I want to take the opportunity to acknowledge the emotional toll recent events are having on our country and offer my sincere hope that we will emerge from this time with greater resilience and communal understanding.  We are fortunate to live in a true democracy.  In the United States, we enjoy certain freedoms within that democracy, and as children we are explicitly taught that the First Amendment to our Constitution protects the freedom of speech.  Today, I am reminded that to realize the intended benefit of our freedoms, there are also certain obligations required of us: the obligation to listen and the obligation to show respect.  As citizens of this nation, we should fulfill our obligation to hear all views and also to respect the property and service of others.  At the CFTC, we are a body of vastly different views and we receive input from each other and varied stakeholders.  But to fulfill our obligation to preserve our democratic system, we have to listen to and respect one another.  I feel like we do a lot of that well here at the CFTC, but this is a time to recommit across all aspects of our daily lives to these obligations.  I am today reminded that we are stronger as an agency – as a country – when we not only listen but hear each other.  And it is easier to hear one another through respectful dialogue.  We all must dedicate ourselves to being part of the solution – racism, violence, and disrespect are at odds with a society obligated to preserve democracy.

I support today’s final rule to prohibit commodity pool operators (“CPOs”) or their principals who are subject to statutory disqualification under Section 8a(2) from claiming an exemption from registration.  This rule narrows a loophole in our CPO registration framework and strengthens the Commission’s regulations to protect customers and market integrity.

Section 8a(2) of the Commodity Exchange Act (“CEA”) lists the offenses for which the Commission may refuse, suspend, or condition registration without a prior hearing.  These offenses include major violations of a number of laws and regulations governing financial markets, including felony convictions for embezzlement, theft, extortion, and fraud.[1]  Today’s rule will ensure that persons who are restricted under Section 8a(2) from operating in registered activities cannot escape such restrictions by engaging in activities that are exempt from registration.

Although to a large degree this rule closes an existing loophole in our regulations, it perpetuates a glaring deficiency by failing to hold CPOs of family offices or their principals to the same standards of conduct as other exempt CPOs.  The risks to market integrity presented by this omission are compounded by another recent rulemaking exempting CPOs of family offices from a requirement to notify the Commission if they claim an exemption from registration.[2]  Thus, under this set of new rules completed today, CPOs of family offices are exempt from registration, exempt from providing notice that they are using an exemption, and exempt from the statutory disqualifications that generally apply to all other CPOs.  This triad of exemptions for CPOs of family offices leaves the Commission uniquely unaware of the activities and integrity of these entities.

As I noted in my dissent on the final rule that exempted CPOs of family offices from notifying the Commission that they are claiming an exemption, family offices today are not “mom and pop” operations that invest small sums in commodities, but rather large and sophisticated asset management enterprises established by and for mega-millionaires and billionaires.[3]  The Commission justified these exemptions on the grounds that related family members in these “sophisticated” entities do not need the customer protections that the CFTC otherwise applies to CPO activities.  However, regardless of whether this assessment is accurate, customer protection is just one of several objectives of the Commission’s CPO regulations.  The regulation of CPOs facilitates the Commission’s oversight of the derivative markets, management of systemic risks, and mandate to ensure safe trading practices.[4]  There is no basis to conclude that the activities of large family office CPOs pose less of a concern in these areas than the activities of other exempt or non-exempt CPOs.

The regulatory principle here is straightforward.  We are not only responsible for monitoring market participants that pose risk to customers, but also those who pose risk to the integrity of our markets.  Individuals who commit felonies or other serious violations affecting the integrity of financial markets should not be permitted to trade in CFTC markets, particularly without at least some supervision and oversight.  If a CPO of a family office or one of its principals has engaged in conduct serious enough to be subject to the disqualification provisions of Section 8a(2), such as fraud or misappropriation, then it should seek registration with the Commission and be subject to our oversight.

However, I am pleased that at my request, the CFTC staff will be making a special call to CPOs of family offices to determine how many, if any, are subject to statutory disqualification under Section 8a(2).  The Commission currently has no information in this regard.  I have consistently supported basing our regulatory decisions on the best available data.  The data we will obtain from this special call will inform our judgment about whether further action is necessary to protect customers and the market.

