This article analyzes the recent trends, updates and changes from the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC). It also examines Securities and Exchange Commission (SEC) developments in relation to the ESG objectives and disclosure obligations of various companies.
CFTC leadership update
In the last year, the CFTC has had almost total leadership turnover at the commissioner level. Four of its five current commissioners were sworn in in 2022. Chairman Rostin Behnam was sworn in as chairman in January 2022 after serving at the agency since 2017. Other CFTC commissioners include Kristin Johnson, Christy Goldsmith Romero, Summer Mersinger and Caroline Pham. Also of note, Ian McGinley, a former federal prosecutor from the Southern District of New York, became director of the CFTC’s Enforcement Division.
Notable enforcement actions
In 2022, the CFTC imposed a total of more than $2.5 billion in civil monetary penalties, disgorgement and restitution. Almost half of this sum came from CFTC v. Glencore International AG et al, No. 22-16, in which the CFTC found violations of the Foreign Corrupt Practices Act in connection with widespread manipulation of certain benchmarks in the oil industry.
The CFTC is also bringing more enforcement actions in terms of violations of traditional and technical regulatory requirements under the Dodd-Frank Act. This has largely focused on reporting violations concerning swap dealer reporting. In CFTC v. JPMorgan Chase Bank, N.A., No. 22-20, JPMorgan was required to pay $850,000 for failing to report 2.1 million short-dated FX swap transactions. Most of these actions are related to technical violations. Thus, it does behoove market participants responsible for reporting swap data to review and audit their swap data against the CFTC’s reporting standards. Of note, compliance with the specifications set forth by a swap data repository is not enough to ensure compliance, as the CFTC has made clear in certain enforcement actions.
In September 2022, the CFTC and the SEC brought a series of enforcement actions against a number of financial institutions concerning the use of unapproved messaging services such as WhatsApp and Signal. These violations led to a total payout of (a) $710 million in CFTC fines for violating recordkeeping requirements and failure to supervise; and (b) SEC fines in excess of $1.1 billion for generally the same conduct. Thereafter, also in September 2022, the U.S. Justice Department issued guidelines asking prosecutors to consider whether corporations have implemented effective policies to ensure the preservation of business-related electronic data and communications.
IB, CTA or SEF?
Certain commentators have stated that the CFTC is blurring the lines between what is an introducing broker (IB), what is a commodity trading advisor (CTA), and even what are the platforms where swaps are executed, swap execution facilities (SEF). For example, in In re Asset Risk Management (2022), the CFTC held that a CTA who sought pricing from multiple dealers for their clients was acting as an unregistered SEF. This lack of clarity has created confusion in the market, so registered CTAs should examine their practices against the standards being set by the CFTC.
Regulatory developments
The CFTC has not issued much in terms of regulatory rules, but it has made a number of technical updates in relation to reporting standards. New reporting rules also came into effect on December 5, 2022. In 2023, the CFTC intends to propose additional amendments to swap reporting rules (primarily related to the implementation of the new Unique Product Identifier designation) and amendments to commodity pool operator and CTA regulations.
Separately, in January 2023, CFTC staffers created uncertainty when they informally stated that position limits may be applicable to swaps that reference physically settled futures. This issue remains unresolved in the market.
ESG considerations
Environmental, social and governance (ESG) efforts include a commitment to valuing sustainability, equity and inclusion, and embrace the demands of people and the planet. Companies are using ESG as a framework and tool to be more accountable to their shareholders and the communities they serve. ESG is important, as strong ESG performance is believed to be a true indicator of an organization’s financial performance and resilience.
The United States presently lacks specific rules requiring ESG reporting, but the SEC has issued proposed rules. In connection with these proposals, the SEC received over 14,000 comments, indicating the level of attention organizations and the public have toward ESG policies. In contrast to the United States, the United Kingdom and Europe have specific ESG reporting and disclosure rules for publicly listed companies.
In terms of other recent developments, on July 25, 2022, FERC and the North American Electric Reliability Corporation (NERC) issued a joint letter stating that the North America Energy Standards Board is uniquely positioned to support increased gas-electric coordination.
FERC leadership update
FERC has a new iteration of the commission. Acting Chairman Willie Phillips came to FERC from the Public Service Commission of the District of Columbia. Other sitting FERC commissioners are James Danly, Allison Clements and Mark Christie.
In senior leadership changes, Ronan Gulstone is now chief of staff to Chairman Phillips. Chairman Phillips asked Matt Christiansen to remain as general counsel. Nicole Sitaraman was appointed to be acting director of the Office of Public Participation, and Conrad Bolston was installed as senior counsel for FERC’s environmental justice and equity initiatives.
Natural Gas Act developments: Signs of life
Regarding the Spire STL Pipeline project, in 2022, FERC granted and reissued the permanent certificate of public convenience and necessity. Other significant issuances this year include approval of the certification application of the Transcontinental Gas Pipe Line Company Regional Energy Access Expansion Project, which FERC granted on January 11, 2023.
Federal Power Act developments
The FERC/NARUC joint task force on transmission has held six productive meetings, during which federal and state regulators have focused on improving transmission planning and cost allocation processes. Most recently, FERC has considered changes in the regulation of generation interconnection procedures. The rulemaking, still underway, would reform the interconnection queue process with a “first ready, first served” rule change, as well as consideration of cluster studies and colocation of queue positions in order to reduce delays in the queue process.
Winter Storm Uri significantly impacted capacity as well as market prices, resulting in consumer challenges around affordability, reliability and resilience. After Uri, FERC and NERC engaged in a joint inquiry and issued a report and recommendations regarding the winterization of generation facilities, strengthening winterization efforts, and recommending certain extreme weather reliability standards, which FERC has implemented. FERC also issued a notice of proposed rulemaking that focused on internal network security monitoring for high- and medium-impact bulk electric system cyber systems.
Environmental justice and equity
Chairman Phillips recently launched the first-ever FERC roundtable, which featured stakeholders such as policymakers, regulators and frontline activists, discussing why environmental justice issues matter. This convening, coupled with the appointment of Conrad Bolston in the role of senior counsel for environmental justice and equity, demonstrates Chairman Phillips’ strong commitment to inclusion and equity. In April 2022, FERC issued its first Equity Action Plan to promote equity and the removal of barriers for underserved communities.
Enforcement highlights
In November 2022, FERC’s Office of Enforcement reported that the agency’s Division of Investigations (which conducts much of its work confidentially) opened 21 investigations and entered into settlements totaling $55.54 million. The Division of Audits and Accounting completed 12 audits, resulting in 51 findings of noncompliance, 258 recommendations for corrective action and $158 million in refunds.
Recent appellate decisions
On April 14, 2023, the U.S. Supreme Court decided two consolidated cases – Axon Enterprises, Inc. v. FTC, No. 21-86 and SEC v. Cochran, No. 21-1239 – and held that federal district courts have jurisdiction to hear extraordinary claims brought to challenge the constitutionality of the structure of both the SEC and the Federal Trade Commission. On April 17, 2023, in California Restaurant Association v. City of Berkley, No. 21-16278, the Ninth U.S. Circuit Court of Appeals overturned the natural gas ban for new buildings that passed in Berkeley, California, finding that the state action was preempted by the U.S. Energy Policy and Conservation Act.
Impact on market participants
The recent developments to both FERC and CFTC (changes in key personnel, a greater level of enforcement actions and a focus on environmental justice) demonstrate that market participants have to be cautious and compliant not only while engaging in their business activities but also in forecasting their future projects and fulfilling their reporting obligations. The activities of FERC, the CFTC and the SEC are aimed at ensuring a fair and competitive market for all participants.
