The Commodity Futures Trading Commission voted unanimously Thursday to approve a final rule that would significantly expand its powers to police fraud and manipulation in the swaps market.
The commission's action came at a public meeting convened nearly one year after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The measure represented the CFTC's first foray into final rulemaking after months of proposing Dodd-Frank rules and weighing public comments.
The anti-fraud rule, patterned after the Securities and Exchange Commission's Rule 10b-5, would give the CFTC broad new authority to prohibit manipulation and fraud in connection with any swap, including municipal derivatives.
Specifically, the provision, known as Rule 180.1, would lower the threshold showing the commission must make — from intentional misconduct to recklessness — in a fraudulent or manipulative scheme. Recklessness would include an extreme departure from the standards of ordinary care.
"This closes a significant gap, as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers," said CFTC chairman Gary Gensler. "We will use these tools to be a more effective cop on the beat, to promote market integrity and to protect market participants."
The CFTC's anti-fraud rule would not empower the agency to go after negligence or good-faith mistakes.
In a statement at the meeting, a CFTC official hailed the measure as a "new and powerful tool" for the commission's enforcement program.
"Prosecuting such activity will better protect the markets and market participants and send a strong message of deterrence," said David Meister, director of the division of enforcement.
Meister also said enforcement staff would look to the substantial body of Rule 10b-5 precedent developed under the securities laws, recognizing the difference between the securities markets and the futures markets.
"This rule will be a priority of the division of enforcement for sure," Meister added.
Among market participants, reaction to the CFTC's move varied.
One observer said the agency's new anti-fraud rule could subject a range of behavior in the municipal securities market to regulatory scrutiny and possible sanction.
For example, statements by swap dealers to state and local governments that recklessly misrepresented or downplayed the risks associated with swaps could fall within the commission's anti-fraud enforcement powers.
A swap dealer, however, expressed concerns that the CFTC's Dodd-Frank rules — including the anti-fraud rule and business conduct standards proposed late last year — could drive swap dealers from the muni market.
"These proposed regulations, coupled with the proposed standards of conduct, have the potential to dissuade dealers from participating in that market, which can significantly reduce liquidity," said Sam Gruer, managing director of Cityview Capital Solutions LLC in Millburn, N.J. "And as an adviser to municipalities, my concern is that there is liquidity in the relevant products, so that municipalities can get fair-market execution."
Under Dodd-Frank, the CFTC has authority to regulate swaps, swap dealers, and major swap participants, including muni-bond-related swaps.
The SEC has oversight over security-based swaps, security-based swap dealers, and major security-based swap participants.
The CFTC's anti-fraud rule will become effective 30 days after publication in the Federal Register, likely in mid-August.
