DeFi Education Fund seeks FOIA amid SEC inaction on securities dispute

The SEC has refused to help a federal appellate court get to the bottom of a securities law dispute, and the DeFi Education Fund wants to know why

article-image

Vitalii Vodolazskyi/Shutterstock modified by Blockworks

share

The DeFi Education Fund recently utilized the Freedom of Information Act to file a request for additional information regarding the Securities and Exchange Commission’s decision not to provide clarity on the classification of syndicated loans as securities.

In March 2023, the United States Court of Appeals for the Second Circuit requested the SEC to provide its perspective on the case of Kirschner v. JPMorgan Chase Bank, N.A. This case deals with the classification of syndicated loans.

The SEC filed motions to extend their deadline to submit, which was originally April 13, 2023, three separate times. On July 18, the SEC wrote to the court saying that it would not be filing an amicus brief. 

In the letter, SEC General Counsel Megan Barbero wrote that the agency “is unfortunately not in a position” to weigh in. 

“For a securities regulator who is seemingly determined to classify nearly all crypto tokens as securities, it is curious that the agency decided not to provide its logic on whether a more traditional financial instrument is also a security,” Amanda Tuminelli, chief legal officer at the DEF, said. 

In 2020, a federal court sided with JPMorgan and other banks, ruling that term loans arranged as part of the bankruptcy of Kirschner’s Millennium Laboratories LLC were not securities. Kirschner alleged in his complaint that the banks had violated Blue Sky Laws — state securities laws — with the loan offering. 

Kirschner filed an appeal in the Second Circuit in 2021, the decision of which could set the precedent for how syndicated loans are treated within courts in the circuit going forward. If the appellate court rules syndicated loans are securities, it poses an “existential threat” to the entire industry, attorneys surveyed by the National Law Review noted. 

The SEC is in between a rock and a hard place, Tuminelli said. If the agency sides with Kirschner, not only are they going against a long standing precedent and thus disrupting a multitrillion-dollar market, they are opening the door for cryptocurrencies to be analyzed in a new way. 

“They’re extremely conscious of the eyes on them by the crypto industry of how they’re analyzing securities,” she added. “They’re sort of afraid either way, and I think why that ultimately matters is because they don’t want [Administrative Procedure Act] challenges.” 

Under the APA, federal agencies can be sued if the agency is enforcing a rule, through enforcement actions or otherwise. It’s a law Coinbase has cited in their lawsuit against the SEC for its alleged refusal to create policies for the industry, and the DEF plans to file an APA suit too, Tuminelli said. 

“I think they don’t want to put it in an amicus so that then I can say ‘look, this is how the SEC is analyzing whether something is a security and we want to challenge that,’” she added. 

The SEC does not have to respond to the DEF by a given date, nor do they necessarily have to hand over any internal communications or documents, per FOIA. 

“If the SEC is holding back solely because they are concerned about losing in court, it is unfair to the American investing public who deserves transparency,” Tuminelli said. “We are determined to get to the bottom of it.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Tags

Upcoming Events

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Avail.jpg

Research

Data publishing costs have historically been a bottleneck for rollups, and as more rollups launch, interoperability will continue to be a major challenge. Avail presents a potential solution to rollup fragmentation through its three products: Avail DA, Nexus, and Fusion, which together aim to unify the web3 experience.

article-image

Bitcoin mining is dominated by pools — with one industry veteran anticipating some will be flushed after the halving

article-image

Chorus One tried to tease out some risks that could emerge from the buzzy restaking protocol

article-image

EY plans to move the service to Ethereum mainnet and a layer-3 in the future, its blockchain head told Blockworks

article-image

We may be witnessing the beginning of a new phase in Bitcoin’s history — one characterized by gradual but consistent growth and sustained market confidence

article-image

The iShares Bitcoin Trust appears poised to soon surpass Grayscale Investments’ GBTC in assets under management

article-image

Ether slipped below $3,000 during Wednesday’s trade