RegFi Episode 79: Inside the CFTC: Priorities, Leadership and What Comes Next
28 min listen
In this episode, Jerry Buckley and Sasha Leonhardt sit down with Orrick partner Dan Ullman, former Associate Director and Chief Trial Attorney at the CFTC, for an insider’s look at what’s shaping the agency’s agenda. Dan discusses how the Commission is approaching digital asset innovation, the evolving interplay between SEC and CFTC authority, ongoing litigation around sports-related prediction markets, and what a more centralized federal regulatory model could mean for market participants.
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Jerry Buckley:
Hello, this is Jerry Buckley, and I am here with RegFi co-host Sasha Leonhardt. We are joined today by our partner, Dan Ullman, to talk about the agenda for the Commodity Futures Trading Commission. Dan recently joined us at Orrick after a distinguished career at the CFTC, where he served as Associate Director and, for over a decade, as the Chief Trial Attorney.
Dan, there’s so much to talk about that we asked you to join us for two RegFi episodes. In this episode, we will give our listeners an insider’s view of what is happening at the CFTC, focusing on the agency’s activities and priorities. Then, in the following episode, we will dive right into what is happening on the CLARITY Act and the role and vision for the CFTC under that proposed legislation. So, stay tuned, listeners.
Dan, let’s start with the basics. Could you give our listeners a short history of the CFTC, talking about why it was formed and how it operates? And in that context, could you talk about the division of responsibilities between the CFTC and the SEC? Also, since you served as Chief Trial Attorney, could you share what is involved in that role? So, there’s a question that may take you a little bit to answer, but, please, feel free.Dan Ullman: Thanks, Jerry, for the great introduction. Happy to be here. I’ve always been told I have a face for podcasts so happy to join everyone online.
Sure, yeah, the CFTC actually started as the Department of Agriculture in 1936 and in 1974 became an independent federal agency with five appointed commissioners. Now, what’s interesting, the CFTC was originally started to protect farmers, to help farmers to be able to hedge potential changes in agricultural prices and also to ensure, kind of, the efficient markets of commodity trading and all related derivatives.
And you can tell this even from the CFTC’s logo, which has a plow in it and also has an eight-sided pit, which is how commodity features are traded on the CME. And this tension exists to this day.Jerry: CME being Chicago Mercantile Exchange. Dan: Yeah, of course. The largest – and I’m going to delve into it. You can’t help but work at the CFTC without having an exclusive dictionary of acronyms. So, thank you, Jerry, yes, I’ll make sure I continue to give you the full names.
You know, the CFTC, again, started to help agriculture and efficient trading, whereas the SEC, as we all know, started in the wake of the Great Depression in the 1930s to stop some unfair and duplicitous trading practices that were occurring with securities.
And security is just simply an ownership in a company. And so, both the SEC and the CFTC started on very divergent paths. One was New York-centric. One was-Chicago centric, where the Chicago Mercantile Exchange was founded and where agriculture trading traditionally in the United States has been centered.
And they have become, as the years go by, progressively more intertwined because the CFTC was sort of, in the words of Heath Tarbert, the most important federal agency you’ve never heard of. That’s only occurred since Dodd-Frank.Jerry: By the way, Heath is a great friend and a wonderful guy and is now the president of Circle. Dan: Great guy, my former boss or a chairman of the commission. And that phrase is used all the time and Heath is never given proper credit for it. It’s actually his phrase. People steal it all the time. And of course, I don’t want to get in any IP trouble on this podcast, so, I want to make complete authorship of that.
But the CFTC was sort of a sleepy agency until Dodd-Frank passed and the CFTC suddenly became a banking regulator, where it was regulating swaps in all type of financial derivatives, not just agriculture derivatives. And that change has been happening slowly since the ’80s. But all of a sudden, the CFTC was a major banking regulator.
And, again, thanks for envisioning the long answer, so I apologize for the monolog. But what’s happened now is that as products have gotten more sophisticated with digital currency, there is sort of overlapping authority on digital currency based on the original jurisdictional ambit of both agencies.Sasha Leonhardt: Dan, thanks for that overview and welcome to RegFi and to Orrick. We’re absolutely thrilled you decided to join us. Within our team, we brought on a number of lawyers over the past several years who have come over from a government practice like you have. And I’m wondering, as you go around and meet people in your new role as a private practitioner, what is the one question you are asked most often? Dan: Great question, and I’ve been surprised by this. The question I get most often is, what’s going on at the CFTC? And that’s been surprising because the CFTC usually isn’t top of mind for people, but the last year or so has been anomalous in the CFTC’s history. First, this is, I believe, the longest period that we’ve had an acting chairman at the CFTC, and it’s almost a year now since there has been no confirmed leadership of the commission.
