by Douglas K. Yatter, Sohom Datta, and Cameron J. Sinsheimer
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 broad in its significance, is the assertion of authority by the Commodity Futures Trading Commission (CFTC) to police insider trading and misappropriation of confidential information in commodities markets. As the primary regulator for derivatives across a wide range of markets, spanning agriculture, energy, interest rates, and beyond, the CFTC had limited authority to address insider trading throughout most of its history. Starting in 2015, however, the agency began bringing enforcement actions against individuals and companies for trading based on misappropriation of confidential information. Since then, the CFTC has brought a series of actions that provide insight into the scope of its new authority, and it has devoted substantial resources to pursuing new cases. Recent enforcement actions in 2020 and early 2021 have continued this trend.
This four-part post reviews the evolution of the CFTC’s insider trading enforcement authority, summarizes the agency’s recent cases, and highlights key developments, including the advent of “tipper” liability, the use of data analytics to identify potential misconduct, and the emergence of parallel criminal enforcement actions. Financial institutions and market participants should be aware that the CFTC — and now also the Department of Justice (DOJ) — will continue to be on the lookout for additional cases to pursue in this emerging area of enforcement.
Limited Historical Authority
Prior to the Dodd-Frank Act, the CFTC had limited authority to police the use of nonpublic information in its markets, as the Commodity Exchange Act (CEA) included provisions prohibiting insider trading only with respect to misuse of information by the CFTC’s own personnel and those of the exchanges and self-regulatory organizations it oversees.[1] The CFTC had no insider trading tool of general applicability to the markets.
In this regard, oversight of commodities markets by the CFTC and oversight of securities markets by the Securities and Exchange Commission (SEC) differed significantly. As the two agencies noted in a joint report in 2009, the “securities markets are concerned with capital formation,”[2] and “securities laws are premised on a corporation’s duties to disclose material information to protect shareholders from corporate insiders who have access to non-public information.”[3] Securities laws and cases applying them have long prohibited insider trading by corporate insiders and by other individuals who trade on material nonpublic information in breach of a duty owed to the source of that information.[4]
By contrast, it has been a “primary purpose” of commodity derivatives markets to “facilitate the management and transfer of risk,” including by “permit[ting] hedgers to use their non-public material information to protect themselves against risks to their commodity positions,” which also enhances price discovery for all market participants.[5] As a result, the CEA did not contain general prohibitions on insider trading, just the more limited provisions noted above.
Broad New Powers After the Dodd-Frank Act
Following the financial crisis of 2008, Congress gave the CFTC broad new authority to regulate the vast swaps market in addition to futures, as well as new enforcement powers to apply across its markets. This new authority led to two significant developments for insider trading enforcement in commodities.
First, in the more heralded provision at the time, the Dodd-Frank Act expanded the narrow existing prohibition on insider trading to apply not only to misuse of information by personnel of the CFTC, self‑regulatory organizations, and exchanges, but also to misuse of information from any federal government source. This new provision targets government personnel who impart confidential government information “in [their] personal capacity and for personal gain with intent to assist another person, directly or indirectly, to use the information to enter into” trades, as well as persons who “knowingly use” such confidential information from a government employee that has been imparted in this manner.[6] Colloquially known as the “Eddie Murphy Rule,”[7] this provision expanded the CFTC’s enforcement authority to include a wider range of actors and potential sources of confidential information. In the years since its enactment, the CFTC has yet to base an enforcement action on this provision, but it remains an area of interest for future application and development.
Second, in the change that has had greater impact to date, Section 753 of the Dodd-Frank Act broadly prohibited fraud and manipulation “in connection with any swap, or a contract of sale of any commodity in interstate commerce, or for future delivery.”[8] On July 14, 2011, pursuant to this provision, the CFTC promulgated Rule 180.1, a “broad, catch-all provision, reaching any manipulative or deceptive device or contrivance” modeled after the SEC’s Rule 10b-5.[9] In the years since adopting Rule 180.1, the CFTC has indeed used it as a broad tool in a variety of manipulation and fraud cases.
Of particular note for today’s era of insider trading enforcement, the CFTC regards Rule 180.1 to prohibit “trading on the basis of material nonpublic information in breach of a pre-existing duty (established by another law or rule, or agreement, understanding, or some other source), or by trading on the basis of material nonpublic information that was obtained through fraud or deception.”[10] When the CFTC announced in 2011 that it would pursue enforcement against misappropriation of confidential information, the agency stated that it would be guided (though not bound) by the large body of case law on insider trading in securities under SEC Rule 10b-5.
