November 15, 1996
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
1155 21st Street, N.W.
Washington, D.C. 20581
Dear Ms. Webb;
I. PURPOSE AND INTRODUCTION
A. Introduction
I responding to the Commission's request for comment as stated in its interpretative letter at internet address http://www.cftc.gov/tm/aug7ver.htm. I thank you for providing me the opportunity to submit my comments which will address my concerns from the perspective of both the consumer / citizen and the small business publisher / citizen.
This letter replaces my previous letter of October 15, 1996.
Although the Commission has stated that it has issued its interpretative letter primarily to address the dissemination of information electronically, the Commission appears to have derived its regulatory authority over participants on the internet from a quite liberal interpretation of the Commodity Exchange Act. This broad interpretation appears to have been expanded over time through a series of staff interpretative letters (CFTC interpretative letter, footnote #s 23-62, 64-5, 70-79, 86-88, 96, 98, 104, 107-8, 112) and other enforcement pronouncements (CFTC interpretative letter, footnote #s 3-4, 63, 81-3, 91-2, 95, 97, 100-1, 103, 105-6, 110-1, 116).
I am responding because it is my opinion that the Commission's enforcement actions violate the First Amendment rights of those United States citizens targeted by the Commission. My comments will thus also address the broader subject of the foundation upon which the Commission's enforcement actions are founded in addition to stating my concerns regarding CFTC's incursion into the internet.
I have attempted to include in this letter either my own personal experiences or the actual experiences of either other consumers or market professionals with whom I have spoken in support of my comments. My hope is that the Commission might better be able to gain insight regarding how its actions affect the lives of American citizens and thereby adopt more appropriate policies.
B. Purpose
My book, "The $upertrader's Almanac", which has won several "Investment Book of the Year"-type awards, has been filed against for not having been registered as a CTA.
In words, a book published in America was assaulted for not having been registered with the United States government.
Only the most repressive regimes in world history have required speech licences.
The issue does NOT involve the QUALITY of the product or the COMPETENCY, THOROUGHNESS, or ACCURACY of the research provided. The only issue at hand was whether the book was properly registered with the government, whether previous editions had also been so registered, whether the book had been published with or without government approval, and whether the publisher's employees were also subject to fines and sanctions during the time the book had been published without government approval.
Because of this assault, I feel a special obligation to address this matter.
II. PROTECTION AFFORDED BY THE UNITED STATES CONSTITUTION
A. First Amendment Protection
Conspicuously absent from the Commission's interpretative letter and footnotes contained therein is discussion explaining the Commission's refusal to uphold the very plain language stated in the First Amendment to the United States Constitution which states, quite clearly, that " . . . Congress shall make no law . . . abridging the freedom of speech, or of the press . . . ".
The Constitution does not categorize or differentiate between political speech, commercial speech, financial speech, hate speech, religious speech, or any other type speech including that which may or may not be "correct" speech or, even, "pork belly" speech nor does it extend its rights to a free press to only large newspapers and magazines as the Commission claims is provided by Section 1a(5) of the Commodity Exchange Act (CEA).
If Congress itself has been prevented from abridging freedom of the press, how does the Commission claim such abridgement rights?
And if the Commission's actions are not lawfully founded in the Constitution, then upon what authority does the Commission claim to possess the power to restrict the First Amendment rights of United States citizens who also happen to disseminate "pork belly" opinions?
Financial publications fall under the umbrella of First Amendment protection, the very cornerstone of our democratic process and the Amendment our Founding Fathers found so important they included it in our Constitutional Bill of Rights as the FIRST Amendment.
The provisions of the First Amendment supersede those of the Commodity Exchange Act and those rules the CFTC may claim have higher priority than those of the United States Constitution.
The Constitution does not specifically protect many of the actions in which citizens engage. For example, the Constitution does not provide for the taking of another's life. The First Amendment does, however, provide, in very clear and specific language, for the protection of speech and for that speech as expressed by the written word. CFTC staff members are individually aware of this conflict between the First Amendment and the CEA and are further aware of the superiority of the Law of the Land.
