Continuing its efforts to engage with FinTech innovators and market participants in the adoption of new technologies, the Commodity Futures Trading Commission (“CFTC”) and its LabCFTC released a Primer on Smart Contracts (the “Primer”) on November 27. The Commission focused its Primer on (1) detailing the technical aspects of smart contract technology; (2) examining potential benefits and risks connected to their widespread adoption; and (3) the CFTC’s role in regulating the adoption of the technology within those markets under its jurisdiction.
On November 30, 2018, Judge Richard Sullivan issued a long-anticipated decision in favor of the defendants in Commodity Futures Trading Commission v. Wilson, No. 13 Civ. 7884, following a four-day bench trial in December 2016 before the U.S. District Court for the Southern District of New York. The court held that the CFTC failed to meet its burden of proof in establishing claims of market manipulation or attempted market manipulation under Sections 6(c) and 9(a)(2) of the Commodity Exchange Act (“CEA”) based on trading by Donald R. Wilson and his firm DRW Investments LLC (“DRW”) of a particular exchange-traded interest rate swap futures contract (the “IDEX Three-Month IRS Contract”). The court found that although the defendants’ trading affected the price of the IDEX Three-Month IRS Contract in a way that benefitted defendants’ existing positions, there was no evidence that the resulting price was “artificial,” which the Second Circuit has held is a necessary element in establishing market manipulation under the CEA.
The Wilson decision is significant because it rejected the CFTC’s argument that the artificiality element could be satisfied merely by showing that a market participant structured bids in a manner intended to affect settlement prices. Because the defendants had a “legitimate economic rationale” for the bids they submitted, the court held that defendants’ intent to trade in a manner that affected settlement prices does not itself create liability for market manipulation under the CEA.
Please click here to read the full alert memorandum.
On November 15, 2018, the Division of Enforcement (the “Division”) of the U.S. Commodity Futures Trading Commission (“CFTC”) released its Annual Report on the Division of Enforcement (the “Report”), highlighting the enforcement division’s recent initiatives and reinforcing its focus on cooperation and self-reporting. The Report provides a succinct overview of the Division’s enforcement priorities over the last year, discusses its overall enforcement philosophy, sets out key metrics about the cases brought in the last year, and highlights its key initiatives for the coming year. While the Division’s priorities—preserving market integrity, protecting customers, promoting individual accountability, and increasing coordination with other regulators and criminal authorities—do not mark a departure from prior guidance, the Report does highlight the Division’s particular focus on individual accountability and a few target areas of enforcement. Continue Reading Virtual Currencies, Manipulation, Cooperation, and More: CFTC Enforcement Division’s 2018 Annual Report
On September 27, 2018, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) filed parallel actions in federal court against an internet dealer that sold “contracts for difference” (CFD) based on securities and commodities margined with bitcoin. The actions, which were assisted by the Federal Bureau of Investigation and the Department of Justice, signal continued coordination among federal agencies to police market activity involving financial transactions in cryptocurrencies. Continue Reading The CFTC and SEC Bring Charges Against International Securities Dealer for Bitcoin-Funded Swaps Activity
On September 26, 2018, a federal court in the District of Massachusetts found that virtual currencies are a commodity under the Commodity Exchange Act, 7 U.S.C. § 1 et seq, (“CEA”). This marks the second time that a court has accepted the Commodity Futures Trading Commission’s (“CFTC”) position and upheld the agency’s authority to regulate unleveraged and unmargined spot transactions in virtual currency under the agency’s anti-fraud and manipulation enforcement authority. Most notably, however, the reasoning behind its decision potentially expands the scope of the CFTC’s oversight of the market. Continue Reading Second District Court Determines Virtual Currencies Are Commodities
On August 21, 2018, the Commodity Futures Trading Commission (the “CFTC”) unanimously approved final amendments (the “Amendments”) to its regulations governing chief compliance officer (“CCO”) duties and annual compliance report requirements for swap dealers, major swap participants and futures commission merchants (together, “Registrants”) (the “CCO Rule”).
