These days, traders need good lawyers. They are a must-have in the age of regulatory overreach after the Dodd-Frank law, and for comprehending and complying with the rules as they get refined and re-tuned and as crypto markets come into the mix.
One example of a law firm addressing this need is Murphy & McGonigle, a firm with offices in New York, Washington D.C. and Richmond, VA that advises financial services firms like FCMs and broker dealers on regulatory matters. The firm has just added a Commodities, Futures and Derivatives practice to its business to help clients manage and comply with these regulations.
The firm was founded eight years ago by James Murphy & Tom McGonigle, starting with eight lawyers – a mixture of seasoned securities class action defense players and former SEC senior executives.
“Those two pillars were the core strength of the firm…but all along the firm knew that to offer the full panoply of services to financial institutions, they would need to add a commodities, futures and derivatives practice,” said Murphy & McGonigle’s Katherine Cooper. “That’s where Liz and I come in.”
Liz is Elizabeth Davis. She and Cooper are M&M shareholders and senior members in Murphy & McGonigle’s new commodities practice, and both have extensive litigation and regulatory experience. Cooper was senior trial attorney in the CFTC’s Division of Enforcement as well as chief regulatory officer at NYSE Liffe. Davis is a former chief trial attorney for the CFTC’s Division of Enforcement and worked in the tax division at the U.S. Dept. of Justice.
The new practice will cover a broad range of commodity derivatives and futures activity, including swap dealers, proprietary traders and commodity pool operations.
Under Gary Gensler, the CFTC issued a raft of new regulations covering swaps and derivatives that had not been regulated by the agency prior to the Dodd-Frank Act. The current commission, under Chris Giancarlo, is reevaluating some of that massive piece of legislation and fine-tuning some of what needed improvement. At last year’s FIA Boca conference, Giancarlo announced a new initiative, Project KISS (Keep it Simple, Stupid), with the goal, among others, of “rightsizing” the agency’s footprint. In his address at the conference, Giancarlo called the current swap rules “overengineered” and said he wanted the agency to go back to the “principles-based” approach it had before 2008.
Also under the CFTC’s watch now – at least in part – are the crypto markets. This is a particularly challenging area because of the serious lack of regulatory clarity in this new and complex asset class.
To date, the CFTC has brought seven enforcement actions alleging fraud in connection with the sale of virtual currencies in the cash market, according to Cooper.
“The intersection of commodities law with crypto is something that our clients have been quite focused on,” Cooper said. “This is a relatively new power given to the CFTC in Dodd-Frank, which authorizes them to pursue fraud in the sale of a commodity in interstate commerce. It’s new territory for the CFTC and the marketplace.”
She added, “The SEC and the CFTC are attempting to regulate to some degree the cash market space for various tokens and virtual currencies given the powers they have under the Commodity Exchange Act, but it remains unclear whether any regulator has the jurisdiction to enable the kind of comprehensive regulatory authority the SEC has over securities and the CFTC has over futures.”
Anyone who wants to become a Futures Commission Merchant (FCM) must register all customer-facing employees, and they must pass competency tests. Broker-dealers and FCMs must satisfy capital requirements. But none of that exists in the cash market for virtual currencies.
Cooper is currently representing a defendant in a CFTC action involving the crypto space. Crypto is an area “rife with interesting public policy issues,” she said.
The main challenge for the CFTC in general, however, is the lack of proper funding, Davis said. “The CFTC experienced a budget cut last year, and with Dodd-Frank and fintech and crypto and the need for increased knowledge and surveillance, they have severe challenges with their budget being pretty stagnant.”
She added, “I think the commission and Giancarlo are trying very hard. There is always an effort by commissioners and chairmen to try and get the budget increased, but that is a function of Congress. The idea of having companies pay a trading fee keeps getting brought up but doesn’t gain much traction.”
The SEC, in comparison, is self-funded in part, charging traders a small fee on each equity transaction.
Both Cooper and Davis say their backgrounds in prosecution and at the CFTC are extremely helpful now that they are on the defense side. Cooper has worked for both sides in the past and said the investigatory and enforcement work gives her perspective when defending a company or individual being investigated, “because you can anticipate what the enforcement attorney or prosecutor is thinking and where the investigation will go.”
Davis echoed, saying, “It helps to have that inside knowledge about what enforcement staff is looking at and to have those relationships in the division and at the CFTC, at the staff and management level, to help clients with the issues at the agency.”
Murphy & McGonigle has also launched a blog to go with the new practice, at www.Commodity-Corner.com, which serves as a resource for regulatory and enforcement news and trends, along with analysis and perspectives in the commodities, futures and derivatives area.