The failure of the CFTC to recognize the very plain language of the First Amendment while attempting to deprive numerous citizens of their Constitutional and civil rights appears to be a violation of the First Amendment and, thereby, a violation of the Law of the Land.
CFTC's actions and those of individual staff members who have attempted to deprive United States citizens of their right to freely enjoy their Constitutional and civil liberties therefore appears to be a deliberately and inexcusable criminal action.
Further, can there be a better example of a Fifth Amendment taking than for a government agency to force a citizen to expend time and resources in defense of a right so clearly stated in the Law of the Land?
B. Precedent
1. Financial Publications
Numerous cases involving financial publications serve as precedent such as In re Petroleum Prods. Antitrust Litigation, 680 F.2d 5 (2d Cir. 1982)(journalist's privilege is applicable to Platt's Oilgram Price Report, a newsletter relating to current events in the petroleum industry); SEC v. Hirsch Org., Inc., 8 Media L. Rep. (BNA) 2421 (S.D.N.Y. 1982)(journalist's privilege is applicable to Smart Money, a financial newsletter); Nat'l Life Ins. Co. v. Phillips Pub., Inc., 793 F. Supp. 627 (D. Md. 1992)(Profitable Investing, a financial newsletter, was entitled to actual malice standard); First Equity Corp. of Florida v. Standard & Poor's Corp., 690 F. Supp. 256 (S.D.N.Y. 1988)(Corporation Record, an S&P publication summarizing the operations and finances of many corporations, was entitled to actual malice standard); In re Burnett, Misc. No. 5216 (Aug. 27, 1993 N.J. Superior Ct.)(journalist's privilege was applicable to a company that charged a fee for compiling information from insurance companies in order to rate those companies); In re Scott Paper Co. Sec. Litigation, 145 F.R.D. 336 (E.D. Pa. 1992)(a publication containing financial information and creditworthiness ratings was entitled to First Amendment privilege).
2. Lowe
Precedent further appears to have been established in Lowe v. SEC, 472 U.S. 181 (1985).
In this case, the Supreme Court addressed whether Christopher Lowe, a convicted felon serving time in the federal penitentiary and the publisher of a securities newsletter containing nonpersonalized investment advice and commentary, could be enjoined from publishing that newsletter because the publisher was not registered as an investment advisor.
The eight members of the Supreme Court participating in the decision were unanimous in concluding that a registration requirement placed on a publisher of nonpersonalized investment advice would constitute an impermissible prior restraint on constitutionally protected speech. Especially important was the implication that the speech in Lowe was constitutionally protected.
Justice Stevens, writing for the majority, found that, in drafting the Investment Advisers Act of 1940, Congress was aware of First Amendment limitations and did not seek to regulate the press through the licensing of nonpersonalized publishing activities. 472 U.S. 204-5.
The majority held that because the newsletter at issue contained no individualized advice, Lowe was not within the definition of an investment adviser. The SEC, therefore, could not rely on Lowe's unregistered status to enjoin the publication of the newsletter. Id. at 211.
Although the Court based its decision on the language of the statute rather than on constitutional grounds, it interpreted the statute under the assumption that Congress intended to avoid a breach of the First Amendment. Id. See also SEC v. Wall St. Publ. Inst., Inc., 664 F. Supp. 554 (D.D.C. 1986).
Justice White, joined by Justice Rehnquist and Chief Justice Burger, issued a separate opinion which preferred to address the constitutional issue directly by holding that the registration requirement itself was a flat prohibition of speech and that the Investment Advisers Act of 1940 may not constitutionally be applied to prevent persons who are unregistered from offering impersonal investment advice through such publications as those published by Lowe. 472 U.S. at 234, 236. Especially important, again, is the constitutional protection afforded in this opinion.
Justice White also stated in his concurrence, with which Chief Justice Burger and Justice Rehnquist joined, that the statute at issue, as applied to unregistered persons offering impersonal investment advice through publications, " . . . is too blunt an instrument to survive even the reduced level of scrutiny called for by restrictions on commercial speech." Lowe, 472 U.S. at 235.