The Amendments seek to streamline and clarify the CCO Rule, as well as align the CCO Rule with the corresponding Securities and Exchange Commission (“SEC”) regulations governing CCOs of security-based swap dealers and major security-based swap participants (the “SEC CCO Rule”). In particular, the Amendments significantly streamline and help harmonize the content of the annual compliance report. However, the CFTC declined to fully harmonize the CCO’s duties with parallel provisions of the SEC CCO Rule. Specifically, the CFTC emphasized that the CCO Rule requires CCOs to take a more active role in oversight of regulated activities, rather than the advisory role more traditionally associated with CCOs in the securities industry. The CFTC justified the departures from the SEC CCO Rule in respect of these duties by referring to the differences between the Registrants and the SEC-regulated entities. The CFTC did not, however, take these differences into account by adopting more flexible reporting lines, as commenters had requested. If anything, the Amendments reinforce the CFTC’s expectations regarding escalation of issues by the CCO to the highest levels of management of a Registrant.
Please click here to read the full alert memorandum.
On August 2, 2018, the U.S. Commodity Futures Trading Commission (the “CFTC”) announced multiple whistleblower awards totaling more than $45 million. Although this is only the seventh such aggregate award announced by the CFTC since the inception of its whistleblower program in October 2011, it is the Commission’s highest to date, and comes weeks after the agency’s announcement of two such awards last month. This recent activity, which follows a two-year hiatus during which the CFTC did not grant any whistleblower awards, may signal the Commission’s renewed focus on touting the success of its whistleblower program as well as the conclusion of a number of major CFTC investigations. It is also in keeping with the Commission’s aggressive pace of enforcement actions in recent months. Continue Reading CFTC Announces Highest Aggregate Whistleblower Award to Date, Totaling More Than $45 Million
On July 12 and 16, 2018, the U.S. Commodity Futures Trading Commission (“CFTC”) announced two awards to whistleblowers, one its largest-ever award, approximately $30 million, and another its first award to a whistleblower living in a foreign country. These awards—along with recent proposed changes meant to bolster the Securities and Exchange Commission’s (“SEC” or “Commission”) own whistleblower regime—demonstrate that such programs likely will continue to be significant parts of the enforcement programs of both agencies and necessarily help shape their enforcement agendas in the coming years. Continue Reading CFTC Announces Two Significant Awards by Whistleblower Program
Earlier this week, CFTC Chairman J. Christopher Giancarlo announced the signing of a Memorandum of Understanding (MOU) intended to enable greater enforcement coordination and information sharing between the CFTC and state securities agencies. The MOU formalizes a process for exchange of information and coordination between the CFTC, which has jurisdiction over the commodities and swaps markets, and state securities regulators and enforcers. It continues the trend of increasing prominence of the CFTC’s enforcement division, and further reinforces connections with state authorities to promote cross-jurisdictional cooperation and coordinated enforcement action. While the impact of the MOU remains to be seen, it is hoped that it will facilitate more coordinated and efficient enforcement proceedings in cases involving the CFTC. At the same time, the provisions for information sharing reinforce the prudence of assuming that enforcement authorities speak to each other. Therefore, companies facing possible investigations should ensure information provided to all relevant authorities is accurate and complete, and in appropriate cases may consider actively involving state securities agencies early on in order to potentially facilitate a later joint resolution. Continue Reading CFTC Chairman Announces Formal Cooperation Agreement With State Securities Agencies
In a February post, we discussed in detail recent changes to the U.S. tax rules governing the deductibility of settlement payments and court-ordered damages payments. The IRS has now released some limited guidance on this new law (IRS Notice 2018-23), and this post addresses what is in this guidance (the “Notice”).
To recap, under the new law: a settlement or court-ordered payment made to (or at the direction of) a government in relation to the violation of any law (or the investigation or inquiry by such government into the potential violation of any law) is not deductible for U.S. tax purposes unless the payment constitutes “restitution (or remediation of property) ” or “a payment for the purpose of coming into compliance with a law”.