I also am pleased that the Commission has declined to exclude registered investment advisers from the scope of this rule.  The Securities and Exchange Commission has a different statutory disqualification regime.  Registrants should abide by CFTC rules when they operate in our markets.

Going forward, the Commission should propose similar restrictions on the claiming of exemptions by statutorily disqualified commodity trading advisors.  While this rule narrows one of the gaps in our Part 4 regulatory framework, this additional significant gap remains and should be closed. 

I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for working with my office to incorporate some of our comments and proposed revisions to this rule.   As a matter of course, a collaborative rulemaking process that takes into account the input from all five Commissioners will produce better regulations. 

Mr. Chairman, shortly after becoming Chairman of the CFTC you started a new practice where we begin our public meetings by saying the Pledge of Allegiance:

I pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.

We recite the pledge and then move on to consider the pending Commission business.

Today, though, we should pause before we move to consider the pending business.  Cries of anguish, anger, and protest ring out from cities across our country, because for too many Americans—particularly Black Americans—there has been too little liberty and too little justice for far too long.  As a nation, we have not fully lived up to the words in the pledge.  Today, we should consider this too.

We should begin by asking ourselves:  Why have we not achieved liberty and justice for all?  How can we work together to achieve it?  And then we must renew our commitment to achieve it.

Before we started saying the pledge at open Commission meetings, the last time I had said the Pledge of Allegiance was in Mrs. Farrell’s 6th grade class at my elementary school in West Lafayette, Indiana.  Every morning, Mr. Leap, the school principal, would read the pledge over the loudspeaker, and we would stand at our desks, hand over heart, facing the flag in front of the classroom, and say it along with him.

Back then, I said the pledge because I was told to and everyone else was saying it.  But I didn’t fully understand it.  The word “indivisible” confused me—I thought it had something to do with invisibility.   We did not spend any time talking about the pledge or what it meant.

When I learned that we would be saying the pledge at our Commission meetings, I remembered elementary school and the words came right back to me.  But, this time around, I didn’t want to say those words just because an authority was prompting me to say them, or because it would look bad if I didn’t.  I thought about what it means to say those words, and what those words mean to say.

We pledge allegiance not only to the flag as a symbol, but also to the republic for which it stands.  A defining feature of this republic, a unique experiment in the history of nations, is that we are not just one nation, as stated in the pledge, but we are one nation of many people.  Our national motto, “E Pluribus Unum,” means “out of many, one.”  No matter our race, religion, national origin, sex, or other orientation, we are all Americans.  Our diversity makes us stronger.  We must remain committed to advancing that diversity. 

The pledge also embodies the fundamental principles of our republic of liberty and equality under the law.  Francis Bellamy, the author of the original pledge, explained why he chose the words “liberty and justice” in the pledge:  “Liberty and justice were surely basic, were undebatable.”[1]

So what does it mean to say these words?   A pledge is defined as a binding promise or agreement to do something.  Saying the pledge is not just a show of patriotism, or respect for the flag, but rather is a binding promise, a commitment to the underlying values of our republic.  When we say the pledge, we are promising to make the words in the pledge a reality.  We are making a commitment to achieve liberty and justice for all.     

Although we have been making this promise since we were schoolchildren, and generations of schoolchildren before us have made this promise as well, this promise has yet to be fulfilled for all people in this nation.  We are seeing yet again the tragic consequences of the failure to live up to this promise.  The promise has gone unfulfilled for far too long.  As Martin Luther King, Jr. wrote from the Birmingham jail, “justice too long delayed is justice denied.”[2] 

When we say the pledge, we cannot just say the words.  We must renew and strengthen our commitment to liberty and justice for all.  Today, I renew my pledge of continued support and commitment to liberty and justice for all.

Thank you. 