And the second thing that’s going on that market participants want to know about is that we’ve only for the last six months had one commissioner. Remember, there’s supposed to be five and two are supposed to come from the party not holding the White House and three from the party who is holding the White House. So, for the last year, the CFTC has been run essentially by one person. And that raises a lot of questions for people in the marketplace about what’s happening, who’s in charge, and where is the CFTC going?
Now, that’s going to change. Last week, the president’s second nominee now to be the chairman of the CFTC, Michael Selig, had his hearing at the Agriculture Committee and was voted out of committee by one vote last week and insiders think that he’ll be confirmed after the Thanksgiving recess, I think. So, there’s going to be new leadership.
And in an independent commission, this means that probably there’ll be new directors of each division at the CFTC who are powerful and get to decide major policy reasons.
So, right now, the CFTC is in this kind of gray area in terms of policy and what’s going forward, which is going to be changed very soon.Sasha: That’s great, Dan. And I’ll note for those listening to this in the future, we’re recording this just before Thanksgiving. So, we’ll see how that shakes out in the coming weeks.
To kind of go back to something you said and take a little bit of a longer view of the CFTC, can you tell us a little bit more just about the status of the acting chair, the future of agency leadership going forward, perhaps beyond that next confirmation hurdle and looking ahead, you know, however far you feel like looking into your Washington-based crystal ball?Dan: Yeah, so, great question. The first question is, are there going to be other nominees? Okay. Does the commission then go forward with just a chairman, assuming Selig is confirmed.
And you can tell that the Senate is concerned about this because in the latest version of the CLARITY Act—here’s the pitch for part two of the Dan podcast or Orrick podcast—the CLARITY Act, there are several pointed references to the CFTC being fully appointed with commissioners and very concerned about the staffing levels of the CFTC, which have diminished considerably under the Trump administration through attrition or sometimes reductions in force.Jerry: Or people joining Orrick. Dan: Yeah, well, people joining Orrick, right, of course, being the most important consequence. Jerry: Yes. Dan: That's happened. Jerry: Serious brain drain, yeah. Dan: Thank you, thank you. Yeah, so, this is, again, strange. Usually an administration, this is an opportunity to have five people at the commission, okay? And usually it happens relatively quickly. We used to think that if it didn’t happen by April, okay, after a new administration, regardless of the change of party or not, that was strange. I mean, now we’re moving into, it’s close to December and we don’t even have a chairman yet.
So, that’s the major issue. And there are many outstanding issues. I mean, the markets continue to operate, private companies continue to make decisions, people are trying to conform with a fluid regulatory environment. And we’re still waiting for the commission to be staffed at basic levels, you know, so that’s the number one issue. The second issue is, what’s Michael Selig going to be like at the commission?
Is he going to be an activist chairman? Is he going to reverse some of the decisions made by Acting Chairman Pham? Those questions remain unanswered at this point.Jerry: Dan, you know, one of the reasons we asked you to divide your appearances between two episodes is that the CFTC has a full plate, even putting aside the issues associated with the CLARITY Act. So, I’m going to ask you a very open-ended question, and we can get into a little discussion about this, but could you give us some sense of the issues the CFTC is now wrestling with? What are the agency’s priorities? Dan: Great question. The first way to think about this: The financial regulatory structure of the government under the Trump administration is pro-innovation. That is a critical thing. Now, the CFTC has always been, I think, correctly viewed as being industry-friendly or at least industry-understanding in a way that the SEC under Gary Gensler in the last administration is squarely thought of not being that way, especially about digital currency.
So, the CFTC has joined in its public statements with the SEC saying, “Listen, we are pro-innovation. We want digital currency to take off. We want the United States to be the center of digital currency.” And that thematically is how you should think about the regulatory structure of the United States government in this administration.
Going to digital currency, the CFTC had never took the same hard line that the SEC did about cryptocurrency. There are many reasons for – one of them is the CFTC is used to dealing with sort of complicated derivatives products and its definition pro-innovation in a way that the SEC may not be.
But as the CLARITY Act, and we’ll talk about this in the second act, as the CLARITY Act winds its way through Congress, the CFTC is positioned to take jurisdiction over virtually all digital currencies.
And what’s going to happen under the CLARITY Act, at least on its current version, is that the CFTC’s complicated and wide-ranging regulatory structure for market intermediaries, basically anyone who touches derivatives money or trading, is going to be imposed upon market intermediaries for digital currency, okay.
