The Commodity Futures Trading Commission (CFTC) filed and settled charges on October 24 against Upstream Energy Services LLC (Upstream Energy) for acting as an unregistered futures commission merchant. The Commission’s order raises several important points for energy companies. First, while energy companies may view the Federal Energy Regulatory Commission (FERC) as their primary federal regulatory agency, certain types of transactions involving energy resources may fall under the purview of another regulatory authority, such as the CFTC. Second, a company that accepts and places futures and options order on behalf of another party must register as a futures commission merchant. Third, voluntary and full cooperation with an enforcement action can reduce greatly the nature and severity of any penalty sought.
A futures commission merchant is an entity that, among other things, “engage[s] in soliciting or in accepting orders for” “the purchase or sale of a commodity for future delivery” and in connection with soliciting or accepting such orders, “accepts any money, securities, or property (or extends credit in lieu thereof).” 7 USC § 1a(28). The Commodity Exchange Act (the Act) prohibits an entity from acting as a futures commission merchant unless it is registered with the CFTC. 7 USC § 6d(a)(1).
Upstream Energy is a Texas-based natural gas and oil marketing and advisory services company. It has not registered with the CFTC as a futures commission merchant.
The CFTC’s Findings and Settlement
From April 2017 to at least September 2018, Upstream Energy accepted orders from two clients to trade natural gas commodity futures and options on a commodity futures exchange. Upstream Energy placed these orders on behalf of these clients, for a fee, in its own trading accounts. It also extended credit to these clients to facilitate the transactions.
The CFTC found that Upstream Energy acted as a futures commission merchant when it undertook these transactions, and thus violated the Act by not having been registered. The settlement required Upstream Energy to cease violating the Act by acting as an unregistered futures commission merchant. Additionally, Upstream Energy agreed to pay a $75,000 civil monetary penalty. The penalty reflected a substantial reduction due to Upstream Energy’s cooperation with the CFTC’s investigation by voluntarily producing documents and making executives available for interviews, and by implementing proactive remedial measures, such as revising its policies and providing training, to prevent future occurrences.
Though not applicable in Upstream Energy’s case, the CFTC has other avenues of enforcement authority applicable to the energy industry. For example, the CFTC’s anti-manipulation rule closely mirrors FERC’s similar rule. CFTC Rule 180.1 prohibits, in connection with any swap, commodity contract, or futures contract, the use of any device or other act that would defraud or the making of any misleading or untrue statements of material fact while Rule 180.2 prohibits manipulation, or the attempt, of the price of any swap, commodity contract, or futures contract. The CFTC also has the authority to prohibit disruptive trading, such as engaging intentionally in uneconomic transactions in one market to profit through ancillary transactions in another market, though final regulations regarding disruptive trading are pending.