The CFTC settled charges with an energy company that was alleged to have acted as an unregistered commodity trading advisor ("CTA") and for violating certain CTA disclosure rules.

According to the Order, the company advised clients (retailers of heating oil, natural gas, and other fuel products) on the development and implementation of fuel hedging programs to mitigate the clients' fuel price exposures. These hedging strategies entailed the clients purchasing and selling OTC commodity option and swap contracts, with the company acting as counterparty and charging an undisclosed markup.

The CFTC Order found that the company:

  • engaged in the business of advising clients as to the value or advisability of trading in over-the-counter ("OTC") commodity options and swaps, for compensation or profit, without being registered as a CTA;
  • marketed itself as an expert in helping its clients devise optimal hedging strategies, uniquely tailored to each client's business;
  • gave clients the clear impression, through its marketing materials, including its website, that the company would act in its clients' best interests;
  • undertook to act as a general advisor and consultant in matters related to the development and implementation of hedging strategies, among other things; and
  • failed to adequately disclose the conflict between, on the one hand, advising clients on the merits of entering into commodity option and swap transactions and, on the other hand, the company's financial interest in those same transactions as the counterparty to its clients' option and swap contracts – a fact of which certain clients were not aware.

The CFTC ordered the company to: (i) pay a $250,000 civil monetary penalty for acting as an unregistered CTA; and (ii) cease and desist from further violations of the CTA registration provision of the CEA and disclosure provisions, as charged.

Commentary / Bob Zwirb

The CFTC stated, without any further explanation, that the company's "commodity trading advice was not solely incidental to its business," a significant finding because the definition of a "CTA" in the Commodity Exchange Act provides an exemption for advice that is solely incidental to a company's business.

At first blush, this would appear to be a case about a firm assisting its clients to better manage the fuel that it wholesales to them by providing advice that is ancillary to such sales, in which case application of the CEA's CTA provisions would interfere with an efficient business arrangement. But upon closer examination (though it remains somewhat ambiguous), it appears to be a case involving a firm whose sole business involves providing expertise and advice to energy clients on how to manage and hedge their fuel needs in the derivatives markets, in which case the application of the CTA provisions would be appropriate.

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