In a very similar way that the swaps industry had to go under after Dodd-Frank, all of a sudden had five or six different categories of market intermediaries. So, that is going to happen. This Commodity Exchange Act is going to be extended upon virtually all people that are entities dealing with digital currency. So, that’s the second issue, but we’ll hit that more next time.
The third issue has to do with, is the CFTC and the SEC going to be harmonized? Are they going to work together in a more lockstep way? And that’s an open issue.Jerry: You know, interestingly, when you raise that, probably one of the first people nominated by the Trump administration was Paul Atkins, who is a longtime Washington player, was on the SEC before, comes back now as chairman.
I remember going to his holiday party last year and everybody in Washington was there. He is an important thought leader, and he has been pro-crypto, and he has a crypto task force at the SEC. And interestingly, and this – I’d like you to sort through this, obviously the jurisdiction over the SEC is in the Senate Banking Committee, which generally has all the financial services.
And then, as you described, there is the Agriculture Committee with its own historic jurisdiction in the commodities trading area, which has led to its current role and the feeling that it is more sympathetic to the blockchain world. But Paul has also been sympathetic to the blockchain world.
It would be fascinating to see—I know we’ll come back to the CLARITY Act legislation in the next episode—but it’s fascinating to see how do these competing or different committees and the agencies that are under their jurisdiction actually coordinate their activities.
What are the conversations that go on between the two agencies, or are there any conversations going on?Dan: Yeah, well, no, great question. I mean, there is always talk in every administration. You can always guarantee that someone’s going to suggest CFTC and the SEC should be merged, okay? There was a recent editorial. It is an evergreen thing. It seems to make sense on paper but—and Jerry, as you well know from your experience in the Senate—you have two competing committees, neither one of which I think wants to give up jurisdiction over each one of these independent agencies.
So, I don’t think that’s going to happen. But the harmonization question is real. I mean, the SEC and the CFTC actually get along quite well and harmonize on a lot of things. You’ll see joint enforcement actions all the time, joint rules all the time. So, the two agencies know each other well. Sometimes there are often employees that go back and forth, like the nominated chairman is the head of the, I believe, of the digital assets group at the SEC.
And, so, what I think is happening to the Trump administration is that you’re seeing a more centralized – centralization of federal regulatory control.
So, I think there are two commissioners at the SEC and one at the CFTC, you know, and for a while, even though there was a strong rumor that they were going to nominate Atkins to run the CFTC, incidentally, before Selig, which didn’t happen and seemed implausible.
But nonetheless, that’s how you can tell how seriously this administration takes centralization of regulatory activity. And Selig, by all accounts, is a friend with Chairman Atkins and also a close associate. So, you can see them moving forward together lockstep once Selig is confirmed.Jerry: You know, interestingly, Paul headed the transition team in the first Trump administration but did not go into the administration. He’s clearly a force in this time. Dan: Yeah, I've worked Paul before. Jerry: Wonderful man, yeah. Dan: I think very highly of him. So, yeah, I mean, I think that’s the interesting thing, that centralization of these formerly, and I’m using quotation marks, independent agencies is something to watch for the next few years. Jerry: What about the leveraged spot crypto markets? Any thoughts on that? Dan: Going back to innovation, Acting Chairman Pham has—outside of prediction markets, which we’ll talk about later—has indicated some sort of interesting and forward-thinking changes to how the CFTC’s jurisdiction and what’s being traded.
And there has been some indication that she’s going to allow leveraged spot crypto markets to exist, which doesn’t mean a lot to anybody, but essentially is a big change where you could trade physical digital currency on exchanges.
And then perps they call them, perpetual futures, actually start up as an academic exercise that whether you could have perpetual holding futures contracts.Jerry: Can you explain those a little bit? Dan: Yeah. Jerry: I hate to put you on the spot because it's a tough one. Dan: Well, I’m glad – you know, let’s see how fast I can type into ChatGPT on this one. But no, all futures trading, and this goes back to way back when we were talking about agricultural physical trading, most futures products conceive of a 28-day contract time to match with physical deliveries of commodities.
In other words, if you’re hedging pricing, it’s on a rigid 28- or 30-day contract. It depends on the commodity, but that’s how it goes. And these contracts expire, right? Which is a critical microstructure of all types of futures trading.
Perpetual futures would allow you to have a futures contract that never expires, which I think, again, start out as an academic exercise, is going to be something you would use almost purely for speculation because it would not really match up to a physical product being traded. So, it’s just a sort of radically new idea.Jerry: If I have such a contract ... Dan: Yeah. Jerry: ... it's perpetual, but I assume I can realize on my gains or experience my losses at a particular time, so, it's perpetual, but you can get in and out? Dan: Yeah, yeah, you can. Yeah. Perpetual might be too strong, but that’s what they call it. But right, I think it’s not – you’re not forced to hold onto it forever and nor do you have to hold on it for any amount of time.
