On October 24, 2019, CFTC filed and settled charges against Upstream Energy Services LLC ("Upstream") for engaging in energy futures trading without registering with the CFTC as a Futures Commission Merchant ("FCM"). Similarly, on October 31, 2019, the CFTC, together with the Securities and Exchange Commission, settled charges against Switzerland-based First Global Credit, an unregistered FCM, for accepting commodity futures orders and accepting bitcoin to margin customers' trades. These settlements reflect a broader trend in CFTC enforcement priorities.
Within the last five years, the CFTC has brought 15 enforcement actions against unregistered commodity participants acting as Futures Commission Merchants ("FCMs") and Commodity Trading Advisors ("CTAs"), including four enforcement actions specifically in the energy context. These enforcement actions also fit within a larger CFTC crackdown on registration violations, including unregistered Commodity Pool Operators and Forex Trading Firms.
Registration Violations as a CFTC Enforcement Priority
Section 4 of the Commodity Exchange Act ("CEA") provides that it is unlawful for an entity to act as an FCM unless that entity registers with the CFTC. Section 4 of the CEA also requires a person or entity who acts as a CTA advising others for profit directly, or through publications, writings, or electronic media on the value or advisability of trading in futures or swaps, to register with the CFTC. CTAs may be exempt from registration requirements if they provide commodity trading advice to fewer than 15 persons over 12 months and do not publically hold themselves out as CTAs. However, the availability of this exemption is not always clear-cut and those who fail to comply with registration requirements face the consequences of CFTC enforcement action.
Registration violations have clearly become an enforcement priority for the CFTC, with a range of energy and commodity trading activities on the CFTC's radar. In announcing the Upstream settlement, CFTC Director of Enforcement James M. McDonald confirmed that:
"The Commission will continue to vigorously pursue violations of the registration requirements of the Commodity Exchange Act, which are designed to protect market participants and ensure market integrity."
Recent CFTC Enforcement Actions for Registration Violations by Energy Trading and Advisory Businesses
In the past five years, the CFTC has brought enforcement actions against four energy trading and advisory businesses.
The recent settlement involving Upstream, a Texas-based crude oil and natural gas marketing and advisory services company, hinged on the company engaging in energy futures trading without registering as an FCM. Given Upstream's cooperation with the Division of Enforcement's investigation, the CFTC imposed a reduced civil monetary penalty of $75,000.
In September 2018, the CFTC brought and settled charges against Mobius Risk Group LLC ("Mobius"), an independent energy risk advisory firm based in Houston, Texas, for failing to register as a CTA. In finding that Mobius acted as an unregistered CTA, the CFTC focused on the company's provision of advice, reports, and analysis on over-the-counter ("OTC") swaps and commodity options in oil and natural gas. The CFTC also found that Mobius generally held itself out as a CTA through its public website. The CFTC recognized Mobius' substantial cooperation and imposed a reduced civil monetary penalty of $75,000.
The CFTC has settled registration violations involving entities that provide risk management and swaps trading advice to energy producers and consumers under similar circumstances. For instance, in 2016, the CFTC settled charges against Angus Partners LLC and ordered the company to pay a $250,000 civil monetary penalty for acting as an unregistered CTA and violating certain disclosure rules that apply to CTAs. In 2015, the CFTC entered into a settlement with Summit Energy Services, Inc. for providing advisory services concerning physical natural gas and electricity transactions while failing to register as a CTA, resulting in a $140,000 civil monetary penalty.
If in doubt, Seek Guidance on Whether Registration Requirements Apply to Your Business
The CFTC has taken a strong stance in making registration violations an enforcement priority. Registration violations carry heavy consequences, with the CFTC typically imposing both civil monetary penalties and cease and desist orders. Reduced penalties as credit for cooperation or exemptions from registration requirements are not guaranteed. Therefore, it is important to understand whether registration requirements apply to your energy or commodity trading activities or advisory services. If in doubt, it is best to seek guidance.