From the May 2014 issue of Futures Magazine • Subscribe!

CFTC has new tools and greater authority to pursue wrongdoers

Timothy Massad, President Obama’s nominee for Chairman of the Commodity Futures Trading Commission (CFTC), recently testified before the Senate Agriculture Committee that enforcement of the futures and swaps market supervised by the CFTC would be his “top priority” if confirmed as chairman. He went on to state that, “We must aggressively pursue wrongdoers, whatever their position or size, and we must deter and prevent unlawful practices.” Massad’s statements come as the CFTC is armed with new enforcement tools and invigorated by successful, recent, cooperation with prosecutors in the U.S. Department of Justice and investigators with the Federal Bureau of Investigation. 

At the same time, Massad and others (including former commissioner Bart Chilton and former Chairman Gary Gensler) have stated that the CFTC lacks the necessary resources to completely fulfill its regulatory mandate. Going forward, will the lack of funds slow the CFTC’s “aggressive pursuit of wrongdoers?” Not likely. Massad’s stated enthusiasm for enforcement suggests that justice delayed will not be justice denied. 

The CFTC is more likely to continue its trend of pursuing the cases of yesteryear than to let old cases languish (See  “Did CFTC cherry pick actions to justify rule,” Futuresmag.com, Jan. 18, 2014). Furthermore, as long as there are prosecutors from the Department of Justice lining up to make cases for the CFTC, one can expect the Commission to triage its resources to pursue the most egregious of cases swiftly. 

In short, under-resourced or not, count on the CFTC to use its new enforcement tools and to partner with others (including criminal authorities) to aggressively enforce its new and existing rules and regulations, including in the arena of over-the-counter derivatives.
 

New Tools

Over the past several years, the CFTC has gained some powerful, new, enforcement tools. Section 753 of the Dodd-Frank Act amended Section 6(c) of the Commodity Exchange Act, authorizing the adoption of Rule 180.1 to effectuate the new provisions. In doing so, Dodd-Frank provided the CFTC anti-manipulation enforcement authority similar to—and perhaps even broader than—that given to the SEC under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which are perhaps the most famous duo of civil anti-fraud provisions in the financial world. 

These laws—which former CFTC Enforcement Director David Meister has described as “powerful new tool(s)” to combat market manipulation—provide the CFTC with five, essential, new, powers (see, “New tools for regs,” below). 

First, these changes expand the scope of the conduct the CFTC can regulate. Now, the CFTC can pursue not only manipulation, but attempts to manipulate markets. For example, recent LIBOR enforcement actions (discussed more fully below) include claims for attempted manipulation—whether successful or not—of various LIBOR rates. 

Second, Rule 180.1 broadens the scope of the transactions that the CFTC can regulate. Previously, the CFTC was limited to enforcement related to conduct in connection with a purchase or sale. Under Rule 180.1, the CFTC can regulate deceptive devices or contrivances in connection with any swap, cash contract, or futures contract. Thus, the new rule applies to conduct or attempted conduct in connection with activities well beyond the purchase or sale of a covered instrument (e.g., all of the payment and other obligations under a swap). 

Third, the new rule gives the CFTC flexibility in proving its enforcement cases. Previously, the CFTC was limited to bringing fraud claims based on intentional conduct. In other words, the CFTC had to prove that an alleged violator had specific, fraudulent, intent in taking a certain action. Proof of fraudulent intent typically includes specific evidence, like an e-mail or a recorded conversation, or compelling circumstantial evidence, such as a profit-taking motive. Direct evidence of fraudulent intent is, obviously, difficult to come by. 

And, circumstantial evidence can be rebutted by competing circumstantial or direct evidence of a plausible, non-fraudulent, purpose for taking certain actions. Under the new rule, the CFTC will be able to bring actions based simply on objective proof, such as an industry standard of care, that a defendant recklessly committed an action that had the effect of manipulating the market. This is a significantly lower bar for the regualtor to meet in order to prove a case or to  simply launch an investigation. 

Fourth, Rule 180.1 further eases the CFTC’s burden of proof by allowing the CFTC to bring a market manipulation claim without having to prove actual changes in the price of a commodity. The CFTC stated that, while a market or price effect “may well be indicia” of manipulation, “a violation of final Rule 180.1 may exist in the absence of any market or price effect.” This dovetails with the CFTC’s new authority to pursue attempted, albeit unsuccessful, market manipulation.

Fifth, the new authority granted by Dodd Frank allows the CFTC to bring claims for false statements or material omissions in any statement to a regulator. CEA Section 6(c)(2), 7 U.S.C. § 9(2). In other words, the CFTC need not point to a formal filing to bring a fraud claim. Now, it can even bring fraud claims based on information that a market participant voluntarily or cooperatively provides to the CFTC. 

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