Category: finance

FINRA Facts and Trends: October 2023

Welcome to the latest issue of Bracewell’s FINRA Facts and Trends, a monthly newsletter devoted to condensing and digesting recent FINRA developments in the areas of enforcement, regulation and dispute resolution. This month, we report on ongoing constitutional challenges to FINRA’s enforcement authority, the possible expansion of the SEC’s WhatsApp record-keeping probe to Zoom and other video calling platforms, several multimillion-dollar settlements of FINRA enforcement actions, and more.

Federal Court Allows FINRA Enforcement Action to Proceed Despite Constitutional Challenges

In the wake of the DC Circuit’s July 2023 ruling that granted an injunction staying a FINRA enforcement proceeding against a broker-dealer based on constitutional challenges of FINRA’s authority, two more FINRA member firms have recently filed federal lawsuits seeking to enjoin FINRA proceedings against them on the same basis. First, in August, Eugene H. Kim filed a lawsuit in the District Court for the District of Columbia (the District Court) seeking a stay of a FINRA enforcement action brought against him for allegedly misusing customer funds. More recently, on October 18, Sidney Lebental filed a similar lawsuit in the District Court, seeking a stay of a FINRA enforcement action brought against him for alleged misconduct in connection with his execution of certain trades.

As we reported in July and September, the DC Circuit’s ruling in July granted a preliminary injunction based on a finding that the plaintiff in that case, Alpine Securities Corporation, had “raised a serious argument that FINRA impermissibly exercises significant executive power.” The two more recent lawsuits filed by Kim and Lebental seek to apply this logic to their own cases, and thus to enjoin FINRA’s Department of Enforcement from proceeding with the actions against them.

But in a ruling issued earlier this month, the District Court declined to grant a stay of the FINRA Enforcement proceeding against Kim. While the District Court acknowledged that it takes guidance from the DC Circuit’s preliminary injunction opinion in Alpine, it held that that opinion “does not suggest that courts must enjoin every challenged FINRA enforcement action pending the Alpine merits decision.” To interpret the DC Circuit’s decision as effectively halting all FINRA enforcement actions, the District Court said, “would upend FINRA’s work—a result that would put investors and US securities markets at risk.”

Will the SEC Turn Its Focus to Zoom Recordings After WhatsApp?

The SEC’s highly publicized sweep of financial service providers’ improper use of WhatsApp and other off-channel communication platforms has resulted in settlements exceeding $2.5 billion. Now, people familiar with the scope and findings of the SEC’s WhatsApp probe have raised concerns that the SEC will expand its record-keeping requirement to include calls over video calling platforms, including Zoom and Microsoft Teams. Those who believe that this expansion is inevitable have already taken steps to meet the SEC’s anticipated scrutiny.

Reuters has reported that the proactive steps taken by some firms include retaining technology specialists and risk consultants not only to ensure that video calls are properly monitored and retained, but also to prevent the use of these platforms for sharing non-public information. Already, two “major global banks” are capturing Zoom sessions, said sources with knowledge of the matter. One of these firms is recording calls by traders and other staff, while the other is capturing all calls so they can be accessed at a future time, if necessary. As of now, video calls are subject to little or no formal record-keeping requirements, as they are viewed as proxies for face-to-face encounters. That may change very soon, with regulators apparently poised to begin assessing the potential for compliance failures over video platforms.

Latest FINRA Dispute Resolution Statistics Point to an Increase in Arbitration Filings

FINRA has released its latest dispute resolution statistics for the current year through September 2023. According to FINRA, the number of arbitration filings has increased nearly 25 percent from this time last year. Customer claims have gone up 14 percent, and breach of fiduciary duty was cited as the most frequent customer claim with a total of 1,127 cases, up from 967 this time last year. The number of industry disputes was 43 percent higher than in September 2022 and breach of contract claims have been the most popular claims so far in 2023, with a total of 201 cases, up from 162 cases a year ago. Notably, filings of Regulation BI arbitration claims by customers continue to rise, with 320 claims filed so far this year, compared to just 216 claims in all of 2022. After cracking the top 15 controversy types in May 2022, Reg BI claims through September have moved the category up to 9th place, and the expectation is that heightened Reg BI scrutiny will give rise to even more claims.

We will report on year-end statistics in early 2024.

Source: FINRA, Dispute Resolution Statistics, https://www.finra.org/arbitration-mediation/dispute-resolution-statistics (last visited Oct. 31, 2023).

Lawsuit Against Broker-Dealer Highlights Risks of Online Impersonators

A Swedish woman recently filed a lawsuit in New Jersey federal court against a New Jersey-based FINRA broker-dealer, AlMax Financial Solutions. The complaint alleges that the plaintiff was defrauded out of more than $180,000 — not by AlMax, but by an impostor website that maintained a website falsely impersonating AlMax.

Notably for FINRA members, the plaintiff’s complaint references FINRA Regulatory Notice 20-30 (Fraudsters Using Registered Representatives Names to Establish Imposter Websites), which informs member firms about reports of fraudsters who run imposter websites while posing as FINRA members.

It is unclear whether the lawsuit, which asserts claims for negligence and violation of the New Jersey Consumer Fraud Act, has any legal merit. For one thing, FINRA Regulatory Notice 20-30 prescribes no mandatory measures that member firms must take to root out impostors, and instead only provides certain actions that members “can take” or that they “may also consider.” Nevertheless, the case is a reminder to member firms of the guidance provided by FINRA concerning these imposter websites, and the risks they may pose.

SDNY Judge Halts FINRA Arbitration Brought by Non-Customers

In a ruling issued on October 13, 2023, US District Judge Naomi Buchwald of the Southern District of New York confirmed that FINRA arbitrations may not be commenced by investors who are not customers of a FINRA member firm, and enjoined an ongoing FINRA proceeding on that basis.

The FINRA proceeding in question was filed against Interactive Brokers LLC, a FINRA member firm, by a group of investors in funds managed by EIA All Weather Alpha Fund I Partners, LLC (EIA). According to the FINRA Statement of Claim, EIA misled its investors and misappropriated their investment assets.

EIA separately maintained trading accounts with Interactive Brokers during the relevant period, the FINRA Statement of Claim said. The investor-claimants filed claims against Interactive Brokers, arguing that — even though the investors themselves had no direct relationship with Interactive Brokers — Interactive Brokers had a responsibility to detect and prevent EIA’s misconduct, but failed to do so. And, because EIA’s relationship with Interactive Brokers was governed by an agreement that contained a broad arbitration provision, the investors contended that its claims against Interactive Brokers were subject to FINRA arbitration, either as third-party beneficiaries of EIA’s agreement with Interactive Brokers, or pursuant to FINRA Rules.

In its ruling after Interactive Brokers filed a lawsuit to stay the arbitration, the Court rejected these arguments. Most significantly, the Court reiterated the Second Circuit’s bright-line rule that to qualify as a “customer” for purposes of FINRA Rule 12200, a person must either purchase a good or service from a FINRA member, or maintain an account with a FINRA member. Since the EIA investors had no such relationship with Interactive Brokers, the Court rejected their claim to be “customers” entitled to avail themselves of FINRA Rules. The Court also found that the investors were not third-party beneficiaries of EIA’s agreement with Interactive Brokers, since they did not meet the “heightened threshold for clarity” required to find that a third party has the right to compel arbitration.

Reminder: New Expungement Rule Is Now Effective

This is a reminder that effective October 16, 2023, FINRA amended its rules to provide a stricter standard and procedural process for registered representatives seeking to expunge negative customer-related complaints. We previously provided a comprehensive analysis of the new FINRA expungement rule.

Notable Enforcement Matters and Disciplinary Actions

  • Inaccurate Trade Data. A multinational financial services firm was sanctioned a total of $12 million by FINRA and the SEC for allegedly submitting inaccurate trading data to the two regulators for nearly a decade. The Letter of Acceptance, Waiver, and Consent (AWC) detailing FINRA’s findings on this matter is available here, and the SEC’s administrative order is available here.Firms submit electronic blue sheets (EBSs) to regulators in response to requests for trade information. These EBSs provide examiners with trade details, including the nature of each transaction, the buyer and seller, and the transaction price. According to the SEC and FINRA, the respondent firm submitted tens of thousands of EBSs between November 2012 and October 2022 that were rife with inaccuracies for hundreds of millions of individual transactions.
  • The firm’s reporting failures allegedly stemmed from outdated and inaccurate code, manual validation errors and inadequate verification procedures. Prior to being notified of the inaccuracies, the firm had already begun voluntary remedial efforts, including a full-scale, line-by-line analysis of the code underlying its EBS program, automation of the EBS processing procedures and migration of data to a new reporting system.
  • Trading Approval. A multinational brokerage firm agreed to pay more than $1.6 million to FINRA and the state of Massachusetts to settle claims that it failed to exercise due diligence when approving investors for options trading. The AWC detailing FINRA’s findings is available here.According to regulators, at least some of the alleged violations resulted from a deluge of new account applications in response to the “meme stock” craze of 2020 and 2021. Among other things, the firm’s automated screening system allegedly approved approximately 400 teenagers under the age of 19 to trade options (an impossibility, since the firm’s rules required all customers seeking to trade options to have at least one year of investment experience after the age of 18). The firm also permitted customers to re-submit rejected applications after artificially inflating their trading experience, income and net worth.
  • Inaccurate Research Reports.  A multinational brokerage firm incurred a $2 million sanction over claims that it published thousands of equity and debt research reports with inaccurate conflicts disclosures between 2013 and 2021. The AWC detailing FINRA’s findings is available here.According to FINRA, the firm not only failed to disclose conflicts, but also disclosed conflicts that did not exist. The violations, amounting to more than 300,000 disclosure inaccuracies, allegedly resulted from a series of technical and operational issues, including problems with data feeds, mistakes in the aggregation of client information and a failure to update old data.

