After a fair amount of back-channel arm-twisting, the two agencies with principal (and sometimes overlapping) jurisdiction over energy commodities have reached agreement on two memoranda of understanding (“MOUs”) required by the Dodd-Frank Act. On January 2, 2014, the Federal Energy Regulatory Commission (“FERC”) and the Commodity Futures Trading Commission (“CFTC” and, with FERC, the “Participating Agencies”) entered into two MOUs addressing (i) procedures for resolving overlapping jurisdictional issues (“Jurisdictional MOU”); and (ii) the sharing of information (“Information Sharing MOU”). These MOUs are over three years in the making and roughly three years past the deadline set by Congress.
The MOUs were finally executed not long after former Chairman Wellinghoff left FERC and at the very end of CFTC Chairman Gensler’s term. The MOUs put an amicable face on the historically troubled relationship between the two agencies. Those troubles were on full display in then-Chairman Wellinghoff’s August 26, 2013 letter to Senators Markey and Warren, and in his August 29, 2013 letter responding to an April 29, 2013 letter from Senators Feinstein, Murkowski and Wyden. In the April 29 letter, the senators emphasized the importance of the agencies agreeing to new MOUs “as soon as possible,” because the MOUs “are necessary to ensure that the agencies will work together to pursue manipulation, will share and integrate all data for natural gas and electricity trading, and will cooperate in order to protect American consumers.”
Speaking to the need for increased information sharing between the CFTC and FERC, then-Chairman Wellinghoff stated that “access to additional data from the CFTC would further enhance [FERC]’s ability to protect consumers against market manipulation.” Wellinghoff specifically referenced FERC’s interest in accessing the Large Trader Report provided by the Intercontinental Exchange to the CFTC. In his August 29 letter, Wellinghoff reiterated the importance of FERC gaining access to data in the CFTC’s possession (including the Large Trader Report), because it “would allow FERC staff to identify market participants with an incentive in the financial markets to manipulate the physical markets by trading at physical hubs and nodes [and] would improve the efficiency and precision of FERC staff’s surveillance screens.”
Also in his August 29 letter, Wellinghoff stated that one complication in reaching agreement on the jurisdictional MOU had been “a disagreement over whether FERC has the authority to protect consumers from price impacts in the physical energy markets resulting from manipulation occurring in the financial markets.” Wellinghoff also said that the U.S. Court of Appeals’ March 2013 decision in Hunter v. FERC, which ruled that the CFTC has exclusive jurisdiction over futures trading, “depriv[ed] FERC of authority to bring an action based on manipulation in the futures market even though the activity affected prices in the physical natural gas and electricity markets.” He also said that the Hunter decision “has been interpreted broadly by some market participants to support arguments that FERC does not have the authority to bring manipulation cases for conduct that is squarely within FERC’s jurisdictional markets.”
Importantly, Wellinghoff pressed for a “legislative fix” that would “assist both agencies in clearing the remaining hurdles to executing the jurisdictional MOU” and “ensure that FERC has the full authority” to root out energy and natural gas manipulation. At the time, it appeared that the senators and FERC commissioners Moeller and Clark also supported a legislative effort to confirm the jurisdictional scope of each agency. Indeed, in response to Wellinghoff’s letter, Senator Wyden issued a statement recognizing that “[w]hile FERC has already taken major enforcement actions against traders and companies that manipulated energy prices, it appears that their federal counterparts at the CFTC have been working to undermine FERC’s efforts.” The MOUs likely were an effort to head off a difficult legislative fight where both agencies could lose, and to address growing concerns that the new MOUs were very late in coming.
Now, under the leadership of Acting FERC Chairman LaFleur – it appears that FERC will get information from the CFTC. This marks a significant step forward for FERC’s market monitoring efforts. Before the 2014 MOUs, FERC and the CFTC had been operating under a 2005 MOU (negotiated when Cadwalader partner Gregory Mocek was CFTC Enforcement Director). Regarding the new MOUs, Mocek said, “having a productive, working relationship between the CFTC and FERC makes sense and is important for effective enforcement of the anti-manipulation laws that each agency administers.”
While portending an era of increased cooperation between FERC and the CFTC, however, the MOUs raise significant concerns about the confidentiality of information disclosed by market participants, market administrators and exchanges in the context of FERC and CFTC investigations.
The Jurisdictional MOU
The Jurisdictional MOU establishes procedures under which one Participating Agency (“Notifying Agency”) will inform the other (“Notified Agency”) of a matter that may fall within their overlapping jurisdiction. Where a matter of mutual interest arises, the two agencies will take measures to develop a coordinated approach that respects each agency’s regulatory concerns. Such measures may include information sharing and/or the issuance of public orders addressing the overlapping matter. Further, the Jurisdictional MOU defines specific, time-sensitive actions that the agencies will take to resolve jurisdictional disputes, including elevating disputed matters to the Commissioners of each agency.