Further, the Supreme Court, since the Lowe decision, has strengthened significantly the consitutional protection for commercial speech in such cases as City of Cincinnati vs. Discovery Network, Inc., 113 S.Ct. 1508 (1993), Rubin vs. Coors Brewing Co., 115 S.Ct. 1585 (1995) and 44 Liquormart, Inc. vs State of Rhode Island, 116 S.Ct. 1495 (1996). The Court has recognized the vital role of freely available commercial information to a well-functioning, market economy and has struck down government attempts to prohibit or sharply curtail access to commercial information.
3. Armstrong
The decision of CFTC in In the Matter of Armstrong, Comm. Fut. L. Rep. (CCH) # 25, 657 (Feb. 8, 1993) does not contradict the Lowe conclusions.
In Armstrong, the Commission concluded that the publisher of several financial reports offering personalized commodity futures trading advice including, through affiliates, personal consultations and management of customer funds, was required to register with the CFTC as a CTA. Id.
Many of the services cited in the Commission's interpretative letter such as examples II through IV (page 11, where XYZ provides a list of CTAs hyperlinked to CTAs who pay XYZ an advertising fee unrelated to customer funds), V (page 11, where WXY generates leads that are "forwarded" to CTAs), IX (page 12, where XYZ provides biographical and descriptive information on selected CTA advertisers), X (page 12, where RST provides free trade advice of a generic nature), and XII (pages 12-13, where Sally solicits for a CPO) are not engaged in the management of customer funds nor is personal consultation apparently provided as in Armstrong. The Armstrong matter is thus not supportive of the Commission's conclusion and examples contained in its interpretative letter.
Most software programs and publications similarly provide only impersonal, generic information, again unlike Armstrong.
Hence, to attempt to apply the specific and personal circumstances of Armstrong where customer funds were being actively managed to those of impersonal settings appears quite misleading and disingenuous.
C. Section 1a(5) of the Commodity Exchange Act
The Commission has attempted to exclude itself from these very clear precedents through the use of language in Section 1a(5)(C) of the Commodity Exchange Act which limits publishers' exclusion of Section 1a(5)(B)(iv) of the Act to those persons whose services are " . . . solely incidental to the conduct of their business or profession" (CFTC interpretative letter, footnote # 53, page 36) and has further claimed that " . . . a broad construction of the exclusion from the definition of CTA" is not mandated for certain publishers (CFTC interpretative letter, footnote # 61, page 37). The Commission further cites Armstrong in support of its conclusions (CFTC interpretative letter, footnote #s 56, 58, 60, 61, and 71).
1. CEA Language Similar to that of the Investment Advisor's Act (IAA)
The Commission itself has acknowledged the " . . . striking similarities between the (language concerning investment advisors in the) Investment Advisors Act and the law and regulations governing commodity trading advisors . . . " In the Matter of Polyaxon Capital, Inc., CFTC Docket No. 85-31 (ALJ Feb. 22, 1988).
When Congress borrows from one statute and incorporates it into another statute, the language of the two acts should generally be interpreted the same. Greenwood Trust v. Commonwealth of Massachusetts, 971 F.2d 818, 826-7 (1st Cir. 1992) and cases cited therein.
2. Large Publishers Constitutionally Protected by Lowe
The large publisher exemption in Section 1a(5)(C) of the Commodities Exchange Act has the effect of subjecting large publishers to only that portion of Section 1a(5) which is exclusive of Section 1a(5)(C). As the Commission has itself admitted (CFTC interpretative letter, footnote 61), the remaining language of this section and that of the Investment Advisor's Act are virtually identical. Polyaxon Capital and Greenwood Trust provide that large publishers are thus extended the protections provided in Lowe due to the adoption in the CEA of language contained in the IAA. This First Amendment protection is in addition to the exemption in Section 1a(5)(C) of the CEA. Already protected by Lowe, this Section 1a(5)(C) exemption is transparent to large publishers. The Section 1a(5)(C) exemption thus serves only to selectively discriminate against small publishers by denying BOTH the Lowe precedent and the First Amendment protections BOTH of which ARE afforded large publishers by the remaining language in Section 1a(5).