FINRA Notices and Rule Filings

  • Regulatory Notice 23-16 – FINRA amended its By-Laws to exempt from the Trading Activity Fee any transaction by a proprietary trading firm that is executed on an exchange of which the firm is a member. This exemption relates to the SEC’s recent amendments to Exchange Act Rule 15b9-1, which we reported on last month. The TAF exemption for proprietary trading firms will be effective November 6, 2023.
  • SR-FINRA-2023-013 – FINRA has proposed a rule change that would amend the FINRA Codes of Arbitration Procedure to disallow compensated representatives who are not attorneys from representing parties in FINRA arbitrations and mediations. The proposed rule change would also codify that law students enrolled in a law school clinic and practicing under the supervision of an admitted attorney may represent parties in FINRA arbitrations and mediations.

© 2023 Bracewell LLP

By Joshua Klein , Keith Blackman , Russell W. Gallaro of Bracewell LLP

For more on FINRA Trends, visit the NLR Financial Institutions & Banking section.

Inadvertent Errors and Tax Hedge Identification

Businesses often manage their price risks by hedging those risks with financial derivative contracts. Because businesses generate ordinary income and loss on their normal business activities, they want to be sure their hedging activities also generate ordinary tax treatment. If these hedging activities were to generate capital gains and losses, they would be basically worthless for many businesses. As a result, business taxpayers want to be able to net their hedging gains and losses against gains and losses on their normal business activities. (See my article, “Hedging: Favorable Tax Treatment Requires Careful Compliance.”)

Tax Hedge Identification Requirements

 In order to receive favorable tax treatment, a hedge (Hedge) must be clearly identified “before the close of the day on which it is acquired, originated, or entered into.”[1] The item (or items) being hedged (Hedged Item) must also be identified on a “substantially contemporaneous”[2] basis, but not more than 35 days after the taxpayer enters into the Hedge. And, the tax hedge accounting method must “clearly reflect income.”

In order to comply with these requirements, taxpayers can either establish an aggregate hedge program where they enter their Hedges into a designated hedge account, or they can attach a notation to a Hedge identifying the specific transaction as a “Hedge.” Either way, taxpayers must unambiguously and timely identify their Hedges and Hedged Items. Simply identifying a hedge for financial accounting purposes is not good enough because the hedge identification must clearly state that the identification is for tax purposes.

 The Best Laid Plans

So what happens if a taxpayer fails to unambiguously and timely identify the Hedge and the Hedged Item? Mistakes and errors happen. Tax identification can slip through the cracks. Sometimes the employee responsible for proper identification leaves the company and that responsibility is not promptly assigned to someone else. There are many reasons why tax identifications are made late, are incomplete, or are missed entirely. To discourage incomplete or omitted identification, the Code imposes so-called whipsaw rules that treat the gains on misidentified hedge transactions as ordinary and losses as capital.[3] This is a seriously adverse tax result. In limited circumstances, however, a taxpayer can escape the consequence if the failure to provide a proper identification was due to an “inadvertent error.”[4]

Inadvertent Error

Treas. Reg. §1.1221-2(g)(2)(ii) provides that a taxpayer can treat gains and losses on hedges that it has failed to identify if the failure was due to an “inadvertent error.” Unfortunately, neither the Code nor the Treasury regulations define inadvertent error. All we’ve got to go on in this regard is one private letter ruling and two Chief Counsel Advice Memoranda. These documents are not the type of guidance that taxpayers can rely on or cite as precedent. Nevertheless, they are instructive, however, because they give us a look into what the IRS views as inadvertent error.

In LTR 200051035 the IRS stated, “In the absence of a specific definition in the regulations, the term ‘inadvertent error’ should be given its ordinary meaning. . . . The ordinary meaning of the term ‘inadvertence’ is ‘an accidental oversight; a result of carelessness.’”[5] This view seems sensible and entirely appropriate.

Three years later, in CCA 200851082 the IRS Chief Counsel said that the “Taxpayer should bear the burden of proving inadvertence, and its satisfaction should be judged on all surrounding facts and objective indicia of whether the claimed oversight was truly accidental…. The size of the transaction, the treatment of the transaction as a hedge for financial accounting purposes, the sophistication of the taxpayer, its advisors, and counterparties, among other things, are all probative.”

Fair enough, but shortly thereafter, the IRS expressed its displeasure with taxpayers that should have known better and explained when taxpayers can rely on the inadvertent error excuse to receive tax hedge treatment. In CCA 201046015, the IRS Chief Counsel’s Office said that the failure to promptly address failed or improperly identified hedges would undercut a taxpayer’s inadvertent error claim; and that the inadvertent error exception is not intended to “eviscerate” the hedge identification requirements. The IRS went on to state, “Absent a change in the regulation, [it saw] no compelling policy justification to read the inadvertent error rule as an open-ended invitation for taxpayers to brush aside establishing hedge identification procedures.” A taxpayer’s claim of ignorance of the requirement for hedge identification is no excuse and is not grounds for claiming inadvertent error. In other words, inattention to the hedge identification requirements cannot be excused simply by asserting inadvertent error.

CONCLUSION

Notwithstanding the regulatory provision that provides an “inadvertent” error is an excuse for failing to timely identify hedges, it is now clear that the IRS is only willing to entertain an inadvertent error claim in very limited circumstances. Taxpayers have very little hope of being able to rely on this excuse to avoid the whipsaw rule if they do not properly identify their hedging transactions. This is just one more reason why taxpayers must treat the hedge identification requirement with care and seriousness. Failure to do so can have severe tax consequences.

[1] Code § 1221(a)(7).

[2] Treas. Reg. § 1.1221-2(f)(2).

[3] Code § 1221(b)(2)(B).

[4] Treas. Reg. § 1.1221-2(g)(2)(ii).

[5] Dec. 22, 2000.

© 2023 ASKramer Law
For more on Tax Hedge Errors, visit the NLR Tax section.

IRS Offers Forgiveness for Erroneous Employee Retention Credit Claims

The Employee Retention Credit (“ERC”) is a popular COVID-19 tax break that was targeted by some unscrupulous and aggressive tax promoters. These promoters flooded the IRS with ERC claims for many taxpayers who did not qualify for the credit. Now, the IRS is showing mercy and allowing taxpayers to withdraw some ERC claims without penalty.

Many taxpayers were very excited about the ERC, which could refund qualified employers up to $5,000 or $7,000 per employee per quarter, depending on the year of the claim. But the requirements are complicated. Some tax promoters seized on this excitement, charged large contingent or up-front fees, and made promises of “risk-free” applications for the credit. Unfortunately, many employers ended up erroneously applying for credits and exposing themselves to penalties, interest, and criminal investigations—in addition to having to repay the credit. For example, the IRS reports repeated instances of taxpayers improperly citing supply chain issues as a basis for an ERC when a business with those issues rarely meets the eligibility criteria.

After months of increased focus, the IRS halted the processing of new ERC claims in September 2023. And now, the IRS has published a process for taxpayers to withdraw their claims without penalty. Some may even qualify for the withdrawal process if they have already received the refund check, as long as they haven’t deposited or cashed the check.

For those who have already received and cashed their refund checks, and believe they did not qualify, the IRS says it will soon provide more information to allow employers to repay their ERC refunds without additional penalties or criminal investigations.

© 2023 Miller, Canfield, Paddock and Stone PLC
For more articles on the IRS, visit the NLR Tax section.

Cryptocurrency Brings Disruption to Bankruptcy Courts—What Parties Can Expect and the Open Issues Still To Be Resolved (Part Two)

In this second part of our blog exploring the various issues courts need to address in applying the Bankruptcy Code to cryptocurrency, we expand upon our roadmap.  In part one, we addressed whether cryptocurrency constitutes property of the estate, the impacts of cryptocurrency’s fluctuating valuation, issues of perfection, and the effects of cryptocurrency on debtor-in-possession financing.  In this part two, we explore preferential transfers of cryptocurrency, whether self-executing smart contracts would violate the automatic stay, and how confusing regulatory guidelines negatively impact bankruptcy proceedings, including plan feasibility.

Preferential Transfers

Pursuant to section 547(a) of the Bankruptcy Code, a debtor-in-possession (or trustee) can avoid a transfer of the debtor’s property to a creditor made in the 90-days before filing the petition if, among other things, the creditor received more than it would have in a Chapter 7 liquidation proceeding.  Notably, such a transfer can only be avoided if the thing transferred was the debtor’s property.  When cryptocurrency is valued and whether cryptocurrency is considered to be property of the estate can impact preference liability.

Perhaps the first question to arise in cryptocurrency preference litigation is whether the transferred cryptocurrency is property of the estate.  If, as in the Chapter 11 bankruptcy case of Celsius Network LLC and its affiliates, the cryptocurrency withdrawn by the accountholder during the ninety days prior to the bankruptcy is determined to be property of the estate, and not the accountholder’s property, a preferential transfer claim could be asserted.  If, however, the cryptocurrency was property of the accountholder, for instance if it was held in a wallet to which only the accountholder had exclusive rights, no preference liability would attach to the withdrawal of the cryptocurrency.

