On June 29, 2020, the US Supreme Court denied certiorari in the long-running Commodity Futures Trading Commission ('CFTC') action against Monex Credit Company.1 This denial will eventually return the case to district court for further proceedings, potentially including a trial on the merits. It also leaves in place, at least for the time being, the Ninth Circuit's interpretations of the definition of 'actual delivery' in the context of retail commodity transactions and the agency's antifraud authority.
This Legal Update discusses the background of the Monex case and explains the significance of the Supreme Court's denial of certiorari and the Ninth Circuit's interpretations.
Background
The Dodd-Frank Act amended the Commodity Exchange Act ('CEA') to expressly grant the CFTC authority over retail commodity transactions and additional authority to prohibit fraud and manipulation.2
Retail Commodity Transactions
A retail commodity transaction is any transaction for a commodity that is (i) with a person who is not an eligible contract participant or eligible commercial entity and (ii) entered into, or offered (even if not entered into), on a leveraged or margined basis or financed by the offeror.3
The effect of the amendments to the CEA was that, absent an exception, a retail commodity transaction may only be offered on or pursuant to the rules of a designated contract market (that is, a regulated futures exchange). Further, any entity soliciting or accepting orders for retail commodity transactions and accepting money, securities or property (or extending credit in lieu of) to margin, guarantee or secure such transactions must be registered with the CFTC as a futures commission merchant. This effectively precludes non-registrants from offering off-exchange, leveraged retail commodity transactions.
However, the Dodd-Frank Act amendments excluded from the definition of a retail commodity transaction any contract of sale that 'results in actual delivery within 28 days or such other longer period' as the CFTC may determine.4 This means that a person is not subject to the on-exchange or registration requirements if they make such actual delivery of the commodity to the retail counterparty within 28 days.
In 2013, the CFTC issued an interpretation of the meaning of 'actual delivery' that discussed the factors the commission would consider in determining whether actual delivery had occurred and provided five examples of situations in which actual delivery would or would not have occurred.5
One of the examples stated that actual delivery would occur within 28 days if the seller physically delivers the entire quantity of the commodity purchased by the buyer, including any portion of the purchase made using leverage, margin or financing, to a third-party depository6 and transfers title to that quantity of the commodity to the buyer. While the example contemplates that the customer would have title to the commodity and the seller would lack an agency relationship with the depository through which the seller could exercise control, the example does not explicitly address the degree of control the customer must have over the commodity.7
Shortly after the issuance of the 2013 guidance, the Eleventh Circuit interpreted the phrase 'actual delivery' in granting injunctive relief in a CFTC action.8 In the decision, the Eleventh Circuit stated that actual delivery 'denotes a transfer of possession and control,' which elevated the concept of control as an explicit and significant factor in the analysis.9
Antifraud Authority
The Dodd-Frank Act also amended the CEA to expand the CFTC's authority to prohibit fraudulent and manipulative behavior. In particular, the Dodd-Frank Act amendments imported language from Section 10(b) of the Securities Exchange Act of 1934 into the CEA to prohibit 'any manipulative or deceptive device or contrivance' in connection with a swap, futures contract or forward contract.10 The CFTC implemented3 that authority in 2011 through...
