Narrowing CFTC Enforcement Possible Under Trump, Lawyers Say

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By Richard Hill

Dec. 7 — The CFTC could narrow its interpretation of anti-manipulation authority granted by the Dodd-Frank Act once President-elect Trump takes office, enforcement lawyers told Bloomberg BNA.

“I think there are certain types of cases that will be less likely to be prosecuted because they’re borderline and don’t go to what the CFTC’s mandate is,” which includes policing fraud, manipulation and trade practice abuse, Gary DeWaal, special counsel at Katten Muchin Rosenman LLP, New York, said in a telephone conversation.

Esoteric Applications

The CFTC may de-emphasize some “esoteric” applications of the Commodity Exchange Act that “pushed the envelope,” DeWaal, a former CFTC trial attorney who specializes in financial services regulatory matters, told Bloomberg BNA.

Dodd-Frank made it illegal to use “any manipulative or deceptive device or contrivance” in connection with futures and derivatives transactions. The law was broadly written and used “very, very aggressively” during the Obama administration, beginning with the JPMorgan Chase & Co. “London Whale” case, DeWaal said.

The law is likely to stay on the books, he predicted, but the CFTC “will use it much more narrowly. The esoteric theory is not likely to be as attractive to a Republican administration.”

Allison Baker Shealy, a former CFTC trial attorney who worked on the London Whale case, agreed there’s a perception by some that the CFTC has used its Dodd-Frank anti-manipulation authority too broadly. “It’s possible that could be dialed back,” she said.

At the same time, Shealy said that there’s “a strong argument that the CFTC should have the ability to step in and take action when a market participant knows or should know that its actions could have a significant, manipulative effect on a market and acts anyway.”

In the Whale case, JPMorgan Chase was accused of using a “manipulative device” when it suddenly sold more than $7 billion in credit-default swaps one of its traders had accumulated. The CFTC said the bank recklessly ignored obvious dangers the sell-off would pose to the marketplace.

“I think a lot of people thought, OK, they made an internal mistake and they lost a lot of money. How is that fraud on the marketplace?” DeWaal said. “A lot of people were surprised when they saw the use of that [Dodd-Frank] provision in that case.” The manipulative device language was the basis of the commission’s $100 million settlement with the bank in 2013.

Peter Haveles, a partner in the complex commercial litigation department of Kaye Scholer LLP, New York, called post-Dodd Frank CFTC enforcement efforts under Chairman Gary Gensler “hyper-aggressive.” Gensler’s successor, current Chairman Timothy Massad, has “tempered it a bit,” Haveles, who has written about the new anti-manipulation standard, said. He agreed that under Trump, the manipulation standard likely will be interpreted more narrowly.

“I think you will see the CFTC take a more restrained view of the language that was added by Dodd-Frank,” he said, with the agency using it the same way the Securities and Exchange Commission has used similar language to pursue “legitimately fraudulent activity.”

“I think there will be a focus on real fraud as opposed to heavy-handed regulation of the markets,” Haveles told Bloomberg BNA.

No Easy Answers

Overall, the agency’s enforcement agenda will be driven by the priorities of its new chairman, who hasn’t been named. One contender is Republican Commissioner J. Christopher Giancarlo, a former business executive known for his strong pro-industry stance. He has questioned rules on swap market structure and automated trading. Those views don’t necessarily betray his position on enforcement, however.

Tyson Slocum, a policy analyst at consumer-oriented Public Citizen who serves on a CFTC energy advisory committee, warned against assuming the enforcement philosophy of a deregulatory-minded chairman. “It’s important to make a distinction between an advocate of deregulation and someone who wants to have a soft enforcement division,” Slocum said. “They don’t necessarily go hand-in-hand.”

Current events also have a role in the focus of the enforcement unit. “Sometimes enforcement activity may not necessarily be a product of the ideology of the head of the CFTC or enforcement, but rather the circumstances of what’s going on in the marketplace,” Slocum said.

Regardless of who is appointed CFTC chairman, sources predict the agency will continue to bring core cases, targeting fraud, manipulation and trade practice violations. “I don’t see those going away,” DeWaal said. “If there’s a belief someone is manipulating the markets, I would think this administration would want to be very aggressive in that area.”

Core Cases

Brian Walsh, a former CFTC attorney now at Murphy & McGonigle, Washington, said he doesn’t expect a major change in enforcement emphasis when a new chairman takes over. “There are a lot of core cases that aren’t necessarily politically driven that are going to have to be dealt with,” he told Bloomberg BNA in a telephone conversation.

Meanwhile, the larger cases that highlighted enforcement under the Obama administration, such as the benchmark manipulation cases that brought in more than a billion dollars from some of the world’s largest banks over the last several years, also are likely to continue. “I just don’t see how they can ignore something like that,” said Shealy, now at Shulman Rogers Gandal Pordy & Ecker, P.A., Potomac, Md.

Former CFTC Commissioner Bart Chilton said agencies like the CFTC are independent for a reason, and the commission and its staff take that designation seriously. “I don’t think they’re going to stop major investigations from going forward for political reasons,” Chilton, a senior policy advisor at DLA Piper, Washington, said.

Shealy added that Trump’s bottom-line business sense may favor the pursuit of large cases that could yield significant financial penalties—money that goes to the Treasury. “The Division of Enforcement is very, very profitable,” she noted. “If I were a business person and I was looking at statistics—number of cases filed, amounts recovered—that might be relevant.”

To contact the reporter on this story: Richard Hill in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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