Assuming that a preferential transfer claim lies, the court must decide how to value the preferential transfer.  Section 550 of the Bankruptcy Code allows a debtor-in-possession to recover “the property transferred, or, if the court so orders, the value of such property.”[1] This gives the debtor-in-possession wide latitude in asserting a preference claim.  For instance, the debtor-in-possession could take the position that the cryptocurrency is a commodity, in which case a claim could be asserted to recover the cryptocurrency itself, which, by the end of the case, may be worth a much more than it was at the time of the transfer, with any gain accruing to the estate’s benefit.[2]  In contrast, the party receiving the transferred cryptocurrency would likely take the position that the cryptocurrency is currency, in which case a claim would be limited to the value of the cryptocurrency at the time of the transfer.[3]

The proper valuation methodology has not to date been definitively addressed by the courts.  Perhaps the closest a court has come to deciding that issue was in Hashfast Techs. LLC v. Lowe,[4] where the trustee claimed that a payment of 3,000 bitcoins to a supplier was a preferential transfer.  The bitcoin was worth approximately $360,000 at the time of the transfer but was worth approximately $1.2 million when the trustee asserted the preferential transfer claim.  The trustee argued that the payment to the supplier was intended to be a transfer of bitcoins and not a payment of $360,000, and that the supplier was required to pay 3,000 bitcoins to the estate, notwithstanding the substantial increase in value (and the resulting windfall to the estate).  Ultimately, the court refused to decide whether bitcoin is either currency or commodities and held that “[i]f and when the [trustee] prevails and avoids the subject transfer of bitcoin to defendant, the court will decide whether, under 11 U.S.C. § 550(a), he may recover the bitcoin (property) transferred or their value, and if the latter, valued as of what date.”[5]

The changing value of cryptocurrency will also impact the question of whether the creditor received more than it would have in a Chapter 7 liquidation proceeding.[6]  While the value of preferential transfers are determined at the time of the transfer,[7] the analysis of whether such transfer made the creditor better off than in a Chapter 7 liquidation is determined at the time of a hypothetical distribution, which means, practically, at the time of the petition.[8]  Therefore, if a customer withdraws cryptocurrency from a platform during the 90-day preference period, and the cryptocurrency experiences a decrease in value during those 90 days, that customer could arguably be liable for a preferential transfer because the withdrawn cryptocurrency was worth more at the time of the transfer than at the time of the petition.

Presently unanswered is whether the safe-harbor provisions provided for in section 546(e) of the Bankruptcy Code shield cryptocurrency transfers from preferential transfer attack.  Pursuant to section 546(e), a debtor-in-possession cannot avoid as a preference a margin payment or settlement payment made to “financial participant . . . in connection with a securities contract . . . commodity contract . . . [or] forward contract . . . that is made before the commencement of the case.” If the court determines that cryptocurrency is a security or commodity, and that the transfers were made in connection with forward or commodities contracts, then section 546(e) may shield those transfers from attack as preferential.

Violations of the Automatic Stay and Smart Contracts

The self-executing nature of smart contracts may raise automatic stay concerns.  The automatic stay arises upon the filing of a bankruptcy petition, and in general, prevents creditors and other parties from continuing their collection efforts against the debtor.[9]  Of relevance to smart contracts, section 362(a)(3) of the Bankruptcy Code states that the stay applies to “any act” to obtain possession of or control of property of the estate.  Very recently, in Chicago v. Fulton, the United Stated Supreme Court held that section 362(a)(3) prevented any “affirmative act that would alter the status quo at the time of the bankruptcy petition.”[10]

Prior to Fulton, a bankruptcy court in Arkansas examined an analogous issue in Hampton v. Yam’s Choice Plus Autos, Inc. (In re Hampton).[11]  In Hampton, the court adjudicated whether a device that automatically locked the debtor out of her car violated the automatic stay when it disabled function of the car’s engine postpetition.  The device relied on a code—if the debtor paid, the creditor sent her a code, which she would then input, and this prevented the device from automatically disabling the car’s starter.  In this instance, the court found a violation of the automatic stay.[12]

Based on current case law, it remains unclear whether a smart contract, operating automatically, would violate the automatic stay.  For example, if a smart contract is based on a DeFi loan, and it automatically executes postpetition to transfer to the lender assets of the estate, a court may find a violation of the automatic stay.

Hampton would suggest that such actions would be a violation—but two issues caution against relying on Hampton as a clear bellwether.  First, Hampton was decided pre-Fulton and it remains unclear whether, and to what extent, the Supreme Court’s holding in Fulton would change the outcome of Hampton. Second, a potentially key factual distinction exists: the device in Hampton required the creditor to give the debtor a code to prevent the disabling of the car, but smart contracts can be programmed to automatically execute postpetition without any further action by the parties.  If a smart contract is found to violate the automatic stay, the next question is whether such a violation is willful, meaning that a court can impose monetary penalties, including potentially punitive damages.[13]

Note that even if a smart contract is found not to violate the automatic stay, it does not mean that a creditor can retain the property.  Section 542 of the Bankruptcy Code requires those in possession of estate property to turnover the property to the estate.  The estate is created at the time of the filing of the petition, and therefore, any smart contract that executes postpetition would theoretically concern estate property and be subject to turnover.  Unfortunately, ambiguities arise even in this statute, as section 542 contains a good-faith exemption to the turnover mandate if the recipient is not aware of bankruptcy filing and transfers the assets.[14]  Thus, the turnover mandate may be difficult to apply to non-debtor parties to smart contracts who program the contract ahead of time with the knowledge that such a contract may execute after a bankruptcy petition but with no actual knowledge of such petition having been filed.

Regulatory Confusion

The regulatory world has no uniform approach to cryptocurrency. Both the Securities and Exchange Commission (SEC) and the Commodities Future Trading Commission (CFTC), perhaps in part spurred by executive pressure, recently advanced heavier regulatory oversight of cryptocurrency.[15]  The two agencies also share jurisdiction; one agency asserting authority to regulate cryptocurrency does not preclude the other from doing so.[16]  Other agencies, such as the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCen), have also asserted the jurisdiction to regulate cryptocurrency.[17]  The result is regulatory confusion for market participants, both because of the sheer number of agencies asserting jurisdiction and the fact that individual agencies can sometimes issue confusing and ill-defined guidelines.

For instance, the SEC applies the Howey test, developed in the 1940s, to determine whether a specific cryptocurrency is a security.[18]  Unfortunately, the SEC has stated that whether a specific cryptocurrency is a security can change overtime, and recently announced even more cryptocurrencies that they believe meet Howey’s definition of a security via their lawsuits with crypto exchanges Binance.US and Coinbase.[19]

The regulatory confusion clouding cryptocurrency has directly impacted bankruptcy proceedings. One recent case study offers a glimpse into that disconcerting influence. In 2022, crypto exchange Voyager Digital Holdings Ltd. filed for Chapter 11 bankruptcy. Another major crypto exchange, Binance.US, entered into an agreement with Voyager to acquire its assets—valued at around $1 billion. The SEC, the New York Department of Financial Services (NYDFS), and the New York Attorney General all filed sale objections in Voyager’s bankruptcy proceedings, arguing that if Voyager’s crypto assets constitute securities, then Binance.US’s rebalancing and redistribution of these assets to its account holders would be an “unregistered offer, sale or delivery after sale of securities” in violation of Section 5 of the Securities Act.[20]  The NYDFS also alleged that the agreement “unfairly discriminates” against New York citizens by subordinating their recovery of diminished assets in favor of Voyager’s creditors—as well as foreclosing the option to recover crypto rather than liquidated assets.[21]

SEC trial counsel noted that, “regulatory actions, whether involving Voyager, Binance.US or both, could render the transactions in the plan impossible to consummate, thus making the plan unfeasible.”[22]  In April 2023, Binance.US sent Voyager a legal notice canceling the prospective transaction, writing that “the hostile and uncertain regulatory climate in the United States has introduced an unpredictable operating environment impacting the entire American business community.”[23]

The SEC’s desire towards regulating cryptocurrency as securities appears to be growing.  On August 15, 2023, the SEC settled for $24 million its claims against Bittrex, which included violations of Section 5 of the Securities Act.[24] Upon the settlement, the director of the SEC stated that Bittrex “worked with token issuers . . . in an effort to evade the federal securities law.  They failed.”[25]  Uncertainty combined with aggressive enforcement leaves cryptocurrency entities in an uncertain and precarious position.

Plan Feasibility

The Voyager case also highlights issues with plan feasibility in Chapter 11.  In Voyager, the SEC objected to plan feasibility on the basis that one known digital asset of Voyager was a security, and therefore, the purchaser should register as a securities dealer.[26]  Although the court overruled the SEC’s objection, as noted above, Binance.US ultimately withdrew its purchase offer, placing blame on the overall regulatory climate.[27]  As regulations remain uncertain, and government authorities have shown a willingness to assert themselves into the process of reorganization, debtors who file for bankruptcy will have to brace for new or unforeseen objections to an otherwise confirmable plan.

Conclusion

Cryptocurrency has been seen by some as a disruptive force in finance.  As the above issues show, it also appears to be a disruptive force in bankruptcy cases.  Debtors and creditors alike will have to weather the disruption as best they can while the courts continue to grapple with the many open issues raised by cryptocurrencies.

See Cryptocurrency Brings Disruption to Bankruptcy Courts—What Parties Can Expect and the Open Issues Still To Be Resolved (Part One)

[1] See 11 U.S.C. § 550(a).

