Enforcement Round-Up
While there was some—albeit limited—Enforcement activity in May (click here for last month’s enforcement actions), in this month’s Round-Up we want to highlight some updates that suggest the Enforcement front may continue to be quieter in the coming months.
First, within two days of each other, Commissioners Summer Mersinger (Republican) and Christy Goldsmith Romero (Democrat) both publicly announced that they were stepping down and leaving the Commission at the end of May. In addition, Commissioner Kristin Johnson (Democrat) also announced that she will be departing “later this year” and Acting Chair Pham previously stated that once Brian Quintenz is confirmed as the permanent CFTC Chair she too will be departing the Commission. (As of press time for The Desk, Brian Quintenz’s Senate hearing and confirmation process has yet to be scheduled, and with the summer recess looming and the Senate having their hands full with “One Big Beautiful Bill”, your guess is as good as ours.) This means that for now there are only two Commissioners. Should Commissioner Johnson and Acting Chair Pham disagree, then the CFTC will lack the requisite “majority” to resolve a potential enforcement action, among other things. Of particular relevance, Commissioner Johnson previously stated that she is “unable to support” the Division of Enforcement’s “Advisory on Self-Reporting, Cooperation and Remediation” that Acting Chair Pham has championed.
Second, on May 13, 2025, the Special Master assigned to CFTC v. Traders Global Group Inc., et al., No. 23-11808 (D.N.J.) issued its Report and Recommendation regarding the defendant’s motion for sanctions following an evidentiary hearing on that motion. The Special Master found that “[i]n multiple instances, with full knowledge of the error in a sworn Declaration submitted to the Court [in support of the CFTC’s motion for preliminary injunction], rather than be upfront, direct and transparent, the CFTC took deliberate steps down a path of obfuscation and avoidance.” As such, the Special Master concluded that the CFTC’s conduct was “willful and undertaken in bad faith” such that it recommended that the defendants’ motion for sanctions be granted and the CFTC’s complaint dismissed with prejudice, among other relief. That same day, the presiding District Court Judge entered an Order adopting the Special Master’s Report and Recommendation. In her public statement addressing the sanctions, Acting Chair Pham stated: “these types of failures are rarely an isolated incident and point to a broader breakdown in the culture of the Division of Enforcement. This case clearly shows that the Division has for far too long maintained a culture that the CFTC is above the law and that breaking the rules is justified because the CFTC is a government agency.” It remains to be seen whether and how this dismissal may impact the Division’s approach moving forward under Director Young, although in her statement, Acting Chair Pham highlighted the steps already taken in “fixing these issues” since she became Acting Chair, such as the self-reporting and cooperation guidance.
Third, the Division Staff, like many other government agencies, are operating notably leaner these days, which will likely impact case volume for the foreseeable future. In addition, to any voluntary Staff resignations that may have occurred through the “Fork in the Road” initiative, or otherwise, the CFTC announced that “[p]ursuant to the President’s executive orders on lawful governance and accountability, the CFTC has placed staff on administrative leave for potential violations of laws, government ethics requirements and professional rules of conduct.” It is unclear whether and to what extent such action may also be directly related to the sanctions in the Traders Global case noted above.
Tiffany Payne | Email
Carbon Contracts: Big update this week…maybe next week?
On April 8, 2025, President Trump issued an Executive Order requiring U.S. Attorney General Pam Bondi, in consultation with the heads of appropriate executive departments and agencies, to within sixty days identify all state and local laws purporting to address climate change or environmental, social, and governance initiatives including carbon or “greenhouse gas emissions and funds to collect carbon penalties or carbon taxes. Sixty days from April 8th is June 7th…which is this Saturday. So maybe U.S. AG Bondi will deliver her report by Friday this week, maybe next Monday?
The Executive Order directs U.S. AG Bondi to:
- expeditiously take all appropriate action to stop the enforcement of State laws and continuation of civil actions [regarding these contracts] that the Attorney General determines to be illegal; and
- recommend any additional Presidential or legislative action necessary to stop the enforcement of State laws identified [in her report] that the Attorney General determines to be illegal or otherwise fulfill the purpose of this Order.
Market participants should be identifying their exposure to these contracts and have a plan in place should an event occur that causes the temporary or permanent disruption of these contracts. We will be closely following any developments including any potential challenges that may eventually arise from the States, courts, or other venues, depending on the actions coming out of US AG Bondi’s report.
Barrett Morris | Email
Acting Chair Pham’s First 100 Days
During this year’s ISDA AGM, CFTC Acting Chair Caroline Pham delivered the keynote detailing the new administration’s first 100 days under her leadership. Acting Chair Pham highlighted the cost savings and operational efficiencies achieved under her leadership. She detailed all of the new interpretive letters, requests for comment, and advisories issued. In addition, Acting Chair Pham stated that the CFTC’s Market Participants Division will soon be releasing an “FAQ to remind the public of the significant regulatory obligations associated with registering and operating an FCM.”
