On January 16, the Commodity Futures Trading Commission (CFTC) issued a settlement order requiring Summit Energy Services, Inc. (Summit Energy) to pay a $140,000 civil monetary penalty for acting as an unregistered commodity trading advisor (CTA),1 in violation of Section 4m(1) of the Commodity Exchange Act (the CEA).
Section 1a(12)(A)(i) of the CEA defines a CTA as any person2 who, for compensation or profit, engages in the business of advising others as to the value or advisability of trading in, among other things, futures or swaps.3 Section 4m(1) of the CEA requires a person to register with the CFTC if such person is acting as a CTA and makes use of the mails or any instrumentality of interstate commerce in connection with the person’s activities as a CTA, unless (1) the person provides such commodity trading advice to fewer than 15 persons in the preceding 12 months and (2) does not hold itself out generally to the public as a CTA.4
The settlement order stipulates that, from October 2012 to September 25, 2014, Summit Energy violated Section 4m(1) of the CEA by failing to register with the CFTC, despite engaging in a for-profit business of advising more than 15 clients about the value and advisability of trading in over-the-counter (OTC) natural gas swaps and natural gas commodity futures contracts. Moreover, Summit Energy, through its website and public brochures, held itself out to the public as a CTA by offering “risk management services” that included advice on the value and advisability of trading in OTC natural gas swaps and futures.
Summit Energy registered with the CFTC as a CTA on September 26, 2014. In addition to the $140,000 penalty, the CFTC ordered Summit Energy and its parents, affiliates, subsidiaries, successors, and assigns to cease and desist from violating Section 4m(1) of the CEA.
In an enforcement action, $140,000 is the minimum penalty that can be assessed for a violation of the CEA.5 Thus, the $140,000 monetary penalty imposed on Summit Energy could be viewed as lenient. Nevertheless, the Summit Energy settlement order is worth noting. To date, the CFTC staff has been willing to work with market participants who are making a good faith effort to comply with the new regulatory regime imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the addition of swaps to the commodity pool operator and CTA regimes. However, violations of the CEA’s provisions concerning swaps do result in enforcement activity, as evidenced by the Summit Energy settlement order. Market participants should take care to ensure that they are in compliance with all aspects of the CEA. Particular attention should be paid in the context of the CTA regime, as CFTC staff has historically interpreted the terms “advising” and “for compensation or profit” broadly.