As Dodd-Frank deadlines have come and gone, some rules are slowly making their way through the rulemaking process. Recently, the Commodity Futures Trading Commission (CFTC) released the final rules on anti-manipulation and anti-fraud, although some are concerned that the new rules are written too loosely.
In his opening statement at the rulemaking public hearing, CFTC Commissioner Scott O’Malia said, "I have concerns that the anti-manipulation rule has not provided adequate clarity and that such vagueness as to the course of action that will be taken by the Commission in enforcing this rule will add confusion to the markets."
Much of the concern stems from differences in the language used in the new rule as opposed to the agency’s prior rules. "The prior rules focused just on artificial prices, whereas now it focuses more on things that are manipulative and deceptive — much more general terminology," says Willa Bruckner, partner at Alston & Bird LLP. "The anti-manipulation rules under Dodd-Frank, and therefore the final rules put out by the CFTC, pick up on the language and principles approach under the securities laws. It takes those and drops them into the futures laws, and those are different animals."
While the published rules are vague, Jay Gould, partner at Pillsbury Winthrop Shaw Pittman LLP, says they had to be written that way because of the nature of fraud and manipulation. "These rules have to be vague. They can’t specify exactly the conduct that is illegal because creative people will simply circumvent the specified prohibited conduct."
Bruckner says that while she can appreciate the need for room in fraud rules, the opaqueness of the final rules is likely to have a chilling effect on the market. "You have an entire industry on the OTC (over-the-counter) side that already is having to deal with all new rules and structures, and now on top of that is a key enforcement provision. Not only do they have to figure out how to behave in the new world, but now they have to worry about the CFTC coming after them under vague standards," she says.
Ultimately, Gould says it comes down to priorities in the market. "If we want integrity in our securities and commodities markets, a flexible anti-manipulation rule makes sense. If we don’t care about fairness and transparency, then I fully understand why this rule is a problem," he says. Gould goes on to say that the new rules actually apply higher standards because regulators must now prove recklessness and/or intent to manipulate.