The exemption for large publishers further serves as an admission that the subject speech in the CEA (with the exception of the large publisher's exemption contained in Section 1a(5)(C)) is Constitutionally protected speech as in the IAA. If the speech is protected in one instance, it is protected in the other and the Commission's enforcement effort against small financial publishers is one of unlawful, selective, and discriminatory enforcement. Since the Commission has selectively denied Constitutional guarantees and the Lowe precedent to a class of citizens while extending it to a second favored class, the Commission's enforcement against small financial publishers only is not only selective, discriminatory, and unlawful, but is INTENTIONAL and, further, is exercised WITH MALICE towards this small financial publisher class.
The Commission's discriminatory enforcement would appear to be especially incriminating if Commission staff had prior knowledge of such restraint and proceeded with such discriminatory regulation in spite of such knowledge.
I am thus requesting copies of any and all of those congressional and / or CFTC documents pertaining to the original incorporation of Section 1a(5) of the CEA and / or amendment to the CEA involving this section and all other such documents pertaining to interpretation and / or enforcement of the provisions of that section.
D. Fraud Powers Sufficient
Even without the authority to force registration of publishers, government agencies are not without adequate authority to police the markets. Quoting from Schneider v. State, 308 U.S. 147, 164 (1939), Justice White stated in Lowe;
"Frauds may be denounced as offenses and punished by law . . . If it is said that these means are less efficient and convenient than bestowal of power on police authorities to decide what information may be disseminated . . . and who may impart the information, the answer is that considerations of this sort do not empower [government] to abridge freedom of speech and press. Lowe, 472 U.S. at 235.
Supporting Justice White's conclusion is the Commission's own admission that sufficient police powers already exist as evinced by the Fortuna Alliance, L.L.C. matter, among others, in which the Commission states, "The Federal Trade Commission ("FTC") has brought several enforcement actions involving fraud on the Internet" (page 2, paragraph 2). CFTC's own recent fraud actions against "United Metals Trading Corp." and "Western National Trading" further support Justice White's conclusion and clearly demonstrate that the FTC and CFTC EACH already possesses sufficient police power to denounce and punish by law such instances when consumers invest their funds directly in fraudulent schemes.
CFTC's public pronouncements regularly attempt to justify its regulatory expansion and registration requirement by cloaking its agenda under the claim of " . . . small customers 'being defrauded by unscrupulous operators'" ("New CFTC Head to Take Time in Assessing Changes", "The Wall Street Journal", page C1, September 27, 1996). CFTC's solution is to force registration on a group of citizens with a mandate that is so broad it " . . . could arguably include libraries . . . because a library carries publications, just like the one you're reading ("Futures Magazine"), which covers the futures industry, it may have to register" ("Futures Magazine", November, 1996, "WEB : Rule Spinning Begins", pages 79-80).
CFTC uses its trojan horse argument to include in its regulatory purview not only those who directly hold and handle public investment monies, but also those who sell their written opinions as an editorial writer or reporter of a newspaper sells his written opinion for wages.
Since it must call upon existing law in those situations requiring enforcement, CFTC is well aware of the adequacy of the nation's fraud laws.
CFTC is also well aware of Justice White's quotation in Schneider v. State declaring the adequacy of the nation's fraud laws.
CFTC is further well aware of the SEC's ability to prosecute fraudulent schemes despite having been denied the ability by SEC v. Lowe to issue speech licences to the nation's citizens.
In spite of CFTC's knowledge of existing adequate fraud protection, it offers to the press a "victimology" policing requirement based on this very "fraud policing requirement" and, thereby, attempts to deceive the public into concessions regarding the expansion of its true regulatory agenda.
It is ironic that the industry's enforcement agency would itself be engaged in a misrepresentation of its true intentions.
Perhaps the CFTC would be better served to determine the cause / effect relationship between the free and unregulated publishing of stock market newsletters and the quintupling of stock market prices since SEC v. Lowe was rendered and seek to obtain similar results in other of the nation's markets.
