors in what you’re doing and ensure that you’re doing the proper disclosures — and also that you’re not commingling all these functions, trading against your customers. Or using their crypto assets for your own purposes.”

FTX Legal Drama Includes D&O Coverage Fight (Now Withdrawn, but Not Forgotten)

The drama surrounding former crypto mogul Samuel Bankman-Fried’s criminal prosecution and conviction has dominated the business pages for weeks. In addition, and as the news reports noted at the time, just before the criminal trial began, SBF sued one of FTX’s excess D&O insurers, alleging the insurer was refusing to pay his legal bills. Earlier this week, it emerged that SBF has withdrawn his insurance coverage lawsuit. But while the coverage lawsuit apparently now will not go forward, the interesting questions the situation presented are still worth asking. And the short-lived coverage litigation also unearthed some interesting stuff, as discussed below. Daphne Zhang’s November 7, 2023, Bloomberg article about the coverage litigation, which contains a comprehensive overview of the coverage dispute, can be found here.

The SEC’s New Clawback Rules Will Change Internal Investigations

Public companies are swiftly adopting policies regarding “erroneously awarded compensation” by December 1, 2023, to comply with listing standards required by the new SEC Rule 10D-1. These policies will require companies to recover, or “claw back,” incentive-based compensation previously received by current and former Section 16 officers if that compensation was erroneously awarded based on misreported financial information that the company is subsequently required to restate. The SEC rule and the listing standards are complex, but the impact is clear: public company executives whose compensation includes incentive pay based on one or more financial reporting measures will be at risk of having to pay back compensation if the company is required to prepare an accounting restatement, even if the error was immaterial and no misconduct occurred.