Aug. 15 (Bloomberg) -- Tyler and Cameron Winklevoss are fighting for approval from regulators for their proposed bitcoin exchange-traded fund. They stand a chance because Spiderwoman is on the case.
So nicknamed for her work on State Street Corp.’s “Spider,” the first ETF when it came to market in 1993, Kathleen Moriarty is the lawyer attempting to shepherd the Winklevoss Bitcoin Trust through the U.S. Securities and Exchange Commission. The twins, famous for their dispute with Facebook Inc. founder Mark Zuckerberg, aim to roll out the first ETF that invests in a virtual asset, an idea that has its skeptics.
“She brings instant credibility to a less-than-credible investment product,” Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.
Moriarty, 61, who is 5-feet-1-inch tall with a silver bun of hair, has spent more than 20 years breaking ground in the fastest-growing segment of the money-management industry, guiding products to market such as the first hedge-fund replicator, the first physical commodity ETF and the first leveraged offering. She has built a reputation as the go-to lawyer for anyone seeking to sell an innovative ETF that regulators may scrutinize closely.
“I’ve represented most everybody who’s done an unusual ETF,” Moriarty, a partner at New York law firm Katten Muchin Rosenman LLP, said in an interview at her office in Manhattan.
The Bitcoin Trust has already had an unusual journey. Katten Muchin’s executive committee initially rejected the idea of taking on the project because they believed bitcoins might be a Ponzi scheme. Moriarty asked the committee for four weeks to investigate. She came back convinced the virtual currency was “not an inherently fraudulent scheme,” and won their assent.
The world’s smartest investors are divided about bitcoins. While billionaire investor Warren Buffett, 83, has said he’ll be surprised if bitcoins last 10 or 20 years, Legg Mason Inc. stock picker Bill Miller and Michael Novogratz at private-equity firm Fortress Investment Group LLC have both said they’ve bought the virtual currency.
Moriarty declined to say exactly where the Bitcoin Trust stands with regulators beyond indicating the SEC staff is still reviewing and commenting on the proposal.
For any ETF, she said, the SEC first seeks to determine how to categorize its underlying assets, whether they are securities, a commodity, a currency or something else. It’s not clear to many where, exactly, bitcoins should fall.
“We think the closest thing is commodity money, like shells or deerskin,” Moriarty said.
A native of Chicago, Moriarty moved to New York when she was five after the death of her mother. She’s lived in Manhattan for most of her life, except for her years studying psychology and art history at Smith College in Northampton, Massachusetts, and getting a law degree at the University of Notre Dame near South Bend, Indiana, where she met her husband, Robert John Keefe.
Between those schooling years, she had a stint as a paralegal in Washington, D.C., in the mid-1970s, where, she said, a young female college graduate had three options: Capitol Hill aide, secretary or paralegal.
“I didn’t like politics and I couldn’t type,” she recalled. As a paralegal, “I began to realize that the only difference between me and the lawyers was a law degree. They weren’t any smarter than I was.”
Moriarty is one of a handful of people who, by helping to create and continually expand the scope of the industry, can claim credit for transforming the investment landscape, said Matt Hougan, president of research firm ETF.com.
“She’s a legend,” said Hougan, whose company picked Moriarty for their first lifetime achievement award when they started the tradition in March to recognize accomplishments in the ETF world.
An ETF is a bundle of securities that trades on an exchange like a common stock, usually tracking an index of equities, bonds or commodities. Today they hold $1.7 trillion in the U.S. and about $2.6 trillion worldwide, according to data compiled by Bloomberg and research firm ETFGI LLP. They give hedge funds and other big traders a tool for buying, or selling short, whole markets or market segments as frequently as they wish. ETFs have also broadened access for individual investors to those markets at prices unimaginable a generation ago.
Back in 1993 when the first ETF, the SPDR S&P 500 ETF Trust, hit the American Stock Exchange, its success was far from certain. The Spider now holds $163 billion and is the most traded security in the world.
