rins and the cftc: calls for oversight and …...what is the cftc? the federal regulator of...
TRANSCRIPT
RINs and the CFTC: Calls for Oversight and Enforcement of the
Renewable Fuel Standard
October 30, 2013
Presenters: Greg Kaufman Susan Lafferty David McCullough Stephen Tsai
Sutherland’s Energy Regulatory Trading Practice: 30 Years Experience
ENERGY COMMODITIES
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Regulatory Compliance
and Interpretation
Enforcement Advice and Response
Policy Advice and Experience
with Regulators
Commercial Agreements
and Litigation
Overview – Questions to Answer
What is the Renewable Fuel Standard (“RFS”)?
What is the Commodity Futures Trading Commission (“CFTC”) and Dodd-Frank?
What RFS activity is triggering this discussion?
Why would the CFTC want to exercise its authority?
Does the CFTC have authority over the RFS?
What is “market manipulation”?
How do I prepare my Company?
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What is the Renewable Fuel Standard?
Requires refiners, importers and component blenders of gasoline and diesel (“Obligated Parties”) to ensure that renewable fuel replaces petroleum-based transportation fuel, heating oil and jet fuel
Renewable fuel producers generate credits (“Renewable Identification Numbers” aka “RINs”)
RINs can be separated, then freely traded
RINs retired by Obligated Parties and renewable fuel exporters
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What is the CFTC?
The federal regulator of commodity futures, options and swaps
Also regulates certain physical commodities and foreign exchange currency
Gained enhanced powers and jurisdiction from the Dodd-Frank Act
Governed by a panel of five commissioners who are appointed by the President and confirmed by the Senate
Reauthorized by Congress and oversight conducted by Senate and House Ag Committees
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What Activity is Triggering this Discussion? – RIN Price Fluctuations
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Source: Eco-Energy
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What Activity is Triggering this Discussion? – Mandates
2013 Total Renewable Fuel – 16.55 (D6 + D3, D4, D5, D7 RINs) Advanced Biofuel – 2.75 (D5 + D3, D4, D5, D7 RINs) Cellulosic Biofuel – 0.006 (D3, D7 RINs)
Biomass-Based Diesel – 1.28 (D4 RINs)
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What Activity is Triggering this Discussion? – Mandates
2022 Total Renewable Fuel – 36.0 (D6 + D3, D4, D5, D7 RINs)
Total Advanced Biofuel – 21.0 (D5 + D3, D4, D5, D7 RINs)
Cellulosic Biofuel – 16.0 (D3, D7 RINs) Biomass-Based Diesel – At least 1.0 (D4 RINs)
What Activity is Triggering this Discussion? – RIN Fraud
Declared fraudulent generators: Clean Green Fuel
Absolute Fuels
Green Diesel
E-Biofuels?
These four entities generated 140 to 190 million invalid RINs
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What Activity is Triggering this Discussion? – Share of Retirement Obligation
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Source: Eco-Energy
Who is Calling for the CFTC to Regulate RIN Markets?
March 27, Sen. Grassley (R-IA) alleges market manipulation is the cause of increases in RIN prices and derivative market regulators, such as the CFTC, investigate
July 25, CFTC Agricultural Advisory Committee holds a meeting on RIN prices
September 14, The New York Times publishes article alleging that Wall Street is “exploiting” the RIN trading markets
September 24, Sen. Stabenow (D-MI) sends letter to CFTC requesting investigation of RIN volatility
October 22, Letter to CFTC from 13 House Democrats and Republicans
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Does the CFTC Have Authority to Regulate the RIN Markets?
RIN future contracts launched this spring: _
_
Impact on ethanol, gasoline, corn prices, soy
Futures markets for ethanol, gasoline, corn, soy
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What is the CFTC’s Market Manipulation Authority?
The Dodd-Frank Act: CFTC Anti-Manipulation and Anti-Fraud Authority
Market manipulation: generally
New broad standard – Unlawful for any person, directly or indirectly, to intentionally or recklessly engage or attempt to engage in any of the following activities:
• A manipulative device, scheme or artifice to defraud;
• Make untrue or misleading statements or omissions of a material fact;
• An act, practice or course of business, which operates or would operate as a fraud or deceit upon any person; or
• A false, misleading or inaccurate report concerning market information that affects or tends to affect the price of a commodity (subject to good faith exception for price reporting services)
Specific intent not required - reckless actions or inactions can lead to a violation
The CFTC does not have to prove an artificial price to establish market manipulation
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CFTC Anti-Manipulation Authority: CEA Section 9(a)(2)
Elements of manipulation claim under CEA Section 9(a)(2) The defendant had ability to influence market price The defendant intended to manipulate market price
• “Intent is the essence of manipulation”
An “artificial price” existed in the market • The price does not reflect legitimate forces of supply and demand
The defendant caused an artificial price in the market
Elements of an attempted manipulation claim under CEA Section 9(a)(2) The defendant intended to create artificial price
The defendant performed some overt act in furtherance of that intent
The CFTC need not prove artificial price or causation to establish attempted manipulation
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CFTC Penalties
CFTC may seek a range of civil penalties including: The greater of $140,000 per violation or triple the monetary gain to the
person for each violation
In the case of manipulation (or attempted), a civil penalty of $1 million or triple the monetary gain to the person for each violation
Disgorgement
Trading suspensions or trading bans
The CEA authorizes criminal punishments including fines up to $1 million or imprisonment for not more than 10 years for market manipulation
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Special Calls and Investigations by the CFTC
Special Calls
The CFTC may issue special calls to a reporting firm or a trader to investigate a threat of market manipulation or other market disorders
Designed to provide the CFTC with additional information about traders and/or a participant’s trading and delivery activity, including information on persons who control or have a financial interest in the account
Special calls may also request information about positions and transactions in the underlying commodity
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Regulatory Investigations
The CFTC has stepped up investigations into alleged fraud and manipulation in financial and commodity markets
The CFTC will issue document requests and/or subpoenas to entities suspected of conducting manipulative activity
The CFTC will issue subpoenas for testimony under oath to individuals having knowledge of the activity
The CFTC will look for why an entity was engaged in a given activity CFTC Enforcement personnel will likely request tapes, IMs and email
from people inside and outside the entity utilizing document requests and subpoenas
Market positions and trading activity, along with communications can be used as evidence to support a showing of intent
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How Do I Prepare My Company?
Best Practices to Prepare Your Company
Assess current internal controls to determine whether additional oversight is needed in the RIN trading and price reporting space
If the Company reports prices to a price reporting agency, specific standards as to how that function should be undertaken must be known and understood by the reporting individuals
Effective oversight and monitoring by compliance and legal of all processes involving price reporting and trading
Assessments should be performed by internal legal or outside counsel to preserve the attorney-client privilege
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Questions?
Gregory Kaufman, Partner [email protected]
(202) 383-0325
Susan Lafferty, Counsel [email protected]
(202) 383-0168
David McCullough, Associate [email protected]
(202) 383-0853
Stephen Tsai, Associate [email protected]
(202) 383-0897
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CIRCULAR 230 DISCLOSURE: Any advice provided in this outline concerning a federal or state tax issue is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on a taxpayer.
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