On, January 16, the CFTC ordered Summit Energy Services, Inc. (“Summit Energy”) to pay a $140,000 civil penalty to resolve allegations that it violated the Commodity Exchange Act (“CEA”) by failing to register as a commodity trading adviser (“CTA”) with the CFTC.

You can find a detailed analysis in our client alert on the order, CFTC Penalizes Energy Company for Failing to Register as a CTA. The CFTC order is available here and a CFTC press release about the order is available here.

Summit Energy advised clients with respect to physical natural gas and electricity transactions. However, it also advised clients entering into over the counter natural gas swaps and listed futures as part of a “risk management” program. Moreover, Summit Energy included descriptions of its “risk management services” on its website, which the CFTC considered to be holding itself out publicly as a CTA.

The order included a $140,000 fine, and the Company registered as a CTA in September of 2014.

Generally, CTAs are required to register as such unless an exemption to registration applies. The CEA and the related CFTC Rules define a CTA very broadly to mean:

“any person who, for compensation or profit, engages in the business of advising others, either directly or through publications, writings or electronic media, as to the value of or the advisability of trading in any [futures, security futures, swaps, retail forex transactions, commodity options, and leveraged metal contracts.]”

The definition of a CTA excludes certain persons and CFTC Rules exempt certain CTAs from registration as such. However, many of those exclusions and exemptions require the commodities trading advice to be solely incidental to the conduct of the person’s business (note that these exclusions and exemptions may have limited application under prior CFTC staff letters and guidance). Other exemptions require that the CTA falls under another regulatory category with the CFTC (e.g., a commodity pool operator or an introducing broker) or only apply if the person does not hold itself out to the public as a CTA. See CFTC Rule 4.14.

This order serves as a reminder that companies offering “risk management” services with respect to commodities (including energy products) that provide advice on swaps or futures should review their CFTC registration obligations. Moreover, current NFA members interacting with customers or counterparties offering such “risk management” services may want to confirm their NFA Bylaw 1101 obligations. The Swap Report