Insider trading in commodities markets: an evolving application priority – Finance and Banking

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The CFTC and the DOJ are now both pursuing enforcement actions against commodity trade on the basis of the misappropriation of confidential information.

Among the many changes resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), one that has been slow to develop, but far-reaching, is Commodity’s assertion of authority. Futures Trading Commission (CFTC) to control insider trading and the misappropriation of confidential information in commodity markets. As the primary regulator of derivatives in a wide range of markets, spanning agriculture, energy, interest rates and beyond, the CFTC had limited authority to deal with insider trading during most of its history. From 2015, however, the agency began to sue individuals and businesses for trading on the basis of the misappropriation of confidential information. Since then, the CFTC has undertaken a series of actions which shed light on the extent of its new authority and has devoted substantial resources to pursuing new cases. Recent enforcement actions in 2020 and early 2021 have continued this trend.

This article reviews the evolution of the CFTC’s insider trading authority, summarizes the agency’s recent affairs and highlights key developments, including the advent of corporate accountability. “Tipping”, the use of data analysis to identify potential wrongdoing and the emergence of parallel criminal applications. Actions. Financial institutions and market participants should know that the CFTC – and now the Department of Justice (DOJ) as well – will continue to be on the lookout for other cases to pursue in this emerging area of ​​enforcement.

Limited historical authority

Prior to the Dodd-Frank Act, the CFTC had limited powers to control the use of non-public information in its markets, as the Commodity Exchange Act (CEA) included provisions prohibiting insider trading only in this regard. which concerns the misuse of information by CFTC’s own staff and those of the stock exchanges and self-regulatory bodies it oversees.1 The CFTC did not have any general market insider trading tool.

In this regard, the oversight of commodities markets by the CFTC and oversight of securities markets by the Securities and Exchange Commission (SEC) differed considerably. As the two agencies noted in a joint report in 2009, “securities markets are concerned with capital formation”,2 and “Securities laws are based on a company’s obligations to disclose material information in order to protect shareholders from insiders of the company who have access to non-public information.”3 Securities laws and the rulings that enforce them have long prohibited insider trading by company insiders and others who trade in material non-public information in violation of an obligation to the source. these informations.4

On the other hand, one of the “main objectives” of commodity derivatives markets is to “facilitate the management and transfer of risks”, including by “allowing[ting] hedgers to use their material non-public information to protect themselves against the risks associated with their commodity positions, ”which also improves price discovery for all market participants.5As a result, the CEA did not contain general prohibitions on insider trading, but only the more limited provisions mentioned above.

New powers extended after the Dodd-Frank law

In the aftermath of the 2008 financial crisis, Congress gave the CFTC extended new power to regulate the large swap market in addition to futures, as well as new enforcement powers to be enforced in its markets. This new authority has led to two important developments for the application of insider trading in commodities.

First, in the most heralded provision at the time, the Dodd-Frank Act extended the existing narrow ban on insider trading to apply not only to the misuse of information by corporate personnel. CFTC, self-regulatory organizations and stock exchanges, but also the misuse of information from any federal government source. This new provision targets government personnel who disclose confidential government information “by [their] personal ability and for personal gain with the intention of assisting another person, directly or indirectly, to use the information to enter “transactions”, as well as persons who “knowingly use” such confidential employee information government that were communicated in this way.6 Colloquially known as “Eddie Murphy’s Rule”,7 this provision broadened the enforcement power of the CFTC to include a wider range of actors and potential sources of confidential information. In the years since its enactment, the CFTC has not yet based an implementing measure on this provision, but it remains an area of ​​interest for future application and development.

Second, in the change that has had the most impact to date, Section 753 of the Dodd-Frank Act broadly prohibits fraud and manipulation “in connection with any trade in, or contract for the sale of, any commodity. in interstate commerce, or for future delivery. “8 On July 14, 2011, in accordance with this provision, the CFTC promulgated Rule 180.1, a “general and catch-all provision, reaching any manipulative or deceptive device or device” modeled on SEC Rule 10b-5.9 In the years since the adoption of Rule 180.1, the CFTC has indeed used it as a broad tool in a variety of manipulation and fraud cases.