It just means that, you know, and they’re obviously complicated ways to move your position to the next month—which happens all the time at the end of a futures contract—but this would allow you to unwind your position as long as you could find someone who of course would buy it.Jerry: What about prediction markets? Dan: Prediction markets are a big deal. In the last five years or so, you know, prediction markets have received a lot of press. A prediction market is just a type of swap or an option that’s traded on what they call a designated contract market, a DCM.
See, I avoided the acronym there, which would be like the CME or ICE. And originally, these started out with pretty simple ideas like, can you decide who’s going to win the presidency or who is going to win, you know, what the high temperature is going to be in Washington in August? And the last administration thought that those type of contracts were volatile of the Commodity Exchange Act for a lot of reasons.
But the long short of it is that the D.C. Circuit weighed in and said, “Actually, they’re fine,” or actually disagreed with the CFTC’s injunction and then the CFTC didn’t appeal. So, it appears that that type of contract is now less controversial.
But where the rubber really hits the road is on sports contracts. There’s tons of litigation. Every circuit has district court cases about this now. And due to the statutory language of the Commodity Exchange Act and of the regs, the issue about whether you can essentially federalize sports betting, if you can say, “Hey, I want to place a bet that the Celtics are going to win tonight,” or even other types of bets, like how many points are the Celtics going to score tonight, that is a more difficult issue and is being heavily litigated throughout the country.
Now, you’re sitting there thinking, “Well, this sounds like something that the CFTC should weigh in on,” right? The CFTC should be sort of giving instruction to market participants about what the quantity exchange app means, what do the regs mean? And frankly, the CFTC has been relatively silent.
The CFTC issued a letter on September 30th, right before the shutdown, saying, “Listen, we’re aware of the litigation going on about this, and we understand the rules about swap definitions and 40.11a,”—which is the regulation that talks about event contracts—“but we’re not going to say anything except for if they’re found to be illegal in a state, all of our registrants better be able to unwind these positions quickly.”
Okay, that’s, again, going back to orderly markets. And so the CFTC has remained silent. Now, with Selig, it’s thought, “Well, he’s obviously going to have a position about this.” “What’s he going to say?” And “We don’t know what he’s going to say.” However, in his hearing, he was asked about this almost exclusively.
You would think that it wasn’t the Commodity Futures Trading Commission, it was sort of the Commodity Prediction Markets Commission, because there was no other really very many questions about futures contracts or traditional derivatives at all. And Selig basically parroted what the letter of September 30th said: “I don’t really have a position. It’s a complicated legal issue. And I’m going to wait for the courts to decide it and we’ll abide by it.”
Again, if you are a market participant, this does not give you very much clarity about your behavior. Now, could that change? I don’t want to sound like a cynical Washington person. Could you say something at the nomination that you might change when you evolve your opinion when you become confirmed?
Maybe. But as of now, all signs are that the commission is going to stay relatively silent on these markets and will wind through the courts. In particular, like the Third and Fourth and Ninth circuit we expect are going to weigh in this year.Jerry: And of course, we’ve had some issues related to prediction betting and athletes themselves, which have not been ideal for this market. Dan, you know, let’s revert for a second to your job as the chief trial attorney at the CFTC.
And you held that job, I believe, for over 10 years. How does the commission and how do its staff and advisors, particularly the chief counsel, decide what they’re going to go after and what they’re not going to go after?Dan: Yeah, that’s a great question. And again, I’ll be careful about revealing any type of attorney-client privilege, but let’s talk about going forward. Yeah, I mean, each commission has different priorities, and that affects what the commission brings and the enforcement division investigates and what kind of cases the enforcement division brings.
What’s interesting is that when you’re in a time and place where there’s only one chairman with like Selig or one commissioner, that one person is deciding priorities.Jerry: By the way, how long has Caroline—and we know her well ... Dan: Yeah. Jerry: ... how long has she been in the acting chair? Dan: I think since January 20th, I think that weekend or the 20 – maybe it was actually the 22nd or January 25, I believe. So, it’s going to end up being a year, right? Or close to a year where she’s been running it. But, you know, the commission is, the enforcement division in particular, is not particularly political, right?
So, like most prosecutor’s office, it really does try to find violations of the law without any type of sort of partisanship, decide what cases to bring. But the commission and whatever the commission’s composed of will help set priorities, the commission for every division. And this also affects the non-litigating divisions. Now, for example, the division of market oversight could have certain types of political priorities, too.