[2] This position would arguably be consistent with cases interpreting section 550(a) of the Bankruptcy Code that have held that the estate is entitled to recover the value of the property when value has appreciated subsequent to the transfer.  See, e.g., In re Am. Way Serv. Corp., 229 B.R. 496, 531 (Bankr. S.D. Fla. 1999) (noting that when the value of the transferred property has appreciated, “the trustee is entitled to recover the property itself, or the value of the property at the time of judgment.”).

[3] Mary E. Magginis, Money for Nothing: The Treatment of Bitcoin in Section 550 Recovery Actions, 20 U. Pa. J. Bus. L. 485, 516 (2017).

[4] No. 14-30725DM (Bankr. N.D. Cal. Feb. 22, 2016),

[5] Order on Motion for Partial Summary Judgment at 1-2, Hashfast Techs. LLC v. Lowe, Adv. No. 15-3011DM (Bankr. N.D. Cal. 2016) (ECF No. 49).

[6] See 11 U.S.C. § 547(b)(5) (requiring the transferee to have received more that it would have received in a Chapter 7 liquidation).

[7] Maginnis, supra note 3.

[8] See In re CIS Corp., 195 B.R. 251, 262 (Bankr. S.D.N.Y. 1996) (“Thus, the Code § 547(b)(5) analysis is to be made as of the time the Debtor filed its bankruptcy petition); Sloan v. Zions First Nat’l Bank (In re Casteltons, Inc.), 990 F.2d 551, 554 (9th Cir. 1993) (“When assessing an alleged preferential transfer, the relevant inquiry . . . [is] . . . the actual effect of the payment as determined when bankruptcy results.”).

[9] 11 U.S.C. § 362(a).

[10] 141 S.Ct. 585, 590 (2021).

[11] 319 B.R. 163 (Bankr. E.D. Ark. 2005).

[12] Hampton, 319 B.R. at 165-170.

[13] See 11 U.S.C. § 362(k) (providing that, subject to a good faith exception “an individual injured by any willful violation of [the automatic stay] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”).

[14] See 11 U.S.C. § 542(c).

[15] David Gura, The White House calls for more regulations as cryptocurrencies grow more popular (Sept. 6, 2022, 6:00 AM), https://www.npr.org/2022/09/16/1123333428/crypto-cryptocurrencies-bitcoin-terra-luna-regulation-digital-currencies.

[16] See, e.g., CFTC v. McDonnell, 287 F. Supp. 3d 222, 228-29 (E.D.N.Y. 2018) (“The jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.”).

[17] See Treasury Announces Two Enforcements Actions for over $24M and $29M Against Virtual Currency Exchange Bittrex, Inc., (October 11, 2022), https://home.treasury.gov/news/press-releases/jy1006.

[18] See SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[19] Emily Mason, Coinbase Hit With SEC Suit That Identifies $37 Billion of Crypto Tokens As Securities, (June 6, 2023 5:08 pm), https://www.forbes.com/sites/emilymason/2023/06/06/coinbase-hit-with-sec-suit-that-identifies-37-billion-of-crypto-tokens-as-securities/?sh=3cc4c6d667a9; SEC Charges Crypto Asset Trading Platform Bittrex and its Former CEO for Operating an Unregistered Exchange, Broker, and Clearing Agency, https://www.sec.gov/news/press-release/2023-78 (last visited July 31, 2023).

[20] Jack Schickler, SEC Objects to Binance.US’ $1B Voyager Deal, Alleging Sale of Unregistered Securities, (last updated Feb. 23, 2023 at 2:32 p.m.), https://www.coindesk.com/policy/2023/02/23/sec-objects-to-binanceus-1b-voyager-deal-alleging-sale-of-unregistered-securities/.

[21] See NYDFS Objection to Plan, In re Voyager Digital Holdings, et al. at 9-10, No. 22-10943 (Bankr. S.D.N.Y. Feb. 22, 2023) [ECF No. 1051].

[22] Kari McMahon, SEC and New York Regulators Push Back on Binance.US’s Acquisition of Voyager, The Block (Feb. 23, 2023), https://www.theblock.co/post/214333/sec-and-new-york-regulators-push-back-on-binance-uss-acquisition-of-voyager.

[23] Yueqi Yang & Steven Church, Binance US Ends $1 Billion Deal to Buy Bankrupt Crypto Firm Voyager, Bloomberg (April 25, 2023), https://www.bloomberg.com/news/articles/2023-04-25/binance-us-terminates-deal-to-buy-bankrupt-crypto-firm-voyager.

[24] See Crypto Asset Trading Platform Bittrex and Former CEO to Settle SEC Charges for Operating an Unregistered Exchange, Broker, and Clearing Agency, https://www.sec.gov/news/press-release/2023-150 (last visited Sept. 18, 2023).

[25] Id.

[26] See Objection of the U.S. Securities Exchange Commission to Confirmation at 3 n.5, In re Voyager Digital Holdings, et al., No. 22-10943 (Bankr. S.D.N.Y. Feb. 22, 2023) (ECF No. 1047).

[27] See supra at n. 23.

© Copyright 2023 Squire Patton Boggs (US) LLP
Article by Mark A. Salzberg , Justin Cloyd of Squire Patton Boggs (US) LLP
For more articles on cryptocurrency, visit the NLR communications, media and internet section.

FTC Junk Fee Ban Proposed Rule Released

The Federal Trade Commission (FTC) released a new proposed rule to ban junk fees, which are unexpected, hidden, and “bogus” charges that are often applied later in a transaction. The FTC announced the proposed rule on October 11, 2023 after receiving 12,000 comments from consumers about how these fees impact them. The FTC is currently “seeking a new round of comments on a proposed junk fee rule,” according to a press release issued by the agency.

Junk fees include charges added when purchasing concert tickets online, making hotel and resort reservations, changing airline booking and seat choice fees, paying utility bills and renting an apartment. Junk fees are sometimes called partitioned pricing, drip pricing or shrouded pricing, according to Ashish Pradhan of Cornerstone Research. Consumers told the FTC that sellers often don’t say what the fees are for, and if they’re getting anything in return for paying them.

“All too often, Americans are plagued with unexpected and unnecessary fees they can’t escape. These junk fees now cost Americans tens of billions of dollars per year—money that corporations are extracting from working families just because they can,”  FTC Chair Lina M. Khan stated today. “By hiding the total price, these junk fees make it harder for consumers to shop for the best product or service and punish businesses who are honest upfront. The FTC’s proposed rule to ban junk fees will save people money and time and make our markets fairer and more competitive.”

The FTC estimates that junk fees can result in “tens of billions of dollars per year in unexpected costs” for consumers, and more than 50 million hours of time spent searching for the total price of short-term lodging and tickets for live events per year.

What Is the FTC Junk Fee Proposed Rule?

The proposed rule requires businesses to include all mandatory fees to be disclosed in pricing and prohibits sellers from applying any hidden fees during the transaction. The FTC said that this would help consumers “know exactly how much they are paying and what they are getting and spur companies to compete on offering the lowest price.”

Specifically, the Junk Fee Proposed Rule bans:

  • Hidden fees. These fees drive up the price of purchases, often before the transaction is complete. The proposed rule also bars businesses from advertising prices that exclude or hide mandatory fees.
  • Bogus fees. The FTC said that companies often charge “bogus fees.” The agency characterizes these fees as charges that consumers are asked to pay without knowing what their purpose is. The proposed rule requires businesses to tell consumers what these fees are for, what the amount is up front and if the fees can be refunded.

The proposed rule allows the FTC to issue monetary penalties against noncompliant companies and provide refunds to affected consumers.

Junk Fee Regulatory Measures from Other Federal Agencies

The Federal Communications Commission (FCC)

The FTC isn’t the only federal agency targeting junk fees. Other federal agencies are also acting against a variety of add on fees. The Federal Communications Commission (FCC) started implementing its Broadband Consumer Labels tool aimed at increasing price transparency.

“No one likes surprise charges on their bill. Consumers deserve to know exactly what they are paying for when they sign up for communications services. But when it comes to these bills, what you see isn’t always what you get,” said FCC Chairwoman Jessica Rosenworcel on March 23, 2023. “Instead, consumers have often been saddled with additional junk fees that may exorbitantly raise the price of their previously agreed-to monthly charges. To combat this, we’re implementing Broadband Consumer Labels, a new tool that will increase price transparency and reduce cost confusion, help consumers compare services, and provide ‘all-in-pricing’ so that every American can understand upfront and without any surprises how much they can expect to be paying for these services.”

The Consumer Financial Protection Bureau (CFPB)

Additionally, in March, the Consumer Financial Protection Bureau (CFPB) released a report on the use of junk fees “in deposit accounts and in multiple loan servicing markets, including the auto, mortgage, student, and payday/small loan sectors,” according to Greenberg Traurig.

“Americans are fed up with the junk fees that are creeping across the economy,” said CFPB Director Rohit Chopra in the FTC press release. “The FTC’s proposed rule will protect families and honest businesses from race-to-the-bottom abuses that cost us billions of dollars each year. If finalized, the CFPB will enforce the rule against violators in the financial industry and ensure that these firms play fairly.”\

The Department of Housing and Urban Development (HUD)

The Biden Administration and the Department of Housing and Urban Development in a July 19, 2023, press release, specifically address add-on fees in rental housing. “Earlier this year, we called for reform in the housing industry to increase transparency for renters across the country, reflecting the Biden-Harris administration and the Department of Housing and Urban Development’s commitment,” said HUD Secretary Marcia L. Fudge in the FTC press release.

