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The U.S. Securities and Exchange Commission (SEC) suffered another setback on July 28 as the D.C. Circuit overturned a ruling by the regulator ordering that SPIKES Index securities should be treated as ‘futures’ rather than as ‘securities futures’. The judge panel called the SEC order “arbitrary and capricious.”

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

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

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

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

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

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

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