Corporate Governance

Fraud Has A New Watchdog

By Tamar Weinrib

As the New York Times reported on November 1, 2010, the SEC is not the only regulatory agency fighting fraud these days.  Following the enactment of Dodd-Frank, the Commodity Futures Trading Commission ("CFTC") received the formidable task of regulating derivatives like credit default swaps and the exchanges that will trade those contracts.  Section 753 of Dodd-Frank gives the CFTC the power to fight ?manipulative and deceptive? conduct in the commodities, futures and swaps markets similar to the power the SEC has with regard to securities fraud.  To that end- the CFTC proposed a new rule last week patterned after the SEC's Rule 10b-5, called Rule 180.1.  Similar to 10b-5, this rule provides that it is unlawful ?for any person, directly or indirectly, in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, to intentionally or recklessly use or employ, or attempt to use or employ, any device, scheme, or artifice to defraud.? Like 10b-5, this rule requires proof of scienter and materiality.  

Significantly, the new rule may assist private parties as well.  Just as private parties have brought suit in the securities realm based on 10b-5, private parties may now look to Rule 180.1.  One advantage that 180.1 has over 10b-5 is that under Section 25(a) of the Commodity Exchange Act, so called "secondary" actors can be sued for violations of the new Rule, whereas 10b-5 suits against secondary actors are inhibited by the Supreme Court's ruling in Central Bank. 

Derivatives that involve securities will still fall under the purview of the SEC but it looks like the fraud game has a new player in town. 

Full post as published by PomTalk on November 03, 2010 (boomark / email).