Acting Chair Pham in her keynote also shared that the CFTC’s Division of Enforcement dispositioned an impressive 50% of its open enforcement matters (which was apparently hundreds of investigations/cases), at nearly all stages of CFTC inquiry and litigation. According to Acting Chair Pham, dozens of the matters had been open for over 10 to 15 years.
Barrett Morris | Email
CFTC Staff Interpretation Regarding Cross-Border Definitions
The CFTC’s Market Participants Division and Division of Market Oversight issued an interpretation on its cross-border rules in response to a Request for Interpretation from SCB Limited (a digital assets proprietary trading company based and licensed in the Bahamas, “SCB”) regarding whether SCB’s current and proposed activities would trigger a nexus to the U.S., such that SCB would be a “U.S. person” with regard to its futures and swaps activities.
SCB’s Current Activity
SCB’s main office and headquarters (it’s “nerve center”) is located in the Bahamas, along with its C-Suite. SCB also operates out of other non-U.S. offices, but does not operate out of any offices in the U.S. SCB is, however, indirectly owned by a “small number of closely associated” people who are residents in the U.S. These closely associated people own another proprietary trading firm in the U.S. that contracts with SCB to provide SCB with legal, compliance and administrative services, but neither firm provides the other with trading services or has access to the other firm’s trading algorithms.
Based on these facts, the CFTC reasoned that SCB’s current activities do not trigger a U.S. nexus and as such, SCB:
- With regard to its futures activities:
- is not a “person located in the United States” for purposes of the “foreign futures or foreign options customer” definition in CFTC regulation 30.1(c);
- is not a “participant located in the United States” for purposes of CFTC Regulation 48.2(c); and
- is not a “foreign located person” for purposes of CFTC regulation 3.10(c)(1)(ii).
- With regard to its swaps (virtual currency options and perpetual contracts) activities:
- would not count such swaps towards the SD de minimis threshold; and
- would not be subject to the reporting requirements in Part 43 and Part45.
Additionally, because SCB is not a “U.S. person”:
- any non-U.S. exchanges that provide direct access to SCB regarding futures contracts would not, based solely on the provision of direct access to SCB, be required to register with the CFTC as FBOTs; and
- any non-U.S. brokers through which SCB engages in futures contracts would, solely with respect to the provision of such services to SCB be exempt from registration as an FCM.
- any non-U.S. exchange on which SCB trades swaps would not, solely on the basis of such trading by SCB, be subject to registration as a SEF; and
- any non-U.S. exchanges and brokers through which SCB trades swaps would not, solely on the basis of the provision of such services to SCB be subject to registration as a an FCM.
SCB’s Proposed Activity
SCB proposes in its Request for Interpretation to expand its activities in the U.S. through the engagement of U.S.-based traders, quantitative researchers and software developers employed by the SCB affiliate, the licensing of certain trading technology from the related firm owned by its U.S. investors, and the hosting of trading technology on U.S.-located servers. The CFTC opined that none of these proposed activities would impact SCB’s status as a non-U.S. person, and SCB’s place of organization and principal place of business are the key factors in determining its cross-border status.
The CFTC’s analysis in reaching this conclusion is in the first half of its letter. With regard to futures activities, the CFTC notes that relevant regulations refer to an entity or person being either “located in the United States” or “located outside the United States” and that the CFTC has equated location with domicile. Domicile, according to the CFTC’s letter, is “ascertained by looking to an entity’s place of formation, as well as its principal place of business.” The CFTC also looked to the SEC and federal case law to understand “principal place of business” as “the location from which the officers, partners, or managers of the legal person primarily direct, control, and coordinate the activities of the legal person.”
With regard to swaps activities, the analysis is slightly different. Section 2(i) of the Commodity Exchange Act grants the CFTC’s extraterritorial jurisdiction over swaps activity when “those activities…have a direct and significant connection with activities in, or effect on, commerce of the United States…” The CFTC then released guidance in 2013 that provided a “U.S. Person” was “any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing…in each case that is organized or incorporated under the laws of a state or other jurisdiction in the United States or having its principal place of business in the United States.”
In 2020 the CFTC adopted regulation 17 CFR 23.23, which superseded the 2013 guidance and defined “U.S. Person” as an entity “organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States.” Regulation 23.23 also defined “principal place of business” as “the location from which the officers, partners, or managers of the legal person primarily direct, control, and coordinate the activities of the legal person.” Therefore, because SCB is organized and registered in the Bahamas and run by its most senior officers outside the U.S., the CFTC found that SCB is not a U.S. person and its proposed activities do not alter that structure or analysis.