The CFTC’s interpretation and use of Rule 180.1 focuses on the misappropriation theory of insider trading. Under this theory, which has long been applied in the securities markets, fraud occurs when “a person misappropriates confidential information for … trading purposes, in breach of a duty owed to the source of the information.”[11] Some commenters have criticized the CFTC for referring to such conduct in the commodities markets as “insider trading,” since these markets lack the traditional notion of “insiders” associated with securities. Like misappropriation cases under SEC Rule 10b-5, however, Rule 180.1’s applicability to so-called insider trading turns on the use of confidential information in breach of a pre‑existing duty owed to the source of the information. Recent enforcement actions, as discussed below, cast light on the broad range of duties the CFTC considers when determining whether to pursue a charge based on misappropriation of confidential information.
Footnotes
[1] CEA § 9(d), 7 U.S.C. § 13(d) (2008) (regarding “any Commissioner of the Commission or any employee or agent thereof”); CEA § 9(e), 7 U.S.C. § 13(e) (2008) (regarding “an employee … of a board of trade, registered entity, or registered futures association”).
[2] A Joint Report of the SEC and the CFTC on Harmonization of Regulation, at 1 (Oct. 16, 2009), https://www.cftc.gov/sites/default/files/stellent/groups/public/@otherif/documents/ifdocs/opacftc-secfinaljointreport101.pdf.
[3] Id. at 7.
[4] Id. at 55.
[5] Id. at 7. As former CFTC Chair Heath Tarbert recently observed, “[w]hile insider stock trades harm market integrity and can produce conflicts of interest for corporate officers, derivatives regulations permit — and actually encourage — what is commonly viewed as insider trading.” Heath Tarbert, What Is Insider Trading In the Derivatives Markets?, Law360 (Jan. 12, 2021), https://www.law360.com/banking/articles/1343854.
[6] CEA § 4c(a)(4)(A), 7 U.S.C. § 6c(a)(4)(A) (“It shall be unlawful for any employee or agent of any department or agency of the Federal Government or any Member of Congress or employee of Congress or any judicial officer or judicial employee who, by virtue of the employment or position of the … employee … acquires information that may affect or tend to affect the price of any commodity in interstate commerce, … and which information has not been disseminated by the department or agency of the Federal Government holding or creating the information … in a manner which makes it generally available to the trading public … to impart the information in his personal capacity and for personal gain with intent to assist another person, directly or indirectly, to use the information to enter into, or offer to enter into” futures, options, or swaps); see also CEA § 4c(a)(4)(B), 7 U.S.C. § 6c(a)(4)(B) (making it unlawful “for any person who receives information imparted by any employee or agent of any department or agency of the Federal Government or any Member of Congress or employee of Congress or any judicial officer or judicial employee as described in subparagraph (A) to knowingly use such information to enter into, or offer to enter into” futures, options, or swaps).
[7] When describing this prospective amendment to the CEA, then-CFTC Chair Gary Gensler told Congress, “[t]o protect our markets, we have recommended what we call the ‘Eddie Murphy’ rule to ban insider trading using nonpublic information misappropriated from a government source.” Hearing to Review Implementation of Changes to the CEA Contained in the 2008 Farm Bill Before the Subcomm. on Gen. Farm Commodities & Farm Mgmt. of the H. Comm. on Agric., 111th Cong. 4 (2010) (statement of Hon. Gary Gensler, CFTC Chairman), https://www.govinfo.gov/content/pkg/CHRG-111hhrg55459/html/CHRG-111hhrg55459.htm. This provision filled a legal gap highlighted by the 1983 film Trading Places, which involved a scheme to misappropriate information from a governmental source that arguably would not have been covered by the CEA at the time.
[8] Dodd-Frank Wall Street Reform & Consumer Protection Act, Pub. L. No. 111-203, § 753, 124 Stat. 1376, 1750 (2010).
[9] Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41,398, 41,403 (July 14, 2011).
[10] Id.
[11] United States v. O’Hagan, 521 U.S. 642, 652 (1997).
Douglas Yatter is a partner in the New York office of Latham & Watkins and Co-Chair of the firm’s Commodities and Derivatives Regulation and Enforcement Practice. Sohom Datta and Cameron Sinsheimer are associates in the firm’s New York office.
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