Friday, 14 October 2016

SEC - All your base are belong to us

In an interesting decision, to me at least, the SEC has agreed with Forcerank LLC to a proposed settlement for alleged financial indiscretions.

The ramifications are quite broad and may affect many businesses currently under the impression that their activities don't fall within the SEC's jurisdiction. Let's have a short meander...

From the SEC's [pdf] order we get a summary of Forcerank LLC's business:
"Forcerank LLC ran mobile phone games where players predicted the order in which 10 securities would perform relative to each other. In each week-long game, players won points for each instrument based on the accuracy of their prediction, and players with the most aggregate points received cash prizes at the end of the competition. Forcerank LLC kept 10% of the entry fees and obtained a data set about market expectations that it hoped to sell to hedge funds and other investors."
And the SEC decided the agreements with the players were "security-based swaps":
"because they provided for a payment that was dependent on the occurrence, or the extent of the occurrence, of an event or contingency that was “associated with” a potential financial, economic, or commercial consequence and because they were “based on” the value of individual securities. From February to June 2016, Forcerank LLC violated Section 5(e) of the Securities Act and Section 6(l) of the Exchange Act when it offered and sold those security-based swaps to persons who were not eligible contract participants."
Even though,
"The Forcerank LLC website said: Given that the Forcerank contest is not a security or security based swap, and is a skill based contest, it is not currently regulated by the federal government, any state government, or financial regulatory authority. Forcerank has been in close contact with various financial regulatory authorities both before and after launching Forcerank contests." 
"No regulatory authority had cleared the Forcerank contests as not involving swaps or security-based swaps."
Ooops.

The Commodity Exchange Act defines a swap thus,
“[T]he term ‘swap’ [includes] any agreement, contract, or transaction—… (ii) that provides for any purchase, sale, payment, or delivery (other than a dividend on an equity security) that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence[.]”
Which is a pretty broad definition that may also encompass just about anything. Perhaps even fantasy sports?

The further definition of a security-based swap may rule out any such fantastical fantasy associations, but perhaps there is other law meandering close by to ensnare the unsuspecting?

It's interesting if you think about the development of CFDs from their spread betting origins. These developments can have a life of their own.

An "uber" disregard for financial law may not work so well in the inspiring land of fintech aspirations.

Take care out there,

--Matt.

PS: Matt Levine later covered Forcerank's SEC schmozzle much more eloquently here: "Daily fantasy stocks".

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