Quantum Updates 23 | November 2024

Gen Z Turns to Finfluencers for Investment Advice According to BaFin Study

On 16 October 2024, Germany’s Federal Financial Supervisory Authority (BaFin) published a study examining the influence of financial influencers (“finfluencers”) on investment decisions among adults aged 18 to 45. The report discusses the role of social media in shaping financial behaviours, especially among GenZ, and addresses the risks associated with this trend.

• Social media platforms like YouTube and Instagram are seen as reliable sources of financial information by more than half of respondents, with 60% considering them viable alternatives to traditional financial advice.
• Social media users diversify their portfolios more, with notable preferences for equities and crypto assets compared to non-users.
• Generational Divide in Investment Behaviour shows, millennials favour conventional assets such as call and time deposits whereas GenZ leans towards crypto assets and precious metals. Crypto investment surged to 32% of respondents since 2022, up from 10% in earlier studies, with social media users twice as likely to invest in these assets.
• Role of Finfluencers establishes that over 50% of respondents use finfluencers for financial information, and 90% acknowledge receiving investment recommendations, primarily for equities and crypto. 57% of respondents purchased recommended products via influencer-provided links, while 25% did so elsewhere.
• BaFin is advocating for mandatory disclosure of paid partnerships and commissions by finfluencers to enhance transparency. The upcoming Markets in Crypto-Assets regulation will require clear risk communication and greater accountability for crypto promotional content. BaFin is collaborating with social media platforms to detect misleading financial advice and monitoring online investment campaigns.
• BaFin has urged young investors to critically evaluate social media investment advice and remain cautious of fraudulent schemes. Its website provides guidance on recognising and avoiding online fraud, protecting against dubious recommendations, and dealing with potential scams.

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US SEC Initiates Legal Proceedings Against Adani Greens Pvt. Ltd and Its Directors for Securities Law Violations

On 20 November 2024, the United States Securities and Exchange Commission (US SEC) filed a complaint in the United States District Court for the Eastern District of New York against Gautam Adani and Sagar Adani. The complaint alleges that the defendants orchestrated a large-scale bribery scheme involving hundreds of millions of United States dollars to secure renewable energy project contracts in India and misrepresented adherence to anti-bribery principles in connection with a US $750 million United States bond offering.

• The bribery scheme allegedly facilitated long-term power purchase agreements critical to the Manufacturing Linked Projects, including USD 200 million in bribes to officials in Andhra Pradesh.
• In September 2021, Adani Green Energy Limited issued a USD 750 million bond offering targeting United States investors. The US SEC alleges that the offering documents falsely claimed compliance with anti-bribery principles and good corporate governance.
• The US SEC seeks the following reliefs:
  • Permanent injunction barring Gautam and Sagar Adani from engaging in securities law violations.
  • Civil monetary penalties under the United States Securities Act and Exchange Act.
  • Permanent prohibition on the defendants serving as officers or directors of public companies.
  • Disgorgement of financial gains obtained through the alleged violations, with interest.
• The US SEC alleges violations of US Securities Act Section 17(a) which prohibits fraud in securities offerings and violation of US Securities Exchange Act Section 10(b) and SEC Rule 10b-5 which prohibits fraud in connection with the purchase or sale of securities.
• US SEC draws its jurisdiction based on the allegation that it targetted United States investors, the use of interstate commerce, and transactions conducted within the Eastern District of New York.

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Unravelling the Bribery Scheme Involving Indian Energy Companies: US SEC Files Complaint Against Cyril Sebastien Cabanes

On 20 November 2024, the United States Securities and Exchange Commission (US SEC) filed a complaint in the United States District Court for the Eastern District of New York against Cyril Sebastien Dominique Cabanes, a French national residing in Singapore. The complaint alleges Cabanes’ involvement in a bribery scheme involving over USD 250 million in payments to Indian state officials to secure contracts for renewable energy projects. Cabanes is accused of violating the anti-bribery provisions of the United States Foreign Corrupt Practices Act.

