* SEC ruling ‘arbitrary and capricious’ - letter
* Takes fabricators step closer to legal challenge
* JPM’s commodities chief met with SEC a week before approval
* SEC’s ruling on BlackRock due Feb. 22
Jan 10 (Reuters) - U.S. copper users criticized U.S. regulators as “arbitrary and capricious” and requested they reverse their ruling in favor of JPMorgan Chase & Co’s controversial plan for a copper exchange-traded fund.
The letter, filed with the U.S. Securities and Exchange Commission by a group representing half the U.S. demand for copper, could delay the ETF launch further and be the last step before a court challenge of the SEC’s ruling.
The fabricators in their Jan. 9 letter said the SEC had not presented enough evidence to show the fund would not distort supply and prices of the metal used widely in plumbing and cooling systems.
“It appears the commission categorically rejected all of the substantial evidence presented as to the catastrophic damage that the proposed (fund) could have for industrial users of copper,” Robert Bernstein, an attorney with the law firm Eaton & Van Winkle LLP, who is representing the consortium of fabricators, said in the letter.
While the SEC is not obligated to respond to the consortium’s latest filing, the issues are the same as those to be considered by the SEC in its ruling on BlackRock Inc’s similar fund due on Feb. 22.
If the commission doesn’t reconsider, Bernstein has until Feb. 18 - 60 days after the ruling’s publication in the Federal Register on Dec. 20 - to take his case to federal appeals court.
“We haven’t made up our mind yet, but we certainly laid the groundwork to do that,” Bernstein said in an interview on Thursday.
Legal action could further frustrate JPMorgan’s efforts to launch the fund, more than two years after it first filed for approval.
The filing came on the deadline set by the SEC for interested parties to respond to its Dec. 14 ruling giving the go-ahead for the JPM XF Physical Copper Trust.
JPMorgan declined to comment, but in giving the green light, the SEC said it did not believe the fund would affect supplies of metal for immediate delivery.
The U.S. bank has much riding on the launch as the big banks that swept into trading commodities over the past decade look for new ways to make money in the wake of the world financial crisis and amid tighter regulations.
With frantic work going on behind the scenes, the bank’s commodities chief Blythe Masters met with outgoing SEC chairman Mary Schapiro and her successor Elisse Walter on Dec. 6, a week before receiving the green light, according to an SEC memorandum.
Masters has built the bank’s commodities business from scratch in just five years. Under her watch, the bank bought Sempra which gave it a preeminent franchise in oil and metals trading, as well as one of the world’s biggest metals warehousing companies, UK-based Henry Bath. The company’s facilities in the United States and Asia would be used for storing the metal used to back the first ETF of its kind.
Bernstein said on Thursday he found news of the meeting “very disturbing.”
The consortium - SouthWire Co, Encore Wire Corp, Luvata and AmRod - as well as Red Kite, a large hedge fund and physical trader, have fought hard to get the SEC to block the JPMorgan and BlackRock funds.
Industrial users fear it would have a “devastating” affect on the market by disrupting supplies and inflating prices since it will use physical copper cathode as collateral against shares of the fund, effectively removing a chunk of metal from the market.
In its defense, JPMorgan and BlackRock say such fears are unfounded because the funds, which would effectively allow U.S. retail investors to trade physical copper easily for the first time, would be miniscule compared with the 20-million-tonne global market. Up to 183,000 tonnes of copper would be taken off the market, according to filings by both companies.
The BlackRock iShares Copper Trust and JPMorgan products are very similar, although BlackRock’s is twice as large.
JPMorgan’s fund would store LME brand-approved copper valued at up to $499,761,150 - equivalent to about 62,000 tonnes based on a copper price of $8,000 per tonne. BlackRock’s trust would use up to 121,200 tonnes of copper as guarantee against shares in its fund.