Susan Court, Director of Enforcement for the Federal Energy Regulatory Commission (FERC), and Gregory Mocek, Director of the Division of Enforcement for the Commodity Futures Trading Commission (CFTC), discussed coordinating enforcement efforts at a luncheon sponsored by the Futures Industry Association’s Law & Compliance Division on May 24, 2007 in New York City. Coordination between these Commissions became necessary with the granting of expansive regulatory power to FERC in the Energy Policy Act of 2005 (EPAct 2005).
At the luncheon, Sutherland asked if FERC has a process whereby interested individuals or companies may request advice regarding the new enforcement regulations. Ms. Court identified the No Action Letter process initiated in 2005 and modeled after the CFTC and Securities and Exchange Commission (SEC) processes. However, the FERC’s process is limited to inquiries regarding standards and codes of conduct, and does not include antimanipulation issues. Ms. Court expressed FERC’s openness to providing a more expansive advice program, and as a “new” enforcement agency, Ms. Court noted that the FERC is considering holding an enforcement conference this fall patterned after conferences offered by the SEC. At these conferences, SEC Enforcement staff discuss enforcement efforts from the prior year and identify issues they expect to focus on in the coming year.
Jurisdiction Under EPAct 2005
Ms. Court discussed how FERC’s jurisdiction changed as a result of EPAct 2005. Traditionally, FERC regulated investor-owned public utilities and natural gas transportation, and was not a true enforcement entity. In January 2006, the Commission implemented the authority granted to it under EPAct 2005 by issuing Order No. 670. This Order added a new Part 1c to the Commission’s regulations, giving the Commission broad authority to prohibit market manipulation by any entity participating in fraudulent activities in connection with the purchase or sale of natural gas or electric energy. Part 1c states that it is unlawful for an entity, directly or indirectly, in connection with the purchase or sale of natural gas or electric energy or transportation of natural gas or transmission of electric energy subject to the jurisdiction of the Commission:
(1) To use or employ any device, scheme, or artifice to defraud,
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.
(18 CFR Part 1c; Docket No. RM06-3-000; Order No. 670). Nothing in Part 1c creates a private right of action. Ms. Court stressed that FERC’s enforcement jurisdiction now extends over any entity, not just interstate pipelines and investor-owned public utilities.
Click here to read our previous legal alert regarding Order No. 670.
Mr. Mocek briefly described some of the challenges facing CFTC’s Division of Enforcement, noting that his Division is increasingly focusing on off-exchange activity because of the potentially severe impact these activities can have on the market.
According to Ms. Court, FERC conducts two types of investigations – preliminary and formal – both of which can be either public or nonpublic. The only significant difference between these types of investigations is that in a formal investigation the staff must obtain subpoena authority from the Commission in the form of a nonpublic order. All investigations are confidential, including all information obtained and even the fact of the investigation, unless otherwise ordered by the Commission. Mr. Mocek likewise noted that CFTC investigations are confidential. Ms. Court stated that there are no “parties” to a FERC investigation, rather it is just the Enforcement staff and targets of investigations. FERC’s enforcement staff includes attorneys, IT forensic specialists, auditors, former traders, financial analysts and accountants.
Ms. Court listed numerous sources for investigations utilized by FERC. These sources include:
- the formal complaint process;
- the audit process;
- referrals from market monitors under FERC’s jurisdiction;
- self-reporting; and
- referrals from other FERC offices conducting market surveillance and the Commissioners themselves.
Ms. Court noted that most of the cases brought by FERC are settled and that FERC is open to the possibility of settlement even if a hearing is in progress.
CFTC and FERC Coordination
In October 2005, CFTC and FERC entered into a Memorandum of Understanding establishing a framework for ongoing coordination and sharing of information concerning oversight, investigative and enforcement activities. The Directors described efforts by the Commissions to coordinate investigations. Enforcement staff from both Commissions meet quarterly and talk often in an effort to coordinate as much as possible. According to the Memorandum of Understanding, each may request information from the other and any information shared remains confidential. Furthermore, the Commissions do not notify entities that produce information to one Commission that this information is being shared with the other Commission. In addition to coordinating discovery, the CFTC and FERC also coordinate settlements. It should be noted that, while the CFTC and FERC may jointly participate in discovery, the two operate under different statutes and may have different things to prove. The example given was that the CFTC, unlike FERC, must prove artificial price to establish manipulation.