E. CFTC Duty to Uphold the Constitution of Paramount Importance
A citizen who becomes a Commissioned Officer in the United States Military swears to uphold certain principles of our nation and its laws. When a citizen becomes a CFTC staff member, is an oath to uphold the provisions of the Constitution of the United States not similarly executed? If not, and since the Constitution IS the law of the land, should such a requirement not be the FIRST requirement of a new hiree? Even the President of the United States executes such an oath. And if this requirement has not already been adopted and is not immediately adopted, then does it not suggest that it is the Commission's intent to subordinate the law of the land in favor of CFTC's own rules and regulations? And if the Constitution is subordinated by the Commission's refusal to recognize its paramount authority, especially if such allegiance has been sworn, then is not such subordination evidence of malicious intent in civil rights / constitutional cases in which small financial publishers might be involved against NFA's and / or the Commission's oppression against the publisher's Constitutional rights? And if Commission staff have recklessly engaged the full power and resources of a United States government agency in an attempt to deprive a citizen of his(her) Constitutional rights or in an attempt to coerce the voluntary surrender of a citizen's Constitutional rights, then have those staff members not engaged in one of the most vile of actions that can be committed by one individual against another in our nation - the deprivation of one's civil and constitutional liberties and right to pursue all benefits provided by one's chosen profession?
When the Commission staff gather in a room to review enforcement direction and options, has no staff member the courage to stand before the others and state, "This is wrong"?
Do not Commission staff members who served as Commissioned Officers in our nation's military still not have a SWORN DUTY, as some other small financial publishers and I have as former military officers, to uphold the provisions of the United States Constitution? Or is the law of the land simply an inconvenience that is "in the way" of CFTC's agenda?
Does the Commission further not have the duty to first return to Congress and lobby for change when legislative mandates are in conflict with the peoples' Constitutional rights instead of assaulting citizens' rights?
Has ANYONE at CFTC not thought to ask of Congress that the discriminating "publisher's exemption" be removed from Section 1a(5) so that this portion of the Commodity Exchange Act might be brought into compliance with the provisions of the United States Constitution and so that the language might virtually EXACTLY echo the similar language of the Investment Advisor's Act?
Absent such actions, does the alternative not lay bare the CFTC's REAL intent - the unshackeled expansion of bureaucratic power and suppression of citizens' civil and constitutional liberties under the guise of consumer fraud protection?
III. RESTRAINT OF TRADE
A. Section 1a(5)
Not only is the language in Sections 1a(5)(B) and 1a(5)(C) of the Commodity Exchange Act in violation of the United States Constitution as applied to citizen publishers, the clear restraint of trade implications of the exclusionary language which impose a stifling regulatory burden on one set of market participants while exempting a second class from the heavy yoke of that same burden is not only unfair, but is clearly selective and discriminatory enforcement.
The wording of the regulation is unimportant regarding this matter since the effect of the regulation itself is to cause the selective and discriminatory enforcement in addition to contradicting First Amendment protection.
Has the CFTC reported its restraint of trade to the Federal Trade Commission (FTC)? If it does not report this restraint of trade to the FTC, may such silence not be construed as an intentional obstruction?
B. Effect of Restraint of Trade
The Commission's interpretation creates the illogical situation where a small financial publisher of a commodities newsletter of regular or, even, irregular dissemination could have the EXACT SAME information published in, as an example, "The Wall Street Journal" or "Fortune Magazine" or broadcast on "CNBC". The small newsletter publisher would be subject to the full and heavy burden of CFTC's regulatory requirement whereas, in the latter examples, the exact same information published by the large publisher would be subject to the publisher's exemption. This unfair favoritism creates a situation where the small business entrepreneur is forced to incur expenses that the large publisher is not. The large publisher is thus indirectly subsidized by the small financial publisher and provided, by government decree, an unfair competitive advantage in the marketplace.
