In the latest edition of Energy Metro Desk, editor-in-chief John Sodergreen and Cadwalader partner Gregory Mocek examined how extended CFTC enforcement authority over insider trading under CFTC Rule 180.1 will affect communications between industry participants and their customers.
Rule 180.1 prohibits fraud and manipulation in connection with any CFTC-regulated transaction and is patterned after Securities Exchange Act Rule 10b-5. The Rule can be employed, according to the CFTC, against the use of nonpublic information where such information is employed in breach of a pre-existing duty or is obtained through fraud or deception. This interpretation, therefore, creates liability similar to that based on the "misappropriation theory" of insider trading used in securities law.
Mr. Sodergreen opined that the "painfully vague 'misappropriation theory'" under Rule 180.1 may "fundamentally change ... the way voice brokers do business." Mr. Mocek, who previously served as Director of Enforcement at the CFTC, noted that unlike the prohibition against insider trading in the CEA prior to Dodd-Frank, which was narrowly tailored to address the misuse of inside information by regulators and their employees, the scope of the prohibition of Rule 180.1 is "not so clear." That is, even if lawfully attained, the employment of nonpublic information — which is integral to trading in the commodities futures markets — may result in a violation if it is utilized in order to breach a preexisting duty established by private parties.
What is not clear, according to Mr. Mocek, is where the line is drawn for determining a breach of duty where the relationship is between a voice broker, storage operator, or pipeline operator and a customer."Ultimately, what will have to happen ... is that people will have to look at their current relationships with each and every customer and make a determination as to whether they are an arms-length relationship or one that goes beyond that. And this will somehow determine what you can or can't say to them," stated Mr. Mocek.
Commentary
What CFTC Rule 180.1 shares in common with the Department of Labor's new "fiduciary" rule is that both rules make it very difficult to determine the point at which a financial intermediary has assumed agency responsibilities with respect to another person. While it is easy to appreciate why the government favors ambiguity in rulemaking, as that favors after-the-fact judgments and prosecutorial discretion, legal ambiguity is inconsistent with the rule of law where private parties are entitled to be informed of their legal obligations before they act. The statement that "ignorance of the law is not an excuse" should only hold where the law is not a moving target.
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