I support today’s adoption of a final rule (the “Final Rule”) requiring any person that files with the CFTC a notice claiming an exemption from registration as a commodity pool operator (“CPO”) under Regulation 4.13 of the Commodity Exchange Act (“CEA” or the “Act”) to affirmatively represent that neither the claimant nor any of the CPO’s principals has in its background any statutory disqualifications listed in section 8a(2) of the CEA, which are required to be disclosed as a part of a CPO registration application with the Commission.  Beyond closing a regulatory gap that allows certain persons that would generally fail to meet the CEA’s basic conduct requirements to nevertheless claim an exemption from CPO registration, the Final Rule invigorates the Commission’s stance as an active regulator with respect to the most diverse registration category within our jurisdiction.  As I have said before, CPOs (and commodity trading advisors or “CTAs”) are often identifiable by variable organizational structures, investment focus, participation, and solicitation, as well as complexity in how they are regulated within our authority.[1]  These factors demand that when we act, we do so with a laser focus on customer protections.  I am pleased that this Final Rule aggressively advances customer protection in a tangible way.   

I believe it is fully within our statutory duty to provide, at the very least, a foundational level of security on which customers, regardless of their experience and aptitude, can rely when parsing and considering what can seem like an endless amount of important information and fine print.  Today’s Final Rule provides that footing for exempt commodity pool participants by generally prohibiting persons who have, or whose principals have, in their backgrounds any of the statutory disqualifications listed in CEA section 8a(2)—which are generally egregious, recent in time, and based upon a previous finding or order by the Commission, a court, or another governmental body—from soliciting and accepting funds for participation in commodity pools, even if they are exempt.

I am pleased that the Final Rule and its preamble address the significant number of responsive public comments, especially those seeking clarity on process and procedure.  Last fall, when the Commission finalized several amendments to Part 4 of the regulations addressing various registration and compliance requirements for CPOs and CTAs, I commended, among other things, its decision to not move forward at that time on the part of the proposal that led to today’s Final Rule.[2]  That decision has led to a more thoughtful consideration of the comments received, the practicalities of the proposal, and the Commission’s need to fulfill its regulatory goals while remaining true to the Act.  To that end, I appreciate that the Final Rule preserves the Commission’s direct and delegated authorities under CEA section 8a(2) and Regulation 4.12(a) to ultimately evaluate fitness for registration—or exemption, as the facts may dictate.

I wish to thank the staff in the Division of Swap Dealer and Intermediary Oversight for their tremendous efforts working with the National Futures Association in bringing this critical rule to finalization.  Thank you for your consideration of my comments and for working with my team toward ensuring that we leave no doubt as to the regulatory intent and effect of today’s Final Rule.  Thank you. 

I am pleased to support today’s final rule amending the procedures for certain commodity pool operators (CPOs) to claim an exemption from registration.[1]  It is sound policy to prevent a firm from claiming a registration exemption if the entity or its principals are “statutorily disqualified” under section 8a(2) of the Commodity Exchange Act, when the same disqualification would prevent them from registering with the Commission.  The disqualification applicable under today’s amendment covers some of the most serious offenses under the Act, including fraud.  While an exempt CPO is more limited in its activities than a registered CPO, for example, no pool has more than 15 participants[2] or the CPO’s commodity interest activity must remain below certain initial margin and notional amount thresholds,[3] an exempt CPO still manages money for the public.  I therefore agree with today’s amendment that the firm should be held to one of the most fundamental customer protection standards under the Commodity Exchange Act.

I thank the Commission’s staff for their work on this rulemaking, in particular for their thoughtful responses to issues that had been raised by commenters.

One of the great strengths of our derivatives markets – today, just as in the past – is their dynamic nature.  These markets are constantly, and often rapidly, evolving in terms of the scope of products traded, the platforms on which those products are traded, and the participants that trade them.  As a result, “one-size-fits-all” rules often turn out not to be a “good fit” at all.

Throughout its history, the Commission has utilized carefully-crafted exemptions to smooth the sometimes rough edges of its regulatory framework so that it fits the dynamics of the derivatives markets.  Such exemptions help us adapt our rules to the realities of the marketplace.

As Congress has observed, exemptive authority “allow[s] the Commission to respond to future developments in the marketplace to avoid disruption and promote responsible economic and financial innovation, with due regard for the continued viability of the marketplace and considerations related to systemic risk in financial markets.”[1]  I support the Commission’s judicious use of its exemptive authorities for these purposes.

But being exempt from certain regulations does not necessarily mean being outside the Commission’s regulatory framework altogether.  An exemption is a privilege, not a right.[2]  Our job as Commissioners is to see that the exemptions we provide are appropriately tailored to fulfill the specific purpose for which they are adopted, while not undermining the agency’s ability to fulfill the broader customer protection and market integrity purposes of the CEA.