• Cabanes, a director at Azure Power and representative of its largest shareholder, the Canadian pension fund Caisse de dépôt et placement du Québec, allegedly became actively involved in the bribery scheme by May 2022.
• The scheme was devised to overcome resistance from Indian state officials unwilling to sign agreements for Manufacturing Linked Projects awarded by the Solar Energy Corporation of India in December 2019.
• Between 2021 and 2023, payments totalling USD 250 million were either made or promised to secure critical agreements, enabling Azure Power and Adani Green Energy Limited to proceed with the projects, expected to generate billions of United States dollars in revenue.
• The complaint alleges Cabanes used electronic communications, including WhatsApp messages transmitted through United States interstate commerce, to coordinate the scheme and further directed Azure Power executives to conceal the bribery scheme from the company’s board of directors and legal counsel.
• Relief sought by the US SEC includes monetary penalties under the United States Securities Exchange Act Section 21(d)(3), permanent prohibition on Cabanes from serving as an officer or director of any company registered under the United States Securities Exchange Act Sections 12(b) or 15(d) and Disgorgement of financial gains obtained through the violations, with prejudgment interest.
• The allegations state that Cabanes violated Section 30A of the United States Securities Exchange Act of 1934, which prohibits bribing foreign officials to gain business advantages.
• As per US SEC’s contention on jurisdiction in which is established under Sections 21(d), 21(e), and 27 of the United States Securities Exchange Act, as the alleged bribery involved the use of United States interstate commerce and facilitated violations of federal laws governing securities and anti-corruption practices.

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US Commodity Futures Trading Commission Proposes Distributed Ledger Technology for Non-Cash Collateral in Derivatives Markets

On 21 November 2024, the United States Commodity Futures Trading Commission’s (US CFTC) Global Markets Advisory Committee (GMAC), led by Commissioner Caroline D. Pham, recommended enabling the use of distributed ledger technology (DLT) for non-cash collateral in derivatives markets. This initiative aims to enhance efficiency and reduce risks associated with non-cash assets, such as government bonds and securities, marking a significant advancement in the use of blockchain technology within financial markets.

• The recommendation is the fourteenth advanced by GMAC within a year, reflecting its record contributions to maintaining U.S. market integrity and competitiveness in a globally interconnected environment.
• GMAC’s Digital Asset Markets Subcommittee also progressed its Utility Tokens workstream, developing regulatory frameworks for tokenised assets to foster innovation in the digital economy.
• Current practices for non-cash collateral in derivatives transactions involve government bonds, equities, gold, and money market funds, but operational inefficiencies, including intermediary networks and settlement delays, limit practical application.
• GMAC’s recommendations for integrating DLT include retaining existing asset eligibility rules, ensuring only currently approved non-cash collateral remains eligible, leveraging existing risk management processes to address legal, custodial, and information security risks and avoiding new regulatory rules, utilising current US CFTC frameworks to manage operational risks.
• Commissioner Caroline D. Pham stated: “All over the world, there have been successful and proven commercial use cases for tokenization of assets, such as digital government bond issuances in Europe and Asia, over $1.5 trillion notional volume in institutional repo and payments transactions on enterprise blockchain platforms, and more efficient collateral and treasury management, now, we can finally begin to make progress on U.S. regulatory clarity for digital assets with today’s GMAC recommendation on tokenized non-cash collateral. This marks a significant first step toward realizing these opportunities for our derivatives markets — with exactly the same guardrails and protections in place. Embracing new technology does not mean compromising on market integrity. I’m also excited by the progress of the Utility Tokens workstream and their extensive efforts on a regulatory solution for these key assets which will help to unleash rapid innovation and growth in the digital economy. I applaud the leadership of the GMAC and the Digital Asset Markets Subcommittee and workstreams for promoting the competitiveness of our markets and the United States.”

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Gary Gensler Announces Departure as Chair of the United States Securities and Exchange Commission

On 21 November 2024, the United States Securities and Exchange Commission announced that Gary Gensler will step down as Chair on 20 January 2025. Gensler, who began his tenure on 17 April 2021, led transformative reforms aimed at strengthening the efficiency, resilience, and integrity of US capital markets.

• Oversaw reforms in the US $28 trillion Treasury market and the US $55 trillion equity market, including central clearing for Treasury markets, narrowing broker-dealer exemptions, shortening the equity market settlement cycle to one day, and enhancing transparency in broker execution quality.
• Advanced corporate governance through rules on timely disclosure of executive pay versus performance, clawbacks of executive compensation tied to misstated financials, updated insider trading standards, and the introduction of universal proxy cards to improve shareholder voting.
• Strengthened disclosure requirements, particularly around cybersecurity, climate risks, and personal data breaches by broker-dealers and investment advisers.
• Achieved over 2,700 enforcement actions, recovering approximately US $21 billion in penalties and disgorgements, returning US $2.7 billion to harmed investors, and awarding US $1.5 billion to whistleblowers. Focused heavily on crypto markets, addressing fraud, registration violations, and wash trading.
• Enhanced financial reporting resilience with amendments to Form PF, improved transparency for hedge and private equity funds, and achieved an agreement with Chinese authorities to inspect audit firms in China and Hong Kong for the first time.
• Praised the US SEC staff as “mission-driven” and expressed gratitude to President Biden, fellow Commissioners, Congress, and global regulators for their collaboration and support.
• Before joining the US SEC, Gary Gensler held roles, including Chair of the US Commodity Futures Trading Commission, where he led the reform of the US $400 trillion swaps market, and key positions in the United States Department of the Treasury, academia, and private sector. His tenure at the SEC leaves a lasting legacy of regulatory innovation and robust enforcement in an evolving financial landscape.