According to HUD rental application fees can be up to $100 or more per application, and, importantly, they often exceed the cost of conducting the background and credit checks. Given that prospective renters often apply for multiple units over the course of their housing search, these application fees can add up to hundreds of dollars.

The Department of Transportation (DOT)

The Department of Transportation in a March 2023 press release addressed aggravating airline fees: after DOT secured commitments from major U.S. airlines to provide free rebooking, meals, and hotels when they are responsible for stranding passengers. Dot stated that they were working to stop airlines from forcing parents to pay to sit next to their kids by requiring airlines to disclose hidden fees for things like extra bags. DOT stated that they helped secure billions of dollars in refunds for passengers whose flights are canceled.

In 2022, Secretary Buttigieg pressed U.S. airlines to do more for passengers who had a flight canceled or delayed because of the airline, by informing the CEOs of the 10 largest U.S. airlines that the DOT would publish a dashboard on amenities and services provided such as rebooking, meals, or hotels in the event of a controllable delay or cancellation. Prior to Buttigieg’s urging, none of the 10 largest U.S. airlines guaranteed meals or hotels when a delay or cancellation was within the airlines’ control, and only one offered free rebooking.   As of March 2023, all of the 10 largest U.S. airlines guarantee meals and rebooking, and nine guarantee hotels when an airline issue causes a cancellation or delay.

What’s Next?

Consumers can submit comments to the FTC electronically for 60 days once the notice of proposed rulemaking is published in the Federal Register. Consumers can also send written comments to the FTC—instructions on how to do this can be found in the Federal Register notice under the “Supplementary Information” section.

Copyright ©2023 National Law Forum, LLC
For more articles on the FTC, visit the NLR Antitrust and Trade section.

Fed Issues FAQs Clarifying That Credit-Linked Notes Can Serve as Valid Capital Relief Tools for U.S. Banks

On September 28, the Federal Reserve Board (“FRB”) posted three new FAQs to its website regarding Regulation Q (Capital Adequacy of Bank Holding Companies, Savings and Loan Holding Companies, and State Member Banks). The FAQ guidance provides additional clarity on the use of credit-linked notes (“CLNs”) to transfer credit risk and offer capital relief to U.S. banks. While in some respects the FAQs merely confirm positions that the FRB has already taken in regard to individual CLN transactions, these FAQs are nevertheless important inasmuch as they publicly memorialize the FRB’s view of these products as valid capital management tools.

The FAQs speak to two different formats of CLNs: those issued by special purpose vehicles (“SPV CLNs”) and those issued directly by banks (“Bank CLNs”). The FRB’s view of SPV CLNs is relatively straightforward: per the FAQs, the FRB recognizes that properly structured SPV CLNs constitute “synthetic securitizations” for purposes of Regulation Q and that the collateral for such SPV CLNs can serve as a credit risk mitigant that banks can use to reduce the risk-weighting of the relevant assets.

The FRB’s posture toward Bank CLNs, however, is more nuanced.  According to the FRB, unlike SPV CLNs, Bank CLNs do not technically satisfy all of the definitional elements and operational criteria applicable to “synthetic securitizations” under Regulation Q, such that banks that issue Bank CLNs would not be able to automatically recognize the capital benefits of such transactions (as would be the case with properly structured SPV CLNs). The reasons for this are twofold: first, Bank CLNs are not executed under standard industry credit derivative documentation; and second, the issuance proceeds from Bank CLNs generally are owned outright by the issuing bank (rather than held as collateral in which the issuing bank has a security interest). Nevertheless, the FRB recognized that Bank CLNs can effectively transfer credit risk; as such, the FRB is willing to exercise its “reservation of authority” to grant capital relief on a case-by-case basis for Bank CLNs where the only two features of the Bank CLNs that depart from the strictures of Regulation Q are those described above. In other words, Bank CLNs can offer capital relief, but only if the issuing bank specifically requests such relief from the FRB and the FRB decides to grant such relief under its reservation of authority powers.

In his statement dissenting on the issuance of the U.S. Basel III endgame proposed rules—our discussion of which is available here—Federal Deposit Insurance Corporation (“FDIC”) Director Jonathan McKernan argued for increased clarity on the FRB’s position with respect to CLNs in order to provide U.S. banks with better parity in relation to their European counterparts (which routinely issue CLNs in different formats). While these FAQs may not fully address FDIC Director McKernan’s concerns, they do begin to provide some clarity concerning the effective use by banks of CLNs as capital management tools.

© Copyright 2023 Cadwalader, Wickersham & Taft LLP
Article about by: Daniel Meade , Jed Miller of Cadwalader, Wickersham & Taft LLP
For more articles on finance, visit the NLR Financial Institutions & Banking section.

European Commission Action on Climate Taxonomy and ESG Rating Provider Regulation

On June 13, 2023, the European Commission published “a new package of measures to build on and strengthen the foundations of the EU sustainable finance framework.” The aim is to ensure that the EU sustainable finance framework continues to support companies and the financial sector in connection with climate transition, including making the framework “easier to use” and providing guidance on climate-related disclosure, while encouraging the private funding of transition projects and technologies. These measures are summarized in a publication, “A sustainable finance framework that works on the ground.” Overall, according to the Commission, the package “is another step towards a globally leading legal framework facilitating the financing of the transition.”

The sustainable finance package includes the following measures:

  • EU Taxonomy Climate Delegated Act: amendments include (i) new criteria for economic activities that make a substantial contribution to one or more non-climate environmental objectives, namely, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems; and (ii) changes expanding on economic activities that contribute to climate change mitigation and adaptation “not included so far – in particular in the manufacturing and transport sectors.” The EU Taxonomy Climate Delegated Act has been operative since January 2022 and includes 107 economic activities that are responsible for 64% of greenhouse gas emissions in the EU. In addition, “new economic sectors and activities will be added, and existing ones refined and updated, where needed in line with regulatory and technological developments.” “For large non-financial undertakings, disclosure of the degree of taxonomy alignment regarding climate objectives began in 2023. Disclosures will be phased-in over the coming years for other actors and environmental objectives.”
  • Proposed Regulation of ESG Rating Providers: the Commission adopted a proposed regulation, which was based on 2021 recommendations from the International Organization of Securities Commissioners, aimed at promoting operational integrity and increased transparency in the ESG ratings market through organizational principles and clear rules addressing conflicts of interest. Ratings providers would be authorized and supervised by the European Securities and Markets Authority. The regulation “provides requirements on disclosures around” ratings methodologies and objectives, and “introduces principle-based organizational requirements on” ratings providers activities. The Commission is also seeking advice from ESMA on the presentation of credit ratings, with the aim being to address shortcomings related to “how ESG factors are incorporated into methodologies and disclosures of how ESG factors impact credit ratings.”
  • Enhancing Usability: the Commission set out an overview of the measures and tools aimed at enhancing the usability of relevant rules and providing implementation guidance to stakeholders. The Commission Staff Working Document “Enhancing the usability of the EU Taxonomy and the overall EU sustainable finance framework” summarizes the Commission’s most recent initiatives and measures. The Commission also published a new FAQ document that provides guidance on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and on the interactions between the concepts of “taxonomy-aligned investment” and “sustainable investment” under the SFDR.

Taking the Temperature: As previously discussed, the Commission is increasingly taking steps to achieve the goal of reducing net greenhouse gas emissions by at least 55% by 2030, known as Fit for 55. Recent initiatives include the adoption of a carbon sinks goal, the launch of the greenwashing-focused Green Claims Directive, and now, the sustainable finance package.

Another objective of these regulatory initiatives is to provide increased transparency for investors as they assess sustainability and transition-related claims made by issuers. In this regard, the legislative proposal relating to the regulation of ESG rating agencies is significant. As noted in our longer survey, there is little consistency among ESG ratings providers and few established industry norms relating to disclosure, measurement methodologies, transparency and quality of underlying data. That has led to a number of jurisdictions proposing regulation, including (in addition to the EU) the UK, as well as to government inquiries to ratings providers in the U.S.

© Copyright 2023 Cadwalader, Wickersham & Taft LLP

For more financial legal news, click here to visit the National Law Review.

CFIUS Determines it Lacks Jurisdiction to Review Chinese Land Acquisition

In 2022, Fufeng USA, a subsidiary of Chinese company Fufeng Group, purchased 370 acres near Grand Forks, North Dakota, with the intention of developing the land to build a plant for wet corn milling and biofermentation,[1] prompting opposition from federal and state politicians.[2] North Dakota Senators, North Dakota’s Governor, and Senator Marco Rubio urged the Committee on Foreign Investment in the United States (CFIUS) to review the acquisition as a potential national security risk for being located within 12 miles from the Grand Forks Air Force Base, which is home to military drone technology and a space networking center.[3] Following CFIUS’ review of Fufeng’s notice submission, CFIUS determined that it lacked jurisdiction over the transaction. This post summarizes the public information about that CFIUS case and provides observations about the responses by North Dakota and CFIUS in the wake of Fufeng’s proposed investment.

