Recent CFTC Issuances: CFTC Issues Proposed Rules under the Dodd-Frank Act on the Prohibition of Market Manipulation and an Advance Notice of Proposed Rulemaking on the Prohibition of Disruptive Trading Practices

Sullivan & Cromwell LLP - November 9, 2010

On November 3, 2010, the Commodity Futures Trading Commission (the “CFTC”) issued two proposed rules relating to its expanded anti-manipulation authority to prohibit fraudulent and manipulative behavior in connection with its implementation of Title VII of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  In addition, on November 2, 2010, the CFTC published an advance notice of proposed rulemaking, pursuant to its authority to prohibit certain trading practices deemed disruptive of fair and equitable trading.
The two proposed rules relate to the CFTC’s expanded anti-manipulation authority under Section 753 of the Dodd-Frank Act to prohibit fraudulent and manipulative behavior.  The first proposed rule is essentially an anti-fraud rule that appears to be intended to clarify the CFTC’s general anti-fraud authority as well as its ability to bring enforcement actions against fraud-based market manipulation.

The second proposed rule, promulgated pursuant to the CFTC’s general rulemaking authority under Section 8(a)(5) of the Commodity Exchange Act (the “CEA”), is consistent with recent judicial precedent from the Court of Appeals for the Second Circuit holding that a market power manipulation charge can be sustained based solely on trading practices that exploit illiquidity in the markets, even in the absence of  fraud or cornering.

An advance notice of proposed rulemaking and request for comments was also issued in connection with the CFTC’s promulgation of rules to prohibit trading practices that are disruptive of fair and equitable trading, pursuant to Section 747 of the Dodd-Frank Act.