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Miami International Securities Exchange LLC and MIAX PEARL LLC Propose Rule Changes to Allow Bitcoin-Backed Options Trading

On 22 November 2024, the United States Securities and Exchange Commission (US SEC) received proposals i.e. proposal 1, proposal 2 and proposal 3 from Miami International Securities Exchange LLC (MIAX) and its affiliate MIAX PEARL LLC to amend their rules, enabling the listing and trading of options on Bitcoin-backed funds. The funds include Grayscale Bitcoin Trust, Fidelity Wise Origin Bitcoin Fund, and ARK 21Shares Bitcoin Exchange-Traded Fund (ETF), aiming to integrate Bitcoin financial products into the US regulated securities market.

• The proposals seek amendments to several key rules, including Rule 402 which defines eligibility criteria for Bitcoin-backed funds to qualify for options trading, Rule 307 which sets conservative position limits to cap the number of options contracts a trader can hold and Rule 309 which regulates exercise limits on the maximum number of contracts exercisable at any given time.
• Proposed Bitcoin-backed funds for options trading include, Grayscale Bitcoin Trust, it Represents fractional Bitcoin ownership, Fidelity Wise Origin Bitcoin Fund an tracks Bitcoin price movements along with ARK 21Shares Bitcoin ETF which says joint venture between ARK Invest and 21Shares offering Bitcoin exposure.
• The exchanges cite several reasons supporting the proposals such as Investor Demand which offers a regulated alternative to direct Bitcoin investment, addressing custody, security, and regulatory challenges, Liquidity and Market Capitalisation for funds like Grayscale Bitcoin Trust (market value exceeding US $13 billion) and Fidelity Wise Origin Bitcoin Fund (8.9 million average daily share volume) meet trading volume and market capitalisation requirements and improved market functionality: Options trading enhances liquidity, supports hedging, speculation, and price discovery for Bitcoin-backed funds.
• To address risks, conservative position and exercise limits of 25,000 contracts are proposed, lower than those for traditional ETFs with comparable metrics, reflecting a cautious integration of Bitcoin-backed options.
• The proposals aim to align with recent US SEC approvals for Bitcoin-based ETFs like the iShares Bitcoin Trust. However, the US SEC will likely scrutinise the proposals given Bitcoin’s volatility and the evolving cryptocurrency regulatory landscape.

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United States SEC Reports Enforcement Outcomes for Fiscal Year 2024

On 22 November 2024, the United States Securities and Exchange Commission (SEC) released its enforcement statistics for fiscal year 2024, highlighting record monetary remedies and landmark case resolutions despite a decrease in the number of enforcement actions. The report reflects the SEC’s commitment to protecting investors, ensuring market integrity, and addressing evolving risks in the securities market.

• The US SEC secured its highest-ever monetary remedies, totalling US $8.2 billion, comprising US $6.1 billion in disgorgement and prejudgment interest and US $2.1 billion in civil penalties. Over half of this amount came from a jury verdict in the Terraform Labs case against Do Kwon, resulting in US $4.5 billion in penalties for securities fraud.
• The US SEC initiated 583 enforcement actions, a 26% decrease from the prior year, with 431 stand-alone actions (14% decrease) and 93 follow-on administrative proceedings (43% decrease).
• Firms responding to US SEC investigations with self-reporting and remediation saw reduced or no penalties. Over 70 firms faced penalties exceeding US $600 million for federal recordkeeping violations. The US SEC enforced the Marketing Rule, targeting misleading performance claims by investment advisers.
• Actions against misuse of artificial intelligence included QZ Asset Management, which falsely claimed extraordinary returns. Cybersecurity enforcement included delayed cyber intrusion reporting by Intercontinental Exchange. Social media scams and crypto-asset violations, such as Barnbridge DAO for failing to register offerings, remained key priorities.

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Customers Urged to Act on Premium Savings Contracts as BaFin Appeals Frankfurt Court Ruling

On 25 November 2024, Christian Bock, Consumer Protection Officer at BaFin, called on customers holding premium savings contracts to assert claims for overdue interest recalculations before the year-end to prevent statute-bar limitations. This follows BaFin’s appeal against a Frankfurt Administrative Court ruling that overturned its general order on interest adjustment clauses, which has significant implications for consumer rights and regulatory enforcement.