C. Large Publisher's Exemption
Especially illogical is the Commission's interpretation when the market "influence" of the publications are considered. If published in the small financial publisher's newsletter, the influence is generally limited to the subscription list. Usually, these lists are but a few hundred customers. In contrast, if the exact same information is published in "The Wall Street Journal", its influence is extended to over 1.7 MILLION subscribers. If it is broadcast periodically on CNBC, the exposure is believed to be of even greater magnitude. Ironically, however, the Commission appears to view the unregistered small financial publisher as a major threat to the market-place in spite of "The Journal's", "CNBC's", and others' greater influence on the market-place and even cites the Subcommittee on Special Business Problems of the Permanent Committee on Small Business in support of its discriminatory conclusion by stating, "(registration requirements and fitness checks) would include any individuals or organizations identified as influencing or actually investing funds in the commodities market" (CFTC interpretative letter, footnote # 76, page 39).
Does such a statement not describe EXACTLY the activity of a small, individual trader who, privately, invests his own funds? Does the CFTC therefore not seek to eventually force the registration of all individuals who trade the markets? Or perhaps such regulatory authority is sought over just a few selected individuals? And how might a citizen be assured of anything but such an eventual conclusion when the CFTC itself has relied so heavily in its interpretative letter on this very exact opinion and has disregarded the very plain language of the First Amendment to the United States Constitution?
D. CFTC Regulation Discriminatory in Practice
The Commission has not sought, either through regulation or through actual enforcement, to extend its regulatory grasp around "The Wall Street Journal", "Fortune", "CNBC", or other such distributors despite their qualification as " . . . (an) organization identified as influencing (the market)" and despite, in fact, their far greater "influence" over the market. The Commission has thus, again, disingenuously presented an example in a CFTC Staff interpretative letter purporting to authorize the regulation of small financial publishers when, instead, the Commission's one-sided interpretation, in reality, only serves to further demonstrate CFTC's selective and discriminatory assault against small finanacial publishers only.
Especially ironic is that, due to the small and limited exposure provided by the small financial publishers' subscription base, a small financial publisher's opinion can rarely be heard beyond the size of its small subscription base unless the publisher's opinion becomes significant due to a reporter's announcement that the news is "of importance". The news thus becomes "of importance" only when it is reported as such in widely distributed, exempt publications as "The Wall Street Journal", et al.
E. NFA RULE 1101
When a citizen registers with the CFTC, a "FORM 7-R" is provided that also subjects the citizen to "all NFA requirements".
NFA Rule 1101 prohibits members from engaging in business with non-members and thereby appears as an unlawful restraint of trade in that the non-registrant small financial publisher is prevented from entering into business arrangements and from conducting trade with registrants.
I have personally had marketing arrangements for my "Almanac" cancelled because of fear of government reprisal due to this rule and have also had other quite lucrative marketing arrangements cancelled due to my non-registrant status with other firms.
I am sure other non-registrants have similarly experienced such economic discrimination.
IV. CFTC REGULATORY THRUST CONTRADICTS THE WEB'S PURPOSE AND USE
A. CFTC Regulation Selective and Discriminatory
As a panel of judges from the United States Court of Appeals for the Third Circuit recently recognized, the Internet "has achieved, and continues to achieve, the most participatory marketplace of mass speech that this country -- and indeed this world -- has yet seen." American Civil Liberties Union (ACLU) vs Reno, 929 F. Supp. 825 (E.D.Pa. 1996).
Judges in both the United States Courts of Appels for the Second and Third Circuits professed profound skepticism earlier this year toward government efforts to regulate the Internet. Shea vs. Reno, 930 F. Supp. 916 (S.D.N.Y. 1966); ACLU, supra.
The Commission's attempt to force registration of many of those on the internet further contradicts the most important aspect of the net itself which is the DECENTRALIZED free flow of information. In support of this concept of free expression, United States federal courts this year have even upheld the right of publishers to disseminate pornography on the net. The courts were particularly concerned that citizens would have to choose between silence and the risk of prosecution. The same chilling effect the courts were concerned about in those cases applies equally to those who wish to provide "pork belly" opinions without fear of reprisal by government.