CFIUS Review and Determination

1. Procedural History

In conjunction with rising public opposition to its land acquisition, public reports show that Fufeng USA submitted a declaration to CFIUS on July 27, 2022.[4] North Dakota local news outlet Valley News Live obtained a copy of the CFIUS closing letter to that declaration filing, which stated that CFIUS determined on August 31, 2022 that it lacked sufficient information to assess the transaction and requested that the parties file a full notice.[5] (CFIUS has the option under the regulations to request a full notice filing at the conclusion of the abbreviated 30-day review of a declaration filing.) Based on the CFIUS closing letter to that subsequent notice filing, which was likewise obtained and published by Valley News Live, Fufeng USA submitted a notice on October 17, 2022, and CFIUS subsequently concluded that it lacked jurisdiction to review the transaction in December 2022.[6]

2. Why CFIUS did not Review under its Part 802 Covered Real Estate Authority

According the CFIUS Letter released by Fufeng to Valley News Live, Fufeng submitted its notice pursuant to 31 C.F.R. Part 800 (“Part 800”), which pertains to covered transaction involving existing U.S. businesses.[7] The closing letter made no reference to the transaction being reviewed as a “covered real estate transaction” under 31 C.F.R. Part 802 (“Part 802”).[8] A reason for this could be that, at the time the case was before CFIUS, the land acquisition by Fufeng USA was not within any of the requisite proximity thresholds and, thus, did not fall within Part 802 authority. Under Part 802, CFIUS has authority over certain real estate transactions involving property in specific maritime ports or airports, or within defined proximity thresholds to identified “military installations” listed in Appendix A to Part 802. Grand Forks Air Force Base was not included in Appendix A at that time, nor was the acquired land within the defined proximity of any other listed military installation. Accordingly, the only way for CFIUS to extend authority would be under its Part 800 authority relating to certain acquisitions of U.S. businesses.

3. CFIUS Determined It Lacked Jurisdiction Under its Part 800 Covered Transaction Authority

CFIUS’ closing letter to Fufeng stated that “CFIUS has concluded that the Transaction is not a covered transaction and therefore CFIUS does not have jurisdiction under 31 C.F.R. Part 800.”[9] Part 800 provides CFIUS with authority to review covered control transactions (i.e., those transactions that could result in control of a U.S. business by a foreign person) or covered investment transactions (i.e., certain non-controlling investments directly or indirectly by a foreign person in U.S. businesses involved with critical technology, critical infrastructure, or the collection and maintaining of US citizen personal data). Greenfield investments, however, inherently do not involve an existing U.S. business. As such, greenfield investments would be outside of CFIUS’ jurisdiction under Part 800. Although the justification underlying CFIUS’ determination regarding Fufeng’s acquisition is not publicly available, CFIUS might have determined that it lacked authority under Part 800 because Fufeng’s purchase of undeveloped land was not an acquisition of a U.S. business, but more likely a greenfield investment.

State and Federal Response

Under state and federal pressure, the City of Grand Forks, which initially approved Fufeng’s development of the corn milling facility, “officially decided to terminate the development agreement between the city and Fufeng USA Inc.” on April 20, 2023.[10] This decision was largely impacted by the U.S. Air Force’s determination that “the proposed project presents a significant threat to national security with both near- and long-term risks of significant impacts to our operations in the area.”[11] As of today, the land appears to still be under the ownership of Fufeng USA.[12]

CFIUS’ determination that it lacked authority drew sharp criticism from state and federal politicians. North Dakota Senator Cramer purported that CFIUS may have determined the jurisdictional question too narrowly and indicated that the determination may prompt federal legislative action.[13] Senator Marco Rubio (R-Florida) concurred, issuing a statement that permitting the transaction was “dangerous and dumb.”[14] In response to the determination, the Governor of South Dakota announced plans for “legislation potentially limiting foreign purchases of agricultural land” by investigating “proposed purchases of ag land by foreign interests and recommend either approval or denial to the Governor.”[15]

On April 29, 2023, North Dakota Governor Doug Burgum signed Senate Bill No. 2371 into law, which prohibits local development and ownership of real property by foreign adversaries and related entities, effective August 1, 2023. Notably, these entities include businesses with a principal executive offices located in China, as well as businesses with a controlling Chinese interest or certain non-controlling Chinese interest.

On May 5, 2023, the U.S. Department of Treasury, the agency tasked with administering CFIUS, also took steps to expand its authority to cover more real property acquisitions. It published a Proposed Rule that would expand CFIUS covered real estate transaction authority over real restate located with 99 miles of the Grand Forks Air Force Base and seven other facilities located in Arizona, California, Iowa, and North Dakota. See a summary of that Proposed Rule and related implications at this TradePractition.com blog post.

FOOTNOTES

[1] See, Alix Larsen, CFIUS requesting Fufeng USA give more information on corn mill development, Valley News Live (Sep. 1, 2022), https://www.valleynewslive.com/2022/09/01/cfius-requesting-fufeng-usa-give-more-information-corn-mill-development/.

[2] See Letter from Gov. Doug Burgum to Secretaries Janet Yellen and Lloyd Austin (Jul. 25, 2022), https://www.governor.nd.gov/sites/www/files/documents/Gov.%20Burgum%20letter%20urging%20expedited%20CFIUS%20review%2007.25.2022.pdf; Letter from Senators Marco rubio, John Hoeven, and Kevin Cramer to Secretaries Janet Yellen and Lloyd Austin (Jul. 14, 2022), https://senatorkevincramer.app.box.com/s/2462nafbszk2u6yosy77chz9rpojlwtl.

[3] See id; Eamon Javers, Chinese Company’s Purchase of North Dakota Farmland Raises National Security Concerns in Washington, CNBC, July 1, 2022, https://www.cnbc.com/2022/07/01/chinese-purchase-of-north-dakota-farmland-raises-national-security-concerns-in-washington.html.

[4] See, Alix Larsen, CFIUS requesting Fufeng USA give more information on corn mill development (Sep. 1, 2022), https://www.valleynewslive.com/2022/09/01/cfius-requesting-fufeng-usa-give-more-information-corn-mill-development/.

[5] See id.

[6] See Stacie Van Dyke, Fufeng moving forward with corn milling plant in Grand Forks (Dec. 13, 2022), https://www.valleynewslive.com/2022/12/14/fufeng-moving-forward-with-corn-milling-plant-grand-forks/.

[7] See id.

[8] Id.

[9] See id.

[10] Bobby Falat, Grand Forks officially terminates Fufeng Deal (Apr. 20, 2023), https://www.valleynewslive.com/2023/04/20/grand-forks-officially-terminates-fufeng-deal/.

[11] News Release, Senator John Hoeven, Hoeven, Cramer: Air Force Provides Official Position on Fufeng Project in Grand Forks, (Jan. 31, 2023), https://www.hoeven.senate.gov/news/news-releases/hoeven-cramer-air-force-provides-official-position-on-fufeng-project-in-grand-forks.

[12] See, Meghan Arbegast, Fufeng Group owes Grand Forks County more than $2,000 in taxes for first half of 2022 (Apr. 5, 2023), https://www.grandforksherald.com/news/local/fufeng-group-owes-grand-forks-county-more-than-2-000-in-taxes-for-first-half-of-2022.

[13] See Josh Meny, Senator Cramer discusses latest on Fufeng in Grand Forks (Dec. 27, 2022), https://www.kxnet.com/news/kx-conversation/senator-cramer-discusses-latest-on-fufeng-in-grand-forks/.

[14] Press Release, Senator Marco Rubio, Rubio Slams CFIUS’s Refusal to Take Action Regarding Fufeng Farmland Purchase (Dec. 14, 2022) https://www.rubio.senate.gov/public/index.cfm/2022/12/rubio-slams-cfius-s-refusal-to-take-action-regarding-fufeng-farmland-purchase.

[15] Jason Harward, Gov. Kristi Noem takes aim at potential Chinese land purchases in South Dakota (Dec. 13, 2022),https://www.grandforksherald.com/news/south-dakota/gov-kristi-noem-takes-aim-at-potential-chinese-land-purchases-in-south-dakota.

© Copyright 2023 Squire Patton Boggs (US) LLP

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Is Biodiversity Emerging As A Unifying Concept That Can Help Ease The Political Polarization Surrounding ESG?

Highlights

    • In addition to global initiatives by the United Nations, G7, and the U.S., the need for protection against biodiversity loss has become a central focus of the business and investment communities
    • Biodiversity protection is emerging worldwide as a unifying concept that can mitigate the political polarization surrounding ESG and promote constructive dialogue about sustainability
    • A number of steps can be taken to capitalize on the unique attributes and appeal of biodiversity and leverage its potential to serve as a unifying concept

International Biodiversity Day, May 22, 2023, with its theme “From Agreement to Action: Build Back Biodiversity” was a powerful reminder that momentum for biodiversity conservation is accelerating globally. Biodiversity is increasingly being recognized as a potential unifying concept that can help alleviate some of the extreme political divergence over the term ESG.

ESG, which encompasses a broad range of environmental, social, and governance factors, has become politically charged and the subject of intense debate and varying interpretations. Biodiversity, on the other hand, is widely recognized as a critical aspect of environmental sustainability and it is increasingly acknowledged as a pressing issue by virtually all stakeholders, including scientists, policymakers, businesses, and communities.

Biodiversity represents the variety of life on Earth, including ecosystems, species, and genetic diversity. It is a tangible and universally valued concept that resonates with people from various backgrounds and ideologies. The preservation, protection and conservation of biodiversity are essential for the health and resilience of ecosystems, as well as for addressing climate change and ensuring the well-being of future generations.

By emphasizing biodiversity within sustainability discussions, stakeholders can find common ground and rally around a shared objective: protecting and restoring the Earth’s natural diversity. Biodiversity provides a unifying language and focus that transcends political divisions, as it highlights the interconnectedness of all life forms. It allows for a more tangible and universally valued point of reference, which can facilitate collaboration and drive collective action towards conservation efforts.

