The Commodity Futures Trading Commission has recently filed over a dozen enforcement actions against entities allegedly involved in illegally soliciting foreign currency (forex) transactions or engaging in unregistered forex transactions. Thirteen of these actions were filed simultaneously across the country in what the CFTC has dubbed a nationwide sweep. The most recent action was filed on February 18, 2011 against a St. Peters, Missouri resident and three of his Missouri-based business entities for $2.8 Million.
These actions represent the CFTC’s first use of its new authority pursuant to Section 742 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under this Section, entities that participate in the forex market must register with the CFTC and abide by new investor protection rules, such as maintaining certain capital requirements. These additional requirements are purportedly to increase transparency and reduce risk.
As previously forecasted on the Cosgrove Law, LLC blog, Section 742 could potentially expand the “Zelener fix” in the 2008 Farm Bill. The “Zelener Fix” authorizes the CFTC to pursue anti-fraud enforcement actions for transactions conducted on a margin or leveraged basis, especially in the retail forex market. Indeed the CFTC interprets the language in Section 742 as expanding on its enforcement authority, citing that it is taking this opportunity to aggressively pursue enforcement in this sector after the Zelener decision effectively quashed the agency’s efforts in 2004 and the 2008 Farm Bill did little to bolster its enforcement position. The CFTC hopes that this sweep will warn unregistered or noncompliant firms to “shape up or be sued.”
In addition to regulating forex transactions, Section 742 also specifically addresses margined or leveraged retail commodity transactions. However, this Section contains an exception for contracts of sale that either “result in actual delivery within 28 days...” or “create an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver and accept delivery, respectively, in connection with the line of business of the seller and the buyer.” This language loosely tracks state commodity regulation language which exempts certain precious metals contracts, but there are some key differences in term usage. The CFTC has yet to define the distinct terms within this Section. However, none of the actions filed so far pursuant to Section 742 have involved retail commodities dealers, but rather have focused on firms engaging in forex transactions. This is consistent with the Legislature’s primary concern in enacting this portion of Dodd-Frank—to deal with unregulated swaps and foreign currency transactions. Regardless, precious metals firms operating in this area should tread carefully until the CFTC fully defines the scope of this exception.