Court reverses SEC ruling on SPIKES futures, calls it “arbitrary and capricious”

The United States Securities and Exchange Commission (SEC) suffered another setback on July 28 as the United States Court of Appeals for the District of Columbia Circuit overturned a ruling by the regulator ordering that SPIKES Index securities should be treated as futures rather than securities futures. The panel of judges called the SEC order “arbitrary and capricious.“

The decision relates to an order from 2020 in which the SEC exempted the SPIKES Index — a stock volatility index — from the definition of security futures, thus eliminating heavy taxes and other regulatory requirements attached to the term “security.“ The relief, according to the SEC, was intended to promote competition among volatility indexes.

A 3 judge panel of the D.C. Circuit just invalidated an SEC order on the grounds it was “arbitrary and capricious.”

Two of those 3 judges are now considering Grayscale’s case–which seeks to invalidate the SEC’s denial of Grayscale’s bid to convert GBTC to a spot Bitcoin ETF. https://t.co/jqdx5MXFQj

— MetaLawMan (@MetaLawMan) July 29, 2023

However, according to Chief Judge Sri Srinivasan, the exemption granted was “arbitrary and capricious,” as “the SEC failed adequately to explain its rationale and failed to consider an important aspect of the problem.“ The court also noted that the SEC “failed to consider the possibility that its grant of exemptive relief would lead to confusion among market participants.“

Due to the decision, SPIKES Index futures are now considered “securities futures” instead of “futures.” Market participants have three months to wind down their transactions.

Based on the definition of the Clark County Bar Association, an agency action is arbitrary or capricious “if the decision is ‘baseless’ or ‘despotic’ and ‘a sudden turn of mind without apparent motive.‘”

Furthermore, the ruling may hint at the outcome of legal battles between crypto firms and the SEC. Pseudonymous lawyer “MetaLawMan” noted that two of the panel’s judges are also examining Grayscale’s challenge to an SEC decision that denied a request to convert its Grayscale Bitcoin Trust to a spot Bitcoin exchange-traded fund (ETF).

According to Bloomberg’s ETF analyst Eric Balchunas, the decision shows the SEC can lose a court case.

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