As Regulatory Uncertainty Looms, a Case for an SEC-CFTC Merger

By André Rouillard *

The fire beneath legislators after the financial crisis of 2008 has ostensibly died out. After passing the landmark Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Congress seemingly exhausted most of the political will for increased regulation of the United States financial system. With the election of President Donald Trump, the very existence of Dodd-Frank and the regulatory future of Wall Street are uncertain at best. However, there are ways to sate the small-government desires of conservatives while also appeasing those who seek to further empower federal financial regulatory agencies in rule making and enforcement. A merger of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) is one of them.

The idea of a merger between the SEC and CFTC was formally floated most recently in late 2012 by Congressmen Barney Frank and Mike Capuano.[1] The idea failed to gain traction, but emerged again two years ago when the Volcker Alliance, a think tank headed by former Federal Reserve Chairman Paul Volcker, proposed a sweeping overhaul of the financial regulatory system.[2] This overarching proposal included the merger of the SEC and CFTC into a single agency focusing on investor protection and capital markets oversight.[3] This last point is an important one, as the current structure was created in a piecemeal fashion, with new agencies designed to regulate businesses and financial products as they emerged.[4] With modern banks and financial institutions involved in many different lines of business — implicit in the idea of a “financial system” is interconnectedness — it makes sense to have a more centralized regulatory agency for rule-making, adjudication and enforcement.

In the wake of Dodd-Frank, both the SEC and the CFTC are still finding their footing with respect to regulating insider-trading cases. There are two legal theories that apply to commission of insider trading: the “classical” theory and the “misappropriation” theory.[5] Under the classical theory, a corporate officer breaches a fiduciary duty by trading on the basis of material nonpublic information.[6] Because this theory is somewhat narrow in the scope of the parties to which it applies, it falls mainly under securities trading and thus the jurisdiction of the SEC. However, the misappropriation theory applies more generally when “a person misappropriates confidential information for trading purposes, in breach of a duty owed to the source of the information.”[7] The former was postulated in Chiarella v. United States[8] in 1980, while the latter came about with United States v. O’Hagan[9] in 1997.[10] The misappropriation theory puts insider trading under the domain of the CFTC.

Dodd-Frank, by adding Section 6(c)(1) to the Commodity Exchange Act in 2010, explicitly granted the CFTC the ability to police fraud in swaps and sales of commodities.[11] This authority largely mimics the SEC’s anti-fraud powers, and the result is an overlap of authority when it comes to institutions like large banks and macro-oriented hedge funds which may trade across not only securities, but almost certainly in futures contracts and commodities as well. Not only does this type of overlap unnecessarily increase compliance costs for financial institutions, it creates some head-butting between agencies as they attempt to police the same institutions engaging in similar activities with similar authority but with technically separate financial products.

A merger between these two agencies would eliminate the administrative overlap between the SEC’s traditional area of enforcement and the CFTC’s newfound power. Arguably, there are differences between the types of information used when trading in securities and in futures and commodities. In futures and commodities, the information being used to trade is generally considered nonpublic, such as existing positions and physical commodity holdings.[12] However, the insider trading cases the CFTC has already tried and won are similar in their mechanics to your garden-variety insider trading cases that usually fall under the SEC’s jurisdiction. For example, the administrative proceeding In the Matter of Arya Motazedi concerned a case of “front-running” in which an oil and gas trader for “a large, publicly traded corporation” placed orders on his personal account before executing the trades on his employer’s account.[13] The other matter the CFTC has prevailed in, the case of Jon P. Ruggles, also involved front-running — this time by a former Delta Airlines executive.[14]

While the CFTC is still testing the waters of how useful its new insider trading enforcement power will be, there is already a case that this power is similar enough to the SEC to reinforce the idea of a merger between the agencies. As the CFTC grapples with its expanded power and as the financial system continues to integrate and interconnect, expect to find even more areas in which a merger between the two agencies makes sense.


The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

*André Rouillard is a junior editor on MJEAL. He can be reached at andrer@umich.edu.

[1] Sarah N. Lynch, Retiring US Lawmaker Barney Frank Seeks SEC-CFTC Merger, Reuters (Nov. 29, 2012), http://www.reuters.com/article/sec-cftc-merger-idUSL1E8MTGFA20121129.

[2] Gary DeWaal, Volcker Alliance Calls for CFTC and SEC Merger Among Other Financial Oversight Agencies’ Reform, Lexology (Apr. 26, 2015), http://www.lexology.com/library/detail.aspx?g=2f729d58-08cb-400f-925a-e2a3176533f2.

[3] Id.

[4] Id.

[5] CFTC Enforcement Outlook: Insider Trading, Covington & Burling LLP (Oct. 12, 2016), https://www.cov.com/-/media/files/corporate/publications/2016/10/cftc_enforcement_outlook_insider_trading.pdf.

[6] Id.

[7] United States v. O’Hagan, 521 U.S. 642, 652 (1997).

[8]Chiarella v. United States, 445 U.S. 222 (1980).

[9] O’Hagan, 521 U.S. at 642.

[10] CFTC Enforcement Outlook, supra note 5.

[11] Zach Brez & John Daniels, The New Financial Sheriff: CFTC Anti-Fraud Authority After Dodd-Frank, BNA(June 18, 2012), https://www.ropesgray.com/files/upload/ropes_gray_brez_daniels_article.pdf.

[12] Geoffrey Aronow &Michael Sackheim, CFTC Asserts Its Broader Fraud Jurisdiction and Steps into the World of Insider Trading, Sidley Austin LLP (Dec. 31, 2015), http://www.sidley.com/news/12-31-2015-investment-funds-update.

[13] Craig R. Enochs, CFTC Enforces Insider Trading Rules and Aggressively Pursues Its New Enforcement Authority under the Dodd-Frank Act, Reed Smith LLP (Dec. 22, 2015), https://www.reedsmith.com/CFTC-Enforces-Insider-Trading-Rules-and-Aggressively-Pursues-Its-New-Enforcement-Authority-under-the-Dodd-Frank-Act-12-22-2015.

[14] Press Release, U.S. Commodity Futures Trading Comm’n., CFTC Orders Jon P. Ruggles to Disgorge More than $3.5 Million in Trading Profits and Pay a $1.75 Million Penalty for His Illegal Futures and Options Trading, (Sept. 29, 2016), http://www.cftc.gov/PressRoom/PressReleases/pr7459-16.

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