CFTC Pitches Antifraud Powers

(Via The Wall Street Journal)

The Commodity Futures Trading Commission will gain more tools to police fraud and manipulation under a proposal floated on Tuesday.

The plan, approved in a 5-0 vote, would expand the scope of the agency’s antifraud and antimanipulation powers. It would implement provisions in the Dodd-Frank financial law, which greatly expands the CFTC’s authority and allows it to police the $615 trillion over-the-counter derivatives market.

One aspect of the proposed antifraud and antimanipulation rules is styled after longstanding, similar rules in the Securities Exchange Act of 1934. The changes are designed to eliminate holes in the derivatives laws and cover a broader array of offenses by giving the agency new fraud-based manipulation powers.

This fraud-based manipulation authority doesn’t change the agency’s current powers to police manipulation using a price-based standard. Those standards used in the past to police manipulation will remain intact. But under the new fraud-based manipulation powers, the CFTC’s burden of proof would be lower.

“The new rules will give us broader authority,” CFTC Chairman Gary Gensler said. “We’ve had a price-manipulation standard for some time, but we’re adding to it.”

Paul Architzel, a former CFTC staffer now at Alston & Bird, said the proposed changes could have a dramatic effect on the CFTC’s future cases.

“It will provide the commission with additional tools to bring cases. Manipulation has been very difficult for the commission to prove in the past,” Mr. Architzel said.

He added that the new powers would “make it easier for the commission to bring cases and make them stick.”

Tuesday’s proposed rule making also reaffirms the agency’s existing antimanipulation powers as well. Those powers employ a four-part test for proving manipulation. Under that test, the commission must show that there was an artificial price and an intent by the defendants to cause an artificial price, among other things.

The public will now have 60 days to comment on the plan. A second vote is needed to implement it.

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