I respectfully dissent from the Consent Order in CFTC v. Cartu (Masten et al.), because the Commission seems to be once again changing its interpretation of the definition of a “commodity trading advisor” (CTA) in an enforcement action without sufficient explanation and without the opportunity for the public to comment. New registration requirements have widespread impact on the industry and should not be imposed on the public unless the Commission has examined the issue thoroughly with adequate data and analysis. This is not merely regulation by enforcement—this is regulation by fiat. Such a broad proclamation is the act of kings, not of a free democracy.

This is not the first time the Commission has committed this error, and not the first time with respect to CTAs. Recently, the Commission has changed its interpretation of a CTA, finding that in certain circumstances registered CTAs may engage in activities that require SEF registration. This change in interpretation, also made in an administrative consent order for an enforcement action against a registered CTA, Asset Risk Management, LLC, on September 26, 2022, has already been disruptive to the industry and markets. We should not repeat our previous mistakes. 

For the past nearly 10 years, the Commission has distinguished that a signal provider that provides trade signals or advice for compensation must register as a CTA, but that a technology provider that aggregates (but does not originate) trade signals and submits orders to an exchange is not likely required to register as a CTA. 

Effective December 15, 2015, the Commission deemed certified the North American Derivatives Exchange, Inc. (Nadex) rule certification pursuant to section 5c(c)(1) of the Commodity Exchange Act (CEA), as amended, and CFTC Rule 40.6(a) with respect to the Nadex Advisory Notice Regarding Third Party Technology and Signal Providers (“Nadex Advisory Notice”).[1] In relevant part, the Nadex Advisory Notice states: 

To illustrate the [CTA] registration requirement, according to the CEA definition of a CTA, a signal provider who provides advice (i.e. the trade signal) either directly to the trader or through a publication, and is compensated for such advice is acting as a CTA. This provider may need to register with the CFTC as a CTA unless it qualifies for an exemption from registration pursuant to CFTC Rule 4.14(a)(9). On the other hand, a technology provider that sells software capable of receiving and aggregating trade signals, and submitting orders to the Exchange based upon those signals and parameters customized by the trader is not likely required to register with the CFTC as the trade advice does not originate from the technology provider. In such instances, the technology merely facilitates the flow of information between the signal provider, the trader, and the Exchange. (internal citations omitted) (emphasis added) 

But now, for the first time since the Nadex Advisory Notice, the Commission is changing this interpretation because the Masten Consent Order may be construed to require technology providers that do not originate trade signals to nonetheless register as CTAs. This position is also inconsistent with CFTC staff’s interpretation, for the past 15 years, that a software provider that does not produce trade signals but allows customers to analyze market data and enter trades is excluded from the definition of an “introducing broker.” See Division of Clearing and Intermediary Oversight Interpretation Letter 08-12, Section 1a(23) and Regulation 1.3(mm)—Request for Interpretation in Connection with the Definition of an Introducing Broker, at *2 (July 10, 2008).   

The Commission should not arbitrarily change its interpretation of the definition of a CTA and impose new registration requirements on market participants or technology providers without the opportunity for the public to comment. At the very least, the Commission must “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made” and the “explanation must be clear enough that the agency’s path may reasonably be discerned.” Cboe Futures Exchange, LLC v. SEC, No. 21-1038 (D.C. Cir. Jul. 28, 2023) at 9 (internal citations omitted).  

Because the Consent Order would change the Commission’s longstanding interpretation of a CTA in a manner that is inconsistent with the requirements of the Administrative Procedure Act, I must respectfully dissent.