In addition to global initiatives by the United Nations, the Group of Seven (G7), and the U.S., the need for protection against biodiversity loss has also become a central focus of business and investment communities, and appears to be receiving a more favorable reception in the U.S. than the broader concepts associated with and motives attributed to ESG investing. This increased attention has, in turn, opened up a number of practical opportunities for action to leverage the potential of biodiversity as a unifying concept.

International Support for Biodiversity Protection

The United Nations formed the Convention on Biological Diversity (CBD) to promote nature and human well-being. The first draft was proposed on May 22, 1992, which was then designated as International Biodiversity Day. Since the Rio Earth Summit in 1992, nearly 200 countries have signed onto this treaty, which is a legally binding commitment to conserve biological diversity, to sustainably use its components and to share equitably the benefits arising from the use of genetic resources.

In December 2022, at the 15th UN Biodiversity Conference (COP15), the CBD adopted the Kunming-Montreal Global Biodiversity Framework that calls for protecting 30 percent of the planet’s land, ocean, and inland waters and includes 23 other targets to help restore and protect ecosystems and endangered species worldwide, and ensure that big businesses disclose biodiversity risks and impacts from their operations. The Kunming-Montreal framework also focused on increasing funding for biodiversity by at least $200 billion per year (with at least $30 billion per year to developing countries by 2030).

The U.S. is one of just a few countries worldwide that has not yet formally approved the CBD. While President Clinton signed the CBD in 1993, the Senate did not ratify it. Although the U.S. was on the sidelines at COP15 in late 2022, in parallel with the CBD approval of the Kunming-Montreal framework, the U.S. reiterated its support for an ambitious and transformative Global Diversity Framework, outlined in this State Department press release.

In addition to committing to conserve at least 30 percent of U.S. lands and waters by 2030, other U.S. leadership initiatives to mainstream and conserve nature that were announced or reaffirmed at that time include:

    • Conserving forests and combatting global deforestation
    • Prioritizing nature-based solutions to address climate change, nature loss, and inequity
    • Incorporating nature into national economic statistics and accounts to support decision-making
    • Recognizing and including indigenous knowledge in federal research, policy, and decision-making, including protections for the knowledge holder
    • Knowing nature with a national nature assessment that will build on the wealth of existing data, scientific evidence, and Indigenous Knowledge to create a holistic picture of America’s lands, waters, wildlife, ecosystems and the benefits they provide
    • Strengthening action for nature deprived communities by expanding access to local parks, tree canopy cover, conservation areas, open space and water-based recreation, public gardens, beaches, and waterways
    • Conserving arctic ecosystems through increased research on marine ecosystems, fisheries, and wildlife, including through co-production and co-management with Indigenous Peoples

The U.S. also spearheaded efforts to reverse the decline in biodiversity globally by advancing land and water conservation, combating drivers of nature loss, protecting species, and supporting sustainable use, while also enabling healthy and prosperous communities through sustainable development. The U.S. also affirmed its financial commitment to and support for international development assistance to protect biodiversity. Additionally, the U.S. made major policy and financial commitments to protect oceans and advance marine conservation and a sustainable ocean economy.

Of particular importance, the U.S. reaffirmed its commitment to advancing science-based decision making and its support for the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services.

Most recently, the G7 Hiroshima Leaders’ Communique issued at the close of their meeting on May 20 on the cusp of International Biodiversity Day, affirmed that G7 leadership (including the U.S.) welcomed “the adoption of the historic Kunming-Montreal Global Biodiversity Framework (GBF) to halt and reverse biodiversity loss by 2030, which is fundamental to human well-being, a healthy planet and economic prosperity, and commit to its swift and full implementation and to achievement of each of its goals and targets.”
G7 leadership also reaffirmed their commitment “to substantially increase our national and international funding for nature by 2025,” and “to supporting and advancing a transition to nature positive economies.” Notably, they also pressed companies to do so as well while at the same time voicing support for TNFD’s market framework for corporate nature related disclosures:

“We call on businesses to progressively reduce negative and increase positive impacts on biodiversity. We look forward to the publication of the Taskforce on Nature-related Financial Disclosures’ (TNFD’s) market framework and urge market participants, governments and regulators to support its development.”

Similarly, multilateral development banks (MDBs) were urged by the leaders of G7 to increase their support for biodiversity by leveraging financial resources from all sources and “deploying a full suite of instruments.”

Increasing Focus On Biodiversity By The Financial Sector

The financial sector has taken note of the growing international support for biodiversity conservation and protection. A 2023 study by PwC found that “55% of global GDP—equivalent to about US $58 trillion—is moderately or highly dependent on nature.” In its report The Economic Case for Nature, the World Bank found that a partial collapse of ecosystem services would cost 2.3 percent of global GDP ($2.7 trillion) in 2030. Conversely, the report found that implementing policies beneficial to nature and biodiversity conservation (including achieving the “30×30” goal subsequently approved by the CBD in the Kunming-Montreal framework and by Executive Order in the U.S.) could result in a substantial increase in global real GDP by 2030.

According to a 2020 report by the World Economic Forum, protecting nature and increasing biodiversity could generate business opportunities of $10 trillion a year and create nearly 400 million new jobs by 2030. Given this economic potential, it comes as no surprise that a growing number of investors are focusing on deploying capital for nature-based opportunities, and trying to assess whether and to what extent companies are susceptible to biodiversity related risks.

Toward those ends, the financial sector has been monitoring and supporting the development of TNFD’s market framework for nature related disclosures that was most recently endorsed by G7. That private global effort was launched in 2021 in response to the growing need to factor nature into financial and business decisions. The fourth and final beta version was issued in March 2023:

“The TNFD is a market-led, science-based and government supported initiative to help respond to this imperative. The Taskforce is nearing the end of its two-year framework design and development phase to provide market participants with a risk management and disclosure framework to identify, assess, respond and, where appropriate, disclose their nature-related issues. The TNFD framework, including TCFD-aligned recommended disclosures, will be published in September 2023 ready for market adoption.”

While the TNFD framework is not legally binding, the final version will be coming on line just in time for use as a guide for compliance with the EU’s Corporate Sustainability Reporting Directive (CSRD), which was effective in April 2023. It will require a substantial number of European companies and others operating in the EU, to start making disclosures regarding biodiversity and nature in coming years.

One of the more significant catalysts for investment in the protection of biodiversity and nature was the establishment of the Natural Capital Investment Alliance as part of the United Kingdom’s Sustainable Markets Initiative announced in 2020 and the Terra Carta sustainability charter launched by King Charles a year later. The Alliance is a public/private venture that aims to invest $10 billion in natural capital assets. Speaking at the One Planet Summit on biodiversity where the Alliance was announced in January 2021, King Charles stated “… I have created a Natural Capital Investment Alliance to help us arrive at a common language on Natural Capital Investment so that we can start putting money to work and improve the flow of capital.”

According to research by Environmental Finance, total assets held in thematic biodiversity funds more than tripled in 2022, and it is anticipated that momentum and growth will accelerate in response to COP 15 in December 2023, and approval of the Kunming-Montreal framework.

Positioning Biodiversity As A Unifying Concept

While biodiversity is not replacing ESG, it is gaining more attention within the broader ESG framework. Biodiversity conservation is supported by a vast body of scientific research and has a broad consensus among stakeholders. Many companies are incorporating biodiversity considerations into their sustainability strategies, and setting goals for conservation, habitat restoration, and responsible land use. Investors are also factoring biodiversity into their decision-making processes, looking for companies that demonstrate strong biodiversity conservation efforts.

Given the universal importance of biodiversity, it can serve as a focal point for mutual understanding for stakeholders with varying perspectives. Biodiversity conservation provides a unifying language that encourages collaborative efforts towards shared goals of environmental stewardship and the preservation of natural resources. Protection against biodiversity loss is not an ideological issue. To the contrary, it is fundamental, practical, and existential: the need to preserve the natural systems that support life on Earth. Emphasizing the importance of biodiversity shifts the focus to concrete and tangible actions required globally and locally, such as species preservation, and ecosystem protection, which can garner broader support and participation and help bridge political divides.

