Providers of Energy-Related “Risk Management” Services May Need To Register with the Commodity Futures Trading Commission
January 28, 2015
Entities that provide risk management services or advice on trades in the natural gas and electricity markets must periodically analyze and monitor their need to register with the U.S. Commodity Futures Trading Commission (CFTC).
“Risk management” services and providing advice on energy trades are activities that can fall within the CFTC’s broadly defined rules governing commodity trading advisors (CTA). Generally, a CTA advises others regarding the value or advisability of trading in futures or swaps and does so for compensation, which can include profit sharing.[1] Such advice includes “advice based upon knowledge of or tailored to customer’s particular commodity interest account, particular commodity interest trading activity, or other similar types of information.”[2] Most CTAs are required to register with the CFTC. Exemptions from registration exist.[3] But, even unregistered CTAs are subject to certain CFTC regulatory requirements.[4]
In fact, in January 2015, the CFTC assessed a $140,000 civil penalty against Summit Energy Services, Inc. (Summit) for acting as an unregistered CTA.[5] The CFTC found that the company offered clients and prospective clients “risk management” services through its website and brochures that advised clients on the value or advisability of trading in natural gas swaps and futures. The company had provided advice to more than fifteen clients and therefore was required to register with the CFTC.[6] Most of those clients were commercial entities that purchased physical natural gas and electricity to meet their own energy needs. The company agreed to pay the fine and cease engaging in further violations. Summit is now a registered CTA.[7]
The CFTC’s Order serves as a reminder to others engaged in risk management and advisory activities of the need to comply with the CFTC’s registration and regulatory requirements for CTAs.
__________________
[1] Commodity Exchange Act Section 1a(12)(A), 7 USC § 1a(12)(A), and CFTC Regulation 1.3(bb), 17 CFR 1.3(bb). The CEA and the Commission’s regulations may be accessed through the Commission’s Web site: www.cftc.gov.
[2] https://www.nfa.futures.org/nfa-registration/cta/index.html
[3] There are exemptions from the registration requirement. See CFTC Advisory 13-79 (dated December 23, 2013), at Question 3.
[4] CFTC Advisory 13-79 (dated December 23, 2013), at Question 4.
[5] CFTC Docket No. 15-12. The Order is part of a settlement. As part of the settlement, the company neither admitted nor denied liability, but consented to the CFTC entering the Order. A copy of this Order is available at: https://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfsummitorder011615.pdf
[6] There is an exemption for persons advising 15 or fewer persons over the prior 12 months and who do not hold themselves out to the public as a CTA. CFTC Regulation 4.14(a)(10), 17 USC § 4.14(a)(10). In addition, section 1a(12) of the CEA and CFTC Rule 4.14 exclude or exempt from registration certain persons. However, most of those exclusions and exemptions require the commodities trading advice to be solely incidental to the conduct of the person’s business, or require that the CTA is otherwise regulated by the CFTC (e.g., a commodity pool operator or an introducing broker).
[7] https://www.nfa.futures.org/NFA-registration/NFA-directory/nfa_cta.csv
If you have any questions about the need to register as a CTA with the CFTC, please contact: Dan Clearfield at (717) 237-7173 – dclearfield@eckertseamans.com; or Gerit F. Hull at (202) 659-6657 – ghull@eckertseamans.com.
This Eckert Seamans Energy and Utilities Blog is intended to keep readers current on matters affecting businesses and is not intended to be legal advice.