Like velociraptors testing the perimeter of their enclosure jurassic park, the Commodity Futures Trading Commission (CFTC) has started to probe the weaknesses of the law supposed to limit the agency’s authority. The case of Monex Deposit Company c. CFTC gives the Supreme Court a chance to contain such a closing test effort. (Louis Carabini, founder of Monex and petitioner in this case, is a donor to the Reason Foundation, the non-profit association that publishes this website.)
Commodities are commercially available items, from tulips to wood. The CFTC was created in 1974 to regulate commodities future, not all product transactions in a product. In 2010, the Dodd – Frank Act broadened the power of the CFTC to also regulate certain cash contracts that functioned as futures contracts. To prevent the CFTC from regulating all spot contracts, the law has set several limits on the specific power of the commission. A crucial limit: the CFTC is prohibited to regulate any “sales contract” which “results in effective delivery within 28 days”.
The CFTC is currently testing the strength of the phrase “actual delivery” in a $ 290 million coercive action against Monex deposit company.
Monex is a family business that has been selling precious metals to retail buyers since 1967. Buyers take physical delivery of the metals they buy from Monex or store them in fungible bulk with a deposit. In both cases, Monex transfers the title of the metals to the buyer within 28 days of the sale. Monex has used this business model for decades, openly and fully complying with state law governing retail product transactions. Monex sales contracts therefore result in effective delivery within 28 days, which are not statutory “future” transactions and therefore do not fall under the jurisdiction of the CFTC.
In 2013, three years after the promulgation of Dodd – Frank, the CFTC published a notice and comments regulations expressly stating that the commission does not regulate Monex-type contracts. This rule was consistent with long-standing understanding of state laws of what “effective delivery” means. And it was in accordance with the statutory text that Congress adopted. In other words, even if the metals are deposited with an independent depositary, the buyer obtains full ownership of the metals. The buyer can then sell, exchange, recover or otherwise exercise all the other rights contained in the set of sticks supplied with the property.
But a year later, the CFTC abruptly changed course and adopted a new interpretation of “actual delivery”. He did so not by regulation with notice and comment, but in a motion to amend the agency’s complaint in a independent case filed with the Florida federal court. The seller charged in this case did not actually deliver precious metals to the buyer. As alleged, in the case of Florida, the seller received the full purchase price from the buyer and purchased metal derivatives with him that seller ownership – instead of transferring ownership of the metals to the buyer. Such conduct would be a false representation of the variety of the garden and a manipulation of the market. Monex, on the other hand, squarely transfers ownership to the buyer, a business model that has prevailed since mankind engaged in barter.
The position of the CFTC is alarming for several reasons.
First: in civil cases, requests to amend complaints are sufficiently obscure that no one other than the litigants and the judge bother to read them. These are certainly not deposits that give sufficient notice, and they do not allow the public to comment as the notice and comment process for the publication of regulations. Disputes over agency positions, for example, briefs filed with the Supreme Court, may draw attention, as they are filed with the highest court in the country, where industry groups may notice and file them. their own briefs supporting or opposing the positions taken by federal agencies. The disputed position of the CFTC, on the other hand, is buried in a motion asking a federal district court in the Florida Lowlands for leave to vary a complaint. This is the kind of thing you do if you deliberately try to fly under the radar.
Second: the Federal Court rejected the CFTC’s request and the agency’s arguments. The commission had sought to modify its complaint to allege that the seller in the Florida case had not “actually delivered” the metals to the buyer. The judge concluded that this argument made no sense and did not authorize the CFTC to modify its complaint. CFTC finally settled this case with the seller.
The commission then launched a $ 290 million coercive action against Monex, claiming that it was well established in 2014 (due to the failure of the agency’s advocacy position in the Florida case) that Monex’s business model was illegal, and she asked a California federal judge to punish Monex with a hefty fine. The California federal judge again rejected the CFTC’s argument that Monex did not actually deliver precious metals to buyers. Delivery of the goods to a third party custodian, who then follows the buyer’s additional instructions (because the buyer owns the goods), is “actual delivery” in every sense of the word.
After all, all types of products are systematically shipped to warehouses to be kept pending buyer’s instructions. Grain elevators, shipyards, bulk and retail transportation by land or air and pipelines all follow Monex’s business model. Even the flower delivery services allow the buyer to direct the tulips to a helpful neighbor for later pickup. The neighbor’s favor is probably free, but more expensive items could be shipped to your local post office or UPS store for pickup. Tirerack.com sells tires online directly to consumers who have them delivered to their local mechanic for installation. Congress has not given the CFTC the power to regulate these third-party intermediary business models when actual delivery takes place within 28 days.
Third: in the case of Monex, the CFTC went further. Not only does he claim the power to regulate Monex’s business model, but he judges this business model illegal. The implications are staggering. The agency attacks the very foundations of commercial transactions where the products are delivered to someone other than the buyer. “Commodity law is complicated, but the basic question here is simple,” says William Jay, Monex’s lawyer. “Can an independent federal agency supposed to regulate commodities future assert its power over each purchase or sale of a commodity? “
The CFTC’s closing tests in the Monex case are worrying to say the least. The California district judge refused to allow the commission’s trial against Monex. But then, the Ninth Circuit Court of Appeal deferred to the CFTC’s tense interpretation of “actual delivery” and allowed the enforcement action to proceed. the Case East again another example of How? ‘Or’ What the supposedly respect doctrines to have permit the administrative state to dismantle the protections of the Constitution for the civil liberties of the people. The Supreme Court should take the Monex case and lock up the commission’s coup de force.