And again, this is the way that the commission’s independent financial commissions have been set up. So, there’s a variety and a nonpartisan approach to these market problems. Again, with the idea that the CFTC and the SEC are going to protect market integrity and engender confidence in markets and liquidity.Jerry: So, when a decision is made after consultation, the commissioners decide we’re going to bring a case, the role of the chief trial attorney at the agency, how does that work? And how do you coordinate with the Department of Justice? Dan: Yep, great questions. Yeah, so, the chief trial attorney will work with a team to either bring it, try to resolve a case administratively. And the CFTC has never had an internal type of ALJ process, an administrative law judge to figure out issues, so, all cases were litigated in federal court, and we’ll be in charge and we’ll be the first chair in litigating cases in federal court.
And all federal regulatory agencies that deal with financial stuff all coordinate together. So, you could have cases where the CFTC brings cases with the SEC. My last case at the CFTC was a case involving Glen Point and a trader named Neil Phillips. And we worked with the Southern District of New York, and Mr. Phillips was convicted in the Southern District of New York two years ago and that was just upheld by the Second Circuit Court of Appeals.
So, cases that, again, based on the priorities of the Justice Department, usually the fraud division or other types of prosecutors in each type of federal judicial district decide whether they are interested in bringing our cases into the Commodity Exchange Act.
One thing I say to our clients at Orrick, which is important, is that, you know, people consider the CFTC correctly as a civil litigation agency in the enforcement division, which is correct, but the Commodity Exchange Act is a criminal statute as well. And so the Justice Department can charge violations of the Commodity Exchange Act and doesn’t necessarily need to revert to like sort of classical criminal charges.Sasha: Dan, I want to go back to something you just said here and something you said earlier as well during our discussion about decision-making being a little more centralized. I understand the historical approach of the CFTC and the SEC and DOJ kind of all working together.
But within a lot of the consumer financial sphere, we’re seeing OMB become more involved, the White House become more involved, even more than they traditionally have. Could you talk about whether you’re seeing that on the CFTC side as well, or if it’s just too early in this administration to tell and we’re waiting to flush out?Dan: It’s a good question. I think the way I think about it is the CFTC is almost a mini legislature, right? You need a majority vote for anything, for the enforcement division to bring a case, to allow certain types of behaviors by the more regulatory divisions.
And sometimes those are non-partisan or they don’t necessarily break down on partisan three to two lines, whereas you could have someone who’s very concerned about some type of specific agricultural products, say they’re from Nebraska and they’re very concerned about sugar. So, they can be – they break down in a way that’s not necessarily partisan and which I think creates a healthy environment for decision-making, is my personal view about that.
However, and again, these agencies are designed to be independent, that the commissioners, once they are appointed by the president, and again, in a bipartisan way, both commissions, and when all the nominees are confirmed by the Senate, then you’re sort of – there’s this mini legislature that happens within these commissions, which is a decentralized way of making decisions.
This administration, it appears to me, is not particularly interested in that type of decentralized decision-making in the financial administrative sphere.
And, in fact, if you have one person at the CFTC and I think two people at the SEC—two commissioners, going down to one soon—you could, in a way, dictate very specific financial regulatory decisions by one person or very few people, because the sort of mini legislature part of these independent commissions would be eviscerated. And you would have a direct line from the White House to these independent agencies decision making.Sasha: And a similar situation at the FTC where they’re short a few commissioners or the CFPB by design with just one director in the leadership role. Dan: Yeah. I mean, the CFPB does the case study in this, right? I agree completely. Now, again, the Senate’s concerned about this, and I can tell from the markup of the CLARITY Act, because they are concerned about having one person running the CFTC, especially if it’s conferred this additional jurisdictional ambit or control and very concerned about the lack of employees there.
So, you sense there’s a percolating partisan conflict between “Are we going to have these independent agencies fully staffed and have a full slate of commissioners?” or “Are we going to allow the executive branch to basically control these administrative agencies in a way that they were designed to be.”Jerry: That’s very interesting to look forward and understand where they’re headed. And that’s going to be on the CLARITY Act, the subject of our next podcast episode with you. And we’ll delve more into the requirements of the Act and whose consent is needed to move the provisions of the Act forward.
Dan, it has really been great to have you on this week before Thanksgiving, and this episode will come out the week after Thanksgiving. Thank you for joining us. It’s really been great. Thank you for joining us at our law firm because it’s so great to have you and your expertise at the firm.Dan: Thrilled to be here and thanks for having me. Sasha: Thank you, Dan. Take care.