FERC and CFTC Jurisdictional Battle
Commentary by Bob Zwirb
The CFTC and FERC are engaged in a public fight over information sharing. In an August 29th letter, FERC Chairman John Wellinghoff asked Congress to intervene to help FERC and the CFTC execute the memorandum of understanding ("MOU") that Congress requested in April. The MOU is meant to clarify the two Commissions' jurisdictions and help the regulators work more cohesively. One of the primary areas under dispute is the CFTC's Large Trader Report data. FERC claims the data could help identify market participants, which could help FERC identify and deter market manipulation. The CFTC refuses to provide the data. Chairman Wellinghoff stated that the scope of the 2005 MOU should be expanded to give FERC the jurisdiction to bring manipulation cases against energy market manipulators.
In response to the FERC Chairman's letter, Senators Feinstein and Wyden issued statements in support of FERC. Senator Wyden stated that the CFTC has been working to undermine FERC's efforts to police the energy markets, and urges the regulatory agencies to execute a MOU. Moreover, Senator Feinstein called the CFTC's actions "unconscionable," and urged the CFTC to share information with FERC.
See: FERC Chairman's Letter; Senators Feinstein and Wyden Statement.
Commentary
What is going on here is more than the ordinary "turf war" between two government agencies as the popular press would have it. The lack of cooperation on information sharing between FERC and the CFTC on surveillance and enforcement matters is closely linked to an important issue of jurisdiction, one that strongly favors the CFTC due to the CEA's exclusive jurisdiction clause in CEA Section 2(a)(1)(A). Indeed, just six months ago, the DC Circuit reaffirmed a long line of case law interpreting the CEA's exclusive jurisdiction clause as preempting the authority of FERC to regulate or bring an enforcement action over a transaction that took place, in the words of the court, on "a CFTC-regulated exchange." Hunter v. FERC, 711 F3d. 155, 158 (D.C. Cir. 2013). It is the failure of the letter writers here to accept this decision and the jurisdictional divide between the two agencies that are the causes of this contention.
The exclusive jurisdiction provision of the Commodity Exchange Act was incorporated as a key aspect of the 1974 amendments to that statute in order to avoid inter alia subjecting traders "to conflicting agency rulings." Although FERC was given broad authority by Congress in 2005 to address manipulation in its regulated markets (see Energy Policy Act of 2005), that authority did not allow it to intrude upon the "exclusive" domain of the CFTC over the futures markets. As Judge Frank Easterbrook once observed:
"An instrument either is or is not a futures contract. If it is, the CFTC has jurisdiction; if it is not, the CFTC lacks jurisdiction; if the CFTC has jurisdiction, its power is exclusive."
Chicago Mercantile Exchange v. S.E.C, 883 F.2d 537, 548 (7th Cir. 1989).
In his letter to the Senators, FERC Chairman Wellinghoff appears to take issue with all this, including the outcome in Hunter. He points to Dodd-Frank's call for the two agencies to develop MOUs not only on information sharing, but also on jurisdiction as a basis for allowing his agency to "protect consumers from price impacts in the physical energy markets from manipulation occurring in the financial markets." Dodd-Frank Act, Title VII, Sec. 720(a)(1). But Hunter does not allow FERC to do that, notwithstanding Mr. Wellinghoff's assertion to the contrary. Moreover, while FERC and the CFTC could always do a better job of cooperating on information sharing, it is unclear how such cooperation could serve as a basis for establishing jurisdiction between them, especially when jurisdiction for conduct that occurs on futures markets is expressly reserved for the CFTC. Nor can a MOU change this reality, since agencies, as the Seventh Circuit reminds us, cannot alter their jurisdiction "by mutual agreement." Chicago Mercantile Exchange v. SEC, 883 F.2d. at 544. See also Board of Trade of the City of Chicago v. S E C , 677 F2d. 1137, 1142 n.8 (7th Cir. 1982) (noting that while SEC and CFTC may "maintain communications" and otherwise "cooperate" regarding CFTC activities that "relate" to SEC responsibilities, "the two agencies cannot thereby enlarge or relinquish their statutory jurisdictions").
Likewise, Mr. Wellinghoff's call for a "legislative fix" to ensure that his agency has authority to police conduct that falls "squarely within FERC's jurisdictional market" can not fully address the issue unless it also addresses the CFTC's exclusive jurisdiction under CEA Section 2(a)(1)(A). And since this is a "zero-sum game," as the Seventh Circuit once put it, in that any authority granted to FERC over financial contracts regulated by the CFTC would have to come at the expense of the latter, Congress would need to make that statutory adjustment by directly amending CEA Section 2(a)(1)(A) to eliminate the word "exclusive." Chicago Mercantile Exchange v. S.E.C, 883 F.2d at 547 (characterizing a similar jurisdictional dispute between the SEC and the CFTC as "a zero-sum game because of the exclusivity clauses in the CEA").