Each agency is required to notify the other agency, triggered by either (1) receipt of a request from a regulated or potentially regulated entity for authorization or an exemption permitting activity (e.g., RTO/ISO request for an exemption from CFTC regulation), or (2) the decision of the Notifying Agency sua sponte to consider an authorization or exemption, in each case that arguably may fall within the overlapping jurisdiction of the other agency. Importantly, provision of notification is not an acknowledgement that the Notified Agency has jurisdiction.
With shared information treated confidentiality to the extent permitted by applicable laws, the Notified Agency will “promptly” notify the Notifying Agency if it: (1) has no interest in the matter; (2) is interested and wants to invoke the procedures for resolving overlapping jurisdiction; or (3) wants to wait until an entity applies for authorization or an exemption (this option triggers a notification obligation on the part of the Notifying Agency). Importantly, the Jurisdictional MOU does not seem to address squarely issues of overlapping jurisdiction over enforcement matters, but rather is apparently limited to issues of an entity receiving or requesting authorization or exemption or an agency review sua sponte of such authorization or exemption.
The MOU contains informal procedures – e.g., meetings and discussions between the two agencies’ staffs – for resolving overlapping jurisdiction issues. At most, they memorialize a process that the agencies have used in the past and likely would use in the future even without an MOU. On matters of mutual interest, the agencies agree to issue “such public orders as are necessary” to address overlapping jurisdiction issues. The content of the orders would be governed by each agency’s existing statutory authority. The MOU contains a series of escalating dispute resolution procedures and a non-binding timeline for resolving disputes. On a practical level, we expect that Staff and the Director-level contacts will not have the authority to resolve jurisdictional disputes. At best, their efforts may narrow the scope of any jurisdictional dispute. Disputes will be resolved, if at all, at the Commission level. The miscellaneous provisions make clear that the MOU only creates non-binding aspirational procedures for resolving jurisdictional disputes.
The MOU is, by its terms, “strictly for internal management purposes” and does not create, expand, limit or otherwise alter any existing legal obligations of the agencies under their governing statutes or regulations.
The Information Sharing MOU
Under the Information Sharing MOU, FERC is required to ask the CFTC for information from any entity subject to regulation by the CFTC (e.g., a designated contract market, a registered swap execution facility or derivatives clearing organization, or swap data repository), as well as for market participant information in the CFTC’s possession. This provision means that FERC must go to the CFTC – and not directly to exchanges or swap execution facilities – to obtain information about market participants’ financial trades, such as futures contracts and swaps, which may be related to trades under investigation in the physical markets that FERC regulates. The Information Sharing MOU includes similar provisions governing requests from the CFTC to FERC for information from entities subject to regulation by FERC (e.g., ISOs/RTOs, NERC, interstate pipelines and storage facilities) and for market participant information in FERC’s possession. The MOU requires the agencies to “promptly” obtain and furnish responsive requested information.
Under the Information Sharing MOU, the CFTC and FERC must to take all actions reasonably necessary to preserve, protect and maintain all privileges and claims of confidentiality related to information shared under the MOU, all of which is presumed non-public. They must keep confidential and non-public all information furnished pursuant to the MOU and may not disclose any such information except in accordance with Section 8 of the Commodity Exchange Act (in the case of information furnished to FERC by the CFTC) or undefined “restrictions applicable to FERC or otherwise applicable to the CFTC” (in the case of information furnished to the CFTC by FERC). The MOU states that when the CFTC and FERC share information that is privileged under state or Federal law (e.g., work-product, attorney-client, deliberative process or governmental privilege), such information is presumed to be in furtherance of the common interest matter and does not effectuate a waiver of any applicable privilege. It will be interesting to see if material subject to one agency’s deliberative process privilege but disclosed to another agency will maintain its privilege.
The Information Sharing MOU captures the agencies’ agreement to take steps to avoid duplicative information requests and to coordinate oversight, investigative and enforcement activities related to matters of mutual interest. Nevertheless, the MOU does not purport to limit the rights of either agency to obtain information directly from entities under their respective jurisdiction and does not impose any new legally binding obligations upon the agencies except with regard to the confidential treatment of information shared under the MOU.
Paul Pantano, head of Cadwalader’s Energy and Commodities group noted that “the MOUs provide market participants with notice that their trading activity is being monitored by both agencies and that any confidential information that they produce in either a CFTC or FERC investigation is highly likely to be shared between the agencies.”
This memorandum has been prepared by Cadwalader, Wickersham & Taft LLP for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact a member of the Firm or legal counsel licensed in their state. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Cadwalader, Wickersham & Taft LLP without first communicating directly with a member of the Firm about establishing an attorney-client relationship.
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