Of particular note in the current era of insider trading enforcement, the CFTC considers that Rule 180.1 prohibits “trading on the basis of material non-public information in violation of a pre-existing (established by some other law or rule, or agreement, agreement, or some other source), or by negotiating on the basis of material non-public information that has been obtained by fraud or deception. “ten When the CFTC announced in 2011 that it would pursue enforcement against the misappropriation of confidential information, the agency said it would be guided (but not bound) by the vast body of insider trading case law in under SEC Rule 10b-5.

The interpretation and use of Rule 180.1 by the CFTC focuses on the theory of misappropriation of insider trading. According to this theory, which has long been applied in the securities markets, fraud occurs when “a person misappropriates confidential information for commercial purposes, in violation of a duty to the source of the information”.11 Some commentators have criticized the CFTC for calling such conduct in commodities markets “insider trading” because these markets lack the traditional notion of “insider” associated with securities. Similar to cases of misappropriation under SEC Rule 10b-5, the applicability of Rule 180.1 to insider trading relies on the use of confidential information in breach of a pre-existing obligation to the company. source of information. Recent enforcement actions, as discussed below, highlight the wide range of obligations the CFTC takes into account in determining whether to prosecute a charge based on the misappropriation of confidential information.

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Footnotes

1. CEA § 9 (d), 7 USC § 13 (d) (2008) (regarding “any commissioner of the Commission or any employee or agent thereof”); CEA § 9 (e), 7 USC § 13 (e) (2008) (regarding “an employee … of a chamber of commerce, a registered entity or a registered term association”).

2. A Joint SEC and CFTC Report on Regulatory Harmonization, at 1 (Oct 16, 2009), https://www.cftc.gov/sites/default/files/stellent/groups/public/@otherif/documents/ifdocs/opacftc-secfinaljointreport101.pdf.

3. Identifier. at 7 O’clock.

4. Identifier. at age 55.

5. Username. at 7. As former CFTC Chairman Heath Tarbert recently observed, “[w]Although trading in insider shares undermines the integrity of the market and can produce conflicts of interest for company executives, derivatives regulations allow – and in fact encourage – what is commonly considered to be a insider trading. “Heath Tarbert,
What is insider trading in derivatives markets?, Law360 (January 12, 2021), https://www.law360.com/banking/articles/1343854.

6. CEA § 4c (a) (4) (A), 7 USC § 6c (a) (4) (A) (“It is unlawful for any employee or agent of any department or agency of the federal government or of any Member of Congress or Congressional employee or any judicial officer or judicial employee who, by virtue of the employment or position of … employee … acquires information which may affect or tend to affect the price of any goods in interstate commerce, … and what information has not been released by the federal government department or agency holding or creating the information … in a manner that makes it generally available to the commercial public. .. to communicate the information in a personal capacity and for personal gain with the intention of helping another person, directly or indirectly, to use the information to enter into or propose to enter into futures, options or swaps) ;
see also CEA § 4c (a) (4) (B), 7 USC § 6c (a) (4) (B) (making it illegal “to anyone who receives information from an employee or agent of a department or an agency of the Federal Government or any member of Congress or employee of Congress or any officer of the court or employee of justice as described in subparagraph (A) to knowingly use such information to enter into or propose to enter into contracts to term, options or swaps).

7. In describing this possible amendment to the LEC, then CFTC President Gary Gensler told Congress: “[t]To protect our markets, we have recommended what we call the “Eddie Murphy” rule to prohibit insider trading using non-public information hijacked from a government source. ” Hearing to review the implementation of the changes to the CEA contained in the 2008 Farm Bill before Deputy Commr. on Gen. Farm Commodities & Farm Mgmt. of H. Comm. on Agric., 111th Cong. 4 (2010) (Statement by the Honorable Gary Gensler, Chairman of the CFTC), https://www.govinfo.gov/content/pkg/CHRG-111hhrg55459/html/CHRG-111hhrg55459.htm. This provision filled a legal vacuum highlighted by the 1983 film Trading Places, which involved a ploy to hijack information from a government source that arguably would not have been covered by the CEA at the time.

8. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. n ° 111-203, § 753, 124 Stat. 1376, 1750 (2010).

9. Prohibition of the use or attempted use of manipulative and deceptive devices and prohibition of price manipulation, 76 Fed. Reg. 41 398, 41 403 (July 14, 2011).

ten. Username.

11. United States v. O’Hagan, 521 US 642, 652 (1997).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation


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