CFTC Fines Firm for Illegal Off-Exchange Transactions in Precious Metals
Commentary by Bob Zwirb
The CFTC issued an order against a telemarketing firm and its owners for dealing in illegal off-exchange finance transactions in precious metals and for failing to be properly registered.
The CFTC found that from January 2012 to at least March 2013, the firm solicited retail customers for the purpose of engaging in financed transactions in precious metals. According to the CFTC, customers paid a percentage of the purchase price for the metals and received financing for the remainder of the purchase price while paying commissions and fees on the transactions. The order states that financed transactions in commodities with retail customers like those engaged in by the respondents must be executed on a CFTC-regulated exchange unless actual delivery occurs within 28 days of the agreement, or the contract creates an enforceable obligation to deliver between a seller and a buyer who both have the ability to deliver and accept delivery.
The CFTC found that because the respondents' retail-financed precious metals transactions were done off-exchange and delivery took place more than 28 days from the agreement, the transactions were illegal. The CFTC also found that (i) the firm failed to register as a futures commission merchant, as required by the CEA, (ii) the firm was liable for the violations of its individual telemarketing agents, and (iii) the principals of the firm were liable as controlling persons.
The CFTC ordered the firm and its owners to pay restitution to their customers and further civil monetary penalties. The order also prohibited the firm from trading on or pursuant to the rules of any registered entity.
Commentary
The Order states that "whether 'actual delivery' has occurred [within 28 days] . . . requires a consideration of evidence beyond the four corners of the contract documents," and that in making this determination, "the Commission will employ a functional approach and examine how the agreement, contract, or transaction is marketed, managed, and performed, instead of relying solely on language used by the parties in the agreement, contract, or transaction." In the above statement, the CFTC reaffirms its long-standing preference for characterizing the legal status of a contract based upon an ex post "facts-and-circumstances" analysis of the parties' conduct subsequent to reaching an agreement. The CFTC has held this consistent position before, during and after CFTC v. Zelener, the Seventh Circuit decision which held that retail forex transactions involving rolling clauses are spot contracts, not futures, and that rejected the CFTC's ex post approach for making such determinations. CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004).
It should be noted that although the CFTC's position is consistent with the "actual delivery" requirement of the statute, as recently amended, in other contexts such as bankruptcy, contracts with rollover provisions that delay actual delivery beyond the customary timeline of the relevant cash or spot market are still viewed as spot contracts. See Secure Leverage Group, Inc. v. Bodenstein, 510 B.R. 190, 197 and n.6 (Bankr. N.D. Ill. 2014) (noting that "Zelener is still controlling in this circuit regarding the distinction between futures contracts and spot and forward contracts generally, and specifically that retail forex transactions are not futures," and that the CFTC's contrary position has "no bearing on this case").
In order to qualify for spot treatment in an enforcement context when the CFTC is applying its anti-fraud jurisdiction, a retail commodity or retail forex transaction must involve either actual delivery within the customary spot period (two days for forex and 28 days for other commodities) or the intent to deliver. By contrast, in a bankruptcy proceeding, neither actual nor intended delivery is required. See Bodenstein, 510 B.R. at 199 (holding that "the actual intention of the parties regarding delivery does not matter" when analyzing whether a transaction is a future, or a spot or forward). For that reason, the Bodenstein-Zelener analysis would seem to oppose the CFTC's view that even rolling spots into which non-retail or eligible contract participant parties enter would fall within the definition of the term "swap." See CFTC/SEC Swap Definitions Release, 77 Fed. Reg. 48207, 48257 (Aug. 13, 2012).