CFTC Commissioner Argues Unconstitutional Statutory Delegation under Special Rule for Event Contracts

Commentary by Nihal Patel

After consideration of CFTC actions concerning a proposed gaming contract "involving the moneyline, point spread, and total points on NFL football games," CFTC Commissioner Brian D. Quintenz argued that a provision of the CEA was unconstitutional and that a related CFTC rule was invalid.

In a statement, Mr. Quintenz said that, following the CFTC review of the ErisX RSBIX NFL futures contracts, the CFTC staff circulated a proposed Order that would have prohibited ErisX's NFL contracts under CEA Section 5c(c)(5)(c) ("Common provisions applicable to registered entities") and CFTC Rule 40.11 ("Review of event contracts based upon certain excluded commodities"). While the proposed Order was not finalized, given that ErisX chose to withdraw the certifications Mr. Quintenz asserted that the proposed Order revealed additional issues to address and that the CEA provision is "unconstitutional," CFTC Rule 40.11 is "invalid," and the proposed Order is "arbitrary and capricious."

Statute

Mr. Quintenz explained that the proposed Order would have prohibited the ErisX NFL contracts under CEA Section 5c(c)(5)(c), which acts as a "special rule" for the disapproval of certain enumerated event contracts, defined as (i) activity that is unlawful under any Federal or State law, (ii) terrorism, (iii) assassination, (iv) war, (v) gaming, or (vi) other similar activity determined by the CFTC, by rule or regulation, to be contrary to the public interest.

Mr. Quintenz described the general rule: event contracts, including the enumerated ones, are allowed, and the statute does not require the CFTC to make any determination; meaning the CFTC does not shirk "its statutory duty" by remaining silent. Mr. Quintenz also said that should the CFTC make a determination, Congress has provided no standard for the analysis and has failed to indicate what it has intended the CFTC to do.

With regard to the phrase "contrary to public interest," Mr. Quintenz argued that the standard constitutes an "unconstitutional delegation and is unconstitutionally vague," noting the standard could amount to a "moral consideration . . . an interest based on financial stability . . . or even, perhaps, increasing fair access to gaming." Mr. Quintenz stated that identifying the scope of public interest and balancing competing public interests is the job of Congress, not the CFTC.

Regulation

Mr. Quintenz stated CFTC Rule 40.11 was intended to implement CEA Section 5(c)(5)(C) by providing a 90-day review period for the CFTC to determine if the contract is an enumerated event contract. He suggested, however, that this overlooks the fact that all event contracts, including enumerated ones, are permitted absent a CFTC determination that the contract is contrary to the public interest. Mr. Quintenz characterized the regulation as adopting a "per se rule that all enumerated event contracts are prohibited regardless of their utility or benefit." Mr. Quintenz attributed the disconnect between the statute and the regulation to failed "reasoned decision making," citing the CFTC rule proposal for 40.11, which he said "blatantly misquotes the statute."

Proposed Order

In relation to the statute and regulation, Mr. Quintenz noted that the proposed Order found that the contracts (i) are enumerated contracts as they involve gaming, (ii) have no hedging utility and do not form the basis for pricing, and (iii) could promote sports gambling, thereby making the contracts contrary to the public interest.

In discussing the Order itself, Mr. Quintenz said it (i) incorrectly placed the burden on ErisX to affirmatively demonstrate that the NFL contracts have hedging utility, (ii) failed to properly consider the public comments and denied ErisX due process, and (iii) arbitrarily defined "gaming."

Mr. Quintenz stated that Congress should "properly reclaim its legislative power and either ban such contracts outright or provide a detailed framework through which the agency can appropriately fact-find on specific contract cases."

Commentary

Mr. Quintenz's statement is a fun read for lawyers, particularly that handful of us who are interested in reading about whether the Supreme Court should breathe new life into nondelegation doctrine jurisprudence. As a matter of outcomes (which Mr. Quintenz said he does not necessarily disagree with), the result is unsurprising: Congress almost certainly does not want the CFTC to be in the business of regulating "gambling," "hedging," or any other similar risk transactions based on the outcomes of sporting events, and the CFTC itself almost certainly does not want to be in that business.

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