“We all hoped it would be a success, maybe would get to $1 billion,” Moriarty said. “We just had no idea what the market appetite would be. And I still can’t believe it.”
These days, she cultivates her reputation with a bit of flair. Spot her at a conference or industry event and she’s likely to be wearing a brooch decorated with a large, sparkling spider. Her Madison Avenue office is peppered with various stuffed or inflated arachnids that sit atop stacks of paper, filing cabinets and chairs.
While the Spiderwoman schtick is memorable, it’s Moriarty’s hard-won track record of slogging customer after customer through the SEC’s approval process that does the real selling, said James Ross, head of ETFs at Boston-based State Street.
Compared with mutual funds, ETFs typically face much higher regulatory hurdles, partly because they are listed on an exchange. And if a proposed product does something new, the review can be long. The most complex offerings can wait years before they receive approval. The task for the applicant’s lawyer, according to Ross, is part art and part science, and Moriarty is particularly good at it.
“She has the appropriate level of tenacity,” said Ross, also part of the original Spider team. “She balances when to push versus when to let them breathe a little bit.”
Moriarty laughed when she heard that assessment and said it’s true only when her client will let her find that balance.
“Some people who don’t come from a regulated environment, like hedge funds, have a hard time understanding there isn’t more than one SEC,” she said. “You can’t say, ‘Do it my way or we’ll go somewhere else.’”
When an application stalls, those customers sometimes call and demand that she harangue the SEC staff to get them moving.
“If you nag people all the time, they will find you annoying. And if you annoy them, they will start doing things that will make it slower,” she says. “So, yes, there’s an art to knowing when to press and when not to press.”
Mt. Gox Collapse
Bitcoin is a software protocol for issuing and moving money across the Internet. There is now about $8 billion in bitcoin in circulation, according to CoinDesk, a news and pricing website. The Winklevoss brothers owned about $10 million in bitcoins when they filed their initial application with the SEC on July 1, 2013.
The virtual currency has proven to be volatile. Prices plummeted earlier this year from a high of $1,147 in 2013 after the collapse of the Mt. Gox bitcoin exchange, once the world’s largest, and China and Russia moved to block money laundering. One bitcoin currently sells for about $515, according to Bloomberg’s Virtual Currency Monitor.
The SEC in May issued an alert to investors on the risks of bitcoins and other virtual-currency investments, although it has not commented on the proposed bitcoin ETF. Hougan of ETF.com said he put the odds of the Bitcoin Trust making it to market at 45 percent in the next 18 months. S&P’s Rosenbluth said it is impossible to predict whether the Bitcoin Trust would eventually get the SEC’s consent.
“It’s going to be complicated. That doesn’t mean it won’t happen, but it’s not a straightforward effort,” Rosenbluth said.
How Bitcoin is categorized by the SEC is meaningful. That can affect how much regulation a fund is subject to and by whom, influencing the degree of protection for shareholders and the costs they’ll incur. It can also determine the level of taxation for investors.
Once that’s settled, Moriarty said, regulators examine whether the fund will perform as intended. For example, the SEC evaluates whether its share price will stay reasonably close to the value of its index throughout the trading day.
Proposed ETFs are very rarely rejected because the SEC considers a product too risky for investors. Still, if the staff isn’t comfortable with a proposed fund, it can simply keep asking for more information and demanding more disclosures until the applicant gives up.
The Winklevoss twins have argued that bitcoins have a clear practical utility, especially in countries with underdeveloped banking systems. And a bitcoin ETF would make it much easier for people to buy them.
“They really are very passionate about bitcoin,” Moriarty said. “They don’t think it will replace any currency, but that it can be very useful for a number of applications. They think it should be regulated and, as long as it should be regulated they should have some say in how.”
Whether it reaches the market or not, it’s not the wildest ETF idea to cross Moriarty’s desk. Someone once asked her to create a fund investing in yellowcake, a uranium concentrate powder that, when highly refined, can be used to make fuel for nuclear reactors or bombs. She declined.
“If there weren’t any realistic uses, I wouldn’t be so happy about doing this,” she said.
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