While biodiversity protection is by no means a panacea, there are further steps that can be taken to capitalize on its unique attributes and appeal that can improve the potential for biodiversity to serve as a unifying concept that can help reduce the current political polarization in the U.S. over ESG and promote more constructive dialogue around sustainability:

    • Universal concern – Biodiversity loss affects every individual and society, regardless of political affiliation. It is a shared concern that is oblivious to political boundaries, as the preservation of nature’s diversity is vital for the well-being of all life on Earth. By emphasizing biodiversity as a unifying concept, stakeholders can find mutuality and work together towards its conservation.
    • Inclusivity – Biodiversity requires inclusive engagement by diverse stakeholders and technical and scientific support from local communities, indigenous groups, governments, businesses, civil society organizations and the public. Such engagement fosters dialogue, understanding, and collaboration, breaking down political barriers.
    • Tangible and relatable – Biodiversity is a concrete and tangible concept that people can relate to, unlike some of the more complex ESG concepts, like Scope 3 greenhouse gas (GHG) emissions and Net Zero. It encompasses the variety of species, ecosystems, and genetic diversity, which are easily understandable and relatable to everyday experiences. This relatability can bridge political divides and foster broader support for conservation efforts.
    • Interconnectedness – Biodiversity underscores the interconnectedness of ecosystems and species emphasizing that actions in one area can have cascading far-reaching consequences on others, including ecological, social, and economic effects. Recognizing this interconnectedness can encourage stakeholders to collaborate across sectors and ideologies to address biodiversity loss collectively.
    • Co-benefits and shared values – Biodiversity conservation often aligns with other societal values and goals, such as climate change mitigation, sustainable development, and human well-being. By emphasizing the co-benefits that arise from biodiversity conservation, such as ecosystem services and resilience, stakeholders can rally around shared values and work towards a common vision.
    • Economic implications – Biodiversity loss can have significant economic implications for industries like agriculture, tourism, and pharmaceuticals. It can also have impacts on supply chains and market access. Recognizing the economic value of biodiversity and the potential risks associated with its decline can bring together diverse stakeholders, including businesses and investors, who recognize the importance of integrating biodiversity considerations into their strategies and decision-making processes.
    • Science-based approach – Biodiversity conservation relies on scientific knowledge and research. Emphasizing the scientific evidence on the importance of biodiversity helps build consensus and transcends political biases, providing a foundation for constructive discussions.
    • Local and global perspectives – Biodiversity conservation is relevant at both local and global scales. It allows for discussions that incorporate local knowledge, values, and practices, while recognizing the need for global cooperation to address biodiversity loss and protect shared resources.

To leverage biodiversity as a unifying concept, it is crucial to promote open dialogue, knowledge sharing, and collaboration. Stakeholders should engage in inclusive decision-making processes that respect diverse perspectives and prioritize equitable and sustainable outcomes.

Takeaways

Biodiversity is emerging as a potential unifying concept that can help mitigate the political polarization surrounding the term ESG. While ESG has become a politically charged and debated topic, biodiversity is widely recognized as a critical aspect of environmental sustainability and has broad support across different stakeholders.

By focusing on biodiversity, stakeholders can find common ground in recognizing the importance of preserving nature’s diversity and ensuring the long-term sustainability of ecosystems. Biodiversity loss is a global challenge that affects everyone, irrespective of political affiliation, and it is increasingly acknowledged as a pressing issue by scientists, policymakers, businesses, and communities.

It is important to note that while biodiversity can be a unifying concept, there will still be debates and differing opinions on specific approaches and trade-offs involved in biodiversity conservation. Different stakeholders may have differing priorities, perspectives, and proposed means and methods to address biodiversity loss. The complexity of biodiversity issues, such as balancing conservation with economic development or navigating conflicts between different stakeholder interests, requires careful consideration and dialogue.

© 2023 BARNES & THORNBURG LLP

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Rise in VCM Business May Trigger CFTC Oversight on Sales of Carbon Offset Credits

Many major companies have announced a blueprint to minimize their carbon footprint. Some companies have gone so far as to proclaim that they will achieve “net zero” emissions in the near future. To accomplish their climate goals, many have turned to purchasing products called “carbon offset credits.”

Offset credits are defined as tradable “rights” or certificates linked to activities that lower the amount of carbon dioxide (CO2) in the atmosphere. These offsets are purchased and sold on what is commonly referred to as “voluntary carbon markets” (VCMs), where owners of carbon-reducing projects can sell or trade their carbon offsets to emitters who wish to offset the negative effects of their emissions.[1] The VCMs, however, have been subject to criticism and concern due to lack of effective regulation to combat potential fraud. In response, the US Commodity Futures Trading Commission (CFTC) has announced its intent to increase enforcement resources and expertise to police the carbon markets.

How It Works

The owner of the carbon-reducing project applies to an independent (and largely unregulated) registry for carbon offsets. The registry then evaluates the project, often relying on complex information submitted by the project owner, to determine whether and how much atmospheric carbon the project will reduce. If the registry determines the project will reduce atmospheric carbon, it will issue a carbon offset credit to the project owner.

Typically, one offset credit represents one metric ton of carbon dioxide removed or kept out of the atmosphere. The price of offset credits will vary depending on different project types, different levels of benefits, and the markets in which they are traded. Once the registry issues the offset credit, the project owner can sell it to whomever it wants on a VCM. It is not uncommon for profit-seeking entities such as brokers or investors to purchase the offset credit and then sell it to the “end user,” which is the entity that wants to take credit for the carbon reduction. Once the “end user” purchases the offset credit, the credit is “retired” to ensure that it cannot be sold again.

Although voluntary carbon markets have been around for decades, they have taken off in recent years amid a deluge of corporate climate commitments. From 2018 to 2021, the VCM’s value grew from $300 million to $2 billion. Global management consultancy company McKinsey estimates that the value of VCMs may reach as high as $180 billion by 2030, while Research and Markets has projected a global value of $2.68 trillion by 2028.

Yet, the voluntary carbon market is fragmented and largely unregulated, suffers from varying accounting standards, and has been described as “the Wild West” for fraud. An investigation by The Guardian found that 90% of offsets issued by one of the largest registries for rainforest preservation projects were worthless because they did not represent legitimate carbon reductions. The voluntary carbon market is largely unregulated in the United States, and carbon offsets are almost exclusively issued by nongovernmental entities. Perhaps not surprisingly, regulators have started to look at the voluntary carbon markets more closely. In particular, the CFTC has shown an increasing interest in carbon in recent years.

Road Ahead

In September 2020, the CFTC’s Climate-Related Market Risk Subcommittee issued a report, “Managing Climate Risk in the U.S. Financial System,” that concluded climate change poses a major risk to the stability and integrity of the US economy and presented several dozen recommendations to mitigate climate risks. Less than a year later, CFTC Chairperson Rostin Behnam created the Climate Risk Unit to focus on the role of derivatives “in climate-related risk and transitioning to a low carbon economy.”

In June 2022, the CFTC held the first ever Voluntary Carbon Markets Convening to discuss issues related to a potential carbon offset market and to solicit input from industry participants in the CFTC’s potential role. After the Convening, the CFTC issued an RFI asking whether and how the CFTC should be involved in creating and regulating a voluntary carbon market. The responses to the RFI reflected that, while most industry participants agreed on the need for additional transparency and standardization in the voluntary carbon markets, they disagreed on the role the CFTC should play in such a market. A group of seven United States senators, including Sens. Cory Booker (D-NJ) and Elizabeth Warren (D-MA), argued that the CFTC should establish a robust regime governing the carbon market. Others argued that it is too soon for the CFTC to create rules and a registration mechanism, expressing concern that those actions might stifle industry innovation and progress.

At a keynote speech in January 2023, Chair Behnam stated that the CFTC “can play a role in voluntary [carbon] markets.” CFTC Commissioner Goldsmith Romero echoed the sentiment a month later in another speech and gave proposals for the CFTC to “promote resilience to climate risk.” Among those was a proposal that the “Commission should promote market integrity by increasing enforcement resources and expertise to combat greenwashing and other forms of fraud.”

The voluntary carbon market, Goldsmith Romero noted, “carr[ies] particular concerns of greenwashing, fraud, and manipulation” which “can lead to serious harm, distort market pricing, seriously damage a company’s reputation, and undermine the integrity of the markets.” This is particularly true with an esoteric commodity such as carbon offsets. For tangible commodities such as soybeans or oil, verifying delivery of the goods is relatively easy. But for carbon offsets, the offset purchaser often cannot verify that the promised greenhouse gas reduction is actually occurring; instead, the purchaser must rely on the promises made by the project owner or independent registry.

At present, the CFTC has limited enforcement jurisdiction over carbon offsets because only a limited number of carbon derivatives are traded on regulated futures markets. Carbon, as well as carbon and other environmental offsets or credits, are generally considered “commodities” as defined by § 1a(9) of the Commodity Exchange Act of 1936 (CEA). As a regulated commodity, transactions involving carbon credits or offsets are subject to the CFTC’s anti-fraud and anti-manipulation enforcement jurisdiction.

As VCMs continue to grow, it is likely that offerings of carbon derivatives such as futures, options, and swaps will grow with them, which may provide the jurisdictional catalyst for the CFTC to get more involved. The CFTC has exclusive jurisdiction over the regulation of futures markets, including oversight of the listing of new contracts on futures exchanges. Currently, a limited number of carbon futures are available to trade, and most trade on already regulated exchanges such as the Global Emissions Offset (GEO) futures contracts traded at the Chicago Mercantile Exchange (CME). The price of CME’s GEO futures contract is based on CORSIA-eligible (Carbon Offsetting and Reduction Scheme for International Aviation) offset credits issued through specific independent registries.

But given the varying standards and methodologies for these registries, combined with an increasing number of investigations that have found significant issues with offset credits, it is reasonable to expect that the CFTC may eventually seek to engage in more oversight of the registries to ensure that futures contracts are not being manipulated and the offset credits are actually delivering the carbon reductions promised. Given that offsets are widely traded as commodities, that demand for offset-based derivatives products is growing, and that fraud may be a widespread problem throughout the marketplace, it seems like a matter of when, not if, the CFTC begins to regulate VCMs more heavily.

FOOTNOTES

[1] Although often used interchangeably, voluntary carbon markets are different from compliance carbon markets. Compliance carbon markets are regulated markets set by “cap-and-trade” regulations at the state, national, or international governmental organizations. Governmental organizations set a cap on carbon emissions and then provide members with credits that act as a “permission slip” for a company to emit up to the cap. Voluntary carbon markets, on the other hand, involve trading of carbon credits between companies to reduce their own carbon footprint.

© 2023 ArentFox Schiff LLP
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