• Premium savings contracts, popular between 1990 and 2010, often included clauses allowing banks to adjust interest rates unilaterally, which the German Federal Court of Justice (BGH) deemed invalid for lacking transparency.
• Customers are advised to contact their banks immediately to request a review of their contracts and assert claims for overdue interest based on BGH rulings.
• To halt the three-year limitation period, customers can issue written demands for recalculations, approach dispute resolution bodies, initiate legal proceedings, or request waivers of limitation defences.
• BaFin’s general order, issued three years ago, required financial institutions to notify customers of BGH rulings, recalculate interest payments, or offer lawful contract amendments.
• The order affected approximately 1.1 million contracts, with an average underpayment of €1,000 to €2,000 in interest per contract.
• The Frankfurt Administrative Court recently annulled BaFin’s general order, claiming the breaches did not constitute significant consumer protection violations.
• BaFin has filed an appeal, arguing the need for legal clarity to ensure regulatory compliance and consumer protection.
• The court’s decision does not negate customers’ civil claims for interest adjustments under existing BGH case law.
• BaFin highlighted the importance of BGH rulings since 2004, which form the legal basis for recalculating interest and ensuring transparent contract terms.

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United States Securities and Exchange Commission Approves Payment for BitClave Fund Administration

On 25 November 2024, the United States Securities and Exchange Commission (SEC) issued an administrative order approving payment for fund administration services related to the BitClave Fair Fund. This action ensures efficient compensation for investors harmed by the unlawful securities offering conducted by BitClave PTE Ltd.

• The SEC initiated enforcement proceedings against BitClave PTE Ltd. in May 2020, citing violations of securities laws during its 2017 initial coin offering (ICO).
• BitClave raised US $25.5 million through the sale of Consumer Activity Tokens (CAT) but failed to register the offering as required by the Securities Act of 1933.
• The SEC ordered disgorgement of US $25.5 million, prejudgment interest of US $3,444,197, and a civil penalty of US $400,000, creating a total sanction of US $29,344,197.
• The funds were allocated to a Fair Fund under the Sarbanes-Oxley Act of 2002 to compensate harmed investors.
• In April 2021, Kurtzman Carson Consultants LLC was appointed as the fund administrator to manage claims, oversee distribution, and ensure transparency.
• The administrative order approved US $52,460.20 in fees and expenses for the fund administrator for services rendered between April 2021 and February 2024.
• The SEC authorised its Office of Financial Management to disburse the approved payment and streamline future payments within the administrator’s cost proposal.
• The fund administrator’s role has been pivotal in ensuring the equitable and efficient distribution of the Fair Fund to eligible investors.
• The order referenced SEC Rules of Practice, ensuring accountability and adherence to regulatory standards under the Securities Exchange Act of 1934.
• This approval underscores the SEC’s commitment to protecting investors and maintaining the integrity of financial markets through responsive and transparent fund administration.

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US SEC Approves Distribution Plan for Quantstamp Inc., Culminating in Investor Restitution

On 26 November 2024, the United States Securities and Exchange Commission by its order approved a distribution plan for Quantstamp Inc., addressing violations of U.S. securities laws related to the unregistered sale of QSP tokens. This decision finalises restitution efforts for investors affected by the company’s regulatory breaches during its token offering.

• Quantstamp, Inc., a blockchain technology company, raised approximately US $28.35 million in Ethereum and U.S. dollars through an initial token offering in 2017, attracting over 5,000 investors globally, including in the U.S.
• The US SEC determined that QSP tokens qualified as securities under U.S. law, requiring registration or exemption, neither of which Quantstamp fulfilled, violating Sections 5(a) and 5(c) of the Securities Act of 1933.
• On 21 July 2023, the US SEC ordered Quantstamp to cease violations and pay US $3,473,515, which included US $1,979,201 in disgorgement, US $494,314 in prejudgment interest, and a US $1,000,000 civil penalty.
• A Fair Fund was established under the Sarbanes-Oxley Act of 2002 to manage these funds for distribution to investors harmed by the unregistered token offering.
• The distribution plan targets individuals who purchased QSP tokens between 1 October 2017 and 20 July 2023 and ensures restitution for their losses.
• The proposed plan was made public on 7 October 2024 for a 30-day comment period, received no objections, and was approved by the US SEC on 26 November 2024.
• Quantstamp’s QSP tokens were marketed as investment opportunities, with promises of profit, fulfilling the criteria for securities despite their utility claims and therefore, US SEC ruled that the sale and marketing of unregistered QSP tokens exposed investors to risks without adequate regulatory oversight.

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United States SEC Extends Review Period for NYSE Proposed Rule Change on Reverse Stock Splits

On 25 November 2024, the United States Securities and Exchange Commission announced an extension of the review period for a proposed rule change from the New York Stock Exchange. The amendment seeks to introduce new restrictions on reverse stock splits under Section 802.01C of the NYSE Listed Company Manual, which governs price criteria for listed stocks.

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