The Commodity Futures Trading Commission (“CFTC”) recently ordered Summit Energy Services, Inc. (“Summit Energy”) to pay a $140,000 civil penalty to resolve allegations that it violated the Commodity Exchange Act (“CEA”). In the January 16, 2015, order, CFTC Docket No. 15-12, the CFTC found that Summit Energy violated section 4m(1) of the CEA—which provides an exemption from registration, as discussed below—by engaging in the business of advising clients regarding the trading of over-the-counter (“OTC”) natural gas swaps and futures without being registered with the CFTC as a commodity trading advisor (“CTA”).
Summit Energy resolved the CFTC’s allegations through an offer of settlement that the CFTC accepted. In the offer of settlement, Summit Energy neither admitted nor denied liability, but consented to the CFTC entering an order (i) finding that Summit Energy violated section 4m(1) of the CEA, and (ii) requiring Summit Energy to pay the $140,000 civil penalty, and to cease and desist from further violating section 4m(1).
CTAs, defined under section 1a(12) of the CEA and CFTC Rule 1.3(bb), generally include persons who, for pay, advise others directly or through publications regarding the value of or advisability of trading in commodity futures, swaps, or options. Section 4m(1) of the CEA requires CTAs to be registered with the CFTC. However, section 4m(1) and CFTC Rule 4.14(a)(10) also provide that a person will not be found in violation if “during the course of the preceding twelve months,” such advisor “has not furnished commodity trading advice to more than fifteen persons,” and does not hold itself out “generally to the public as a commodity trading advisor.” 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).
The CFTC found that Summit Energy provided its mostly commercial clients with advice concerning physical natural gas and electricity transactions. The CFTC also found that, from October 2012 to September 25, 2014, Summit Energy provided more than 15 clients with advice as to the “value of or the advisability of trading in natural gas OTC swaps and futures for hedging purposes.” The CFTC further found that Summit Energy also acted as a broker in OTC natural gas swaps trades for some of its clients. The CFTC noted that Summit Energy held itself out to the public as a CTA by offering prospective clients “risk management” services through its website and brochures that included advice on trading natural gas swaps and futures, and that such advice was “part of, and not solely incidental to, its business.”
Summit Energy registered as a CTA on September 26, 2014.
The Summit Energy case serves as a reminder that entities that engage in energy marketing or that provide advice with respect to the natural gas and electricity markets must diligently stay abreast of their CFTC registration obligations. Those providing risk management services as part of their client offerings would be well served to periodically review and reassess their CFTC registration obligations in light of their current (and planned) energy marketing and advisory activities. When offering risk management services, companies that are not registered and that do not otherwise qualify for a registration exemption must ensure that they have 15 or fewer clients for services that constitute commodity trading advice, and that they do not hold themselves out publicly as providing commodity trading advice.
Client Alert 2015-011