I believe that the final rule we are adopting today strikes the right balance.  It provides that the serious statutory disqualifications that are listed in Section 8a(2) of the CEA and that can preclude a commodity pool operator (“CPO”) from registering with the Commission can similarly preclude the CPO from acting in an exempt capacity under Rule 4.13, too.

To be sure, sophisticated market participants should be able “to enter into prudent business arrangements that they deem most appropriate for their operations and business needs.”[3]  But not all participants in exempt pools under Rule 4.13 will have the same degree of financial sophistication.[4]

In any event, drawing boundaries is at the core of our regulatory function.  I am very comfortable drawing a boundary such that persons or entities that have, for example, had a prior registration revoked or been convicted in the past ten years of a felony involving fraud or misappropriation of funds, may not offer themselves as an exempt CPO to clients.  Under our rules, a pool operator that believes its particular facts and circumstances make such a result unjust may request relief on an individualized basis.

I therefore support today’s final rule.  I want to thank the staff of the Division of Swap Dealer and Intermediary Oversight, the General Counsel’s Office, and the Chief Economist’s Office, for working with my Office to answer our questions and incorporate our suggestions.

As Robert Louis Stevenson aptly put it, “Everybody, sooner or later, sits down to a banquet of consequences.”[1]

Today we are focused on the consequences of bad acts that result in “statutory disqualification” under the Commodity Exchange Act (“CEA”).  These acts include the most serious types of financial crimes, such as embezzlement, theft, extortion, fraud, misappropriation, and bribery.  Once an individual is statutorily disqualified, the CFTC may deny or revoke his or her registration. The same is true for corporate entities.

It stands to reason that someone who has been statutorily disqualified—and thus has no right to register with the CFTC—would be precluded from managing other people’s money and positions in the derivatives markets the CFTC regulates.  But currently, this is not exactly the case. As it turns out, a statutorily disqualified person who wishes to operate a fund that trades derivatives may simply claim one of the exemptions from registration as a commodity pool operator (“CPO”) under CFTC Rule 4.13.  Although each of these exemptions has a number of conditions, the absence of statutory disqualification is not currently among them.

Today’s final rule closes this loophole for bad actors. Under our rule as amended, a CPO claiming a registration exemption would be required to certify that neither the CPO nor any of its principals has in its background conduct that would result in automatic statutory disqualification under the CEA.  I believe this rule will enhance customer protections and public confidence in the integrity of the derivatives markets by ensuring that bad actors cannot gain access to the funds of innocent, third-party investors simply by filing an exemption claim.[2]

In so doing, we also strike a balance between bad acts that warrant automatic disqualification and other behavior that requires the opportunity for a hearing before the subject is disqualified.  Because the CEA itself makes this kind of distinction in the context of registration, the Commission believes that lesser offenses[3] warrant different treatment than recent and more serious offenses in the context of registration exemptions.  Thus, today’s prohibition on statutory disqualification does not include offenses for which the CEA itself requires a hearing prior to disqualification.

I am comfortable with this exclusion, both because it is consistent with legislative intent and because CPOs relying on a Rule 4.13 registration exemption generally do not manage the money and derivatives positions of the retail public at large.  Rather, these CPOs are limited by the terms of their exemption to small pools of select participants, pools limited to sophisticated investors, pools with de minimis derivatives positions, and the like.[4]

In addition to protecting customers from bad actors and enhancing the integrity of the derivatives profession, this rule also furthers the CFTC’s strategic goal of “being tough on those who break the rules.”[5]  No longer will financial wrongdoers be able to use registration exemptions as a loophole to avoid the full consequences of their actions. For these reasons, I am pleased we are acting to finalize this rule.

Finally, it is worth remembering that sound regulation of the U.S. derivatives markets stems from a robust federal framework that the CFTC primarily administers, complemented and strengthened by an equally robust regime of self-regulation.  A central pillar of that regime is the National Futures Association (“NFA”), the main self-regulatory organization for CPOs.  NFA’s strong support for this rule is just one of countless actions that demonstrate their steadfast commitment to the integrity of the derivatives community.[6]