CFTC's position on this issue places the federal government in the hypocritical position of allowing the free publication of how to make bombs and disseminate pornography on the internet and in other areas of public discourse while demanding that those who suggest the purchase of "pork belly" futures be treated as criminals unless they submit to government registration requirements and the accompanying unknown and selective censorship suggested by such registration. The effect in this area of commerce is to concentrate the dissemination of information in CENTRALIZED fashion and in the hands of but a favored few REGISTERED participants, quite opposite the decentralized features of the internet so many find attractive.
B. CFTC Regulatory Thrust in Opposition to the Interests of the Consumer
The most beneficial development over the last decade to the small trader has unquestionably been the rapid technological advancement achieved in computer applications as a result of the efforts of many small entrepreneurs. The advancements these small financial publisher risk takers have provided through their products have enabled the small trader to now analyze in seconds that which used to require hours (if not days), has allowed for the compilation and storage of massive amounts of data, and, through the efficiencies of open market competition, has collapsed prices to such levels that yesterday's technology which was available only through customized programming at six and seven figure prices available to only a few is today available to all at low three figure prices.
1. Potential Dampening Effect on the Small Software Producer
The Commission should be commended for having had the foresight to have not interfered in this rapid development. I certainly, as a consumer, do not want software publisher Bill Crews at Omega Research to have to spend half his day reviewing government-mandated font styles and sizes and other regulatory red tape and am sure most other consumers echo this sentiment and do not want the government impeding this rapid technological advance. Again, the market-place will eliminate those with inappropriate products.
2. CFTC Regulation Subsidizes Foreign Competition
If American producers are unnecessarily impeded, the market will rapidly shift overseas. Jobs, tax revenues and the national interest will be surrendered to foreign competitors. Hence, the CFTC can best service this market and the small consumer by assuring honest and liquid markets, by assuring the solvency of those who handle customer funds, and by otherwise not interfering with free market forces.
CFTC should also note that very few to no products that have been instrumental in providing the consumer the power to manage his own affairs and which have been at the forefront of this technological revolution have been introduced by either government or by large institutions.
3. Technological Developments Spread to Other Industry Products
These technological advances have also allowed a plethora of new trading techniques and methods to be developed some of which have been published in books, video tapes, seminars, newsletters, and the like. CFTC should not interfere with restrictive mandates or attempts to direct the free evolution of these products anymore than it should interrupt the free development of software programs. The few examples in this letter further suggest that the Commission would be hard pressed to provide the public ANY incremental value in this technological advance and that its pending registration of software and other small financial publishers has received little thought besides being quite ill-conceived and inappropriate.
4. Consumer Use of Open Chat Rooms
The government's approach to open chat rooms that might happen to mention futures products is especially disturbing. Again, if this thought control policy is upheld, it would suggest that a group of citizens standing on a street corner would be equally subject to having their speech monitored by CFTC moles. Were the speech of any of these citizens to pertain to "pork bellies", would such conversation mean that the individual citizen would have to register with the government as a CTA and provide Disclosure Documents to the other citizens on the corner in order to complete the conversation? Chat room conversations should likewise be open and encouraged. Such conversations, uncontrolled by traditional media powers and centralized influence, serve as a tremendous source of information to the citizen and, even, act as a better detriment to fraud and ill-conceived investments than any preventive measure the CFTC might attempt to provide. Even if, as CFTC hypothesizes, a consumer were to be misled to a CTA's site / prospectus, the consumer is still required to acknowledge the reading of the CTA's Disclosure Document upon opening an account and investing funds in a managed account or pool. Upon this reading, any discrepancies between claimed returns and actual performance will be noted by the consumer who can simply then decline the proposal.
5. FCM Use of Mailing List Vendors
It is further astonishing that CFTC would attempt to force mailing list vendors to register as Associated Persons or CTAs. These vendors are especially important to the small Futures Commission Merchant, especially a small firm that provides deeply discounted commissions. These discount firms are especially of importance to those small traders who manage their own affairs. Is this attempt to mandate registration of a person who maintains and sells mailing lists an attempt to deprive small discounters a source of business that may be the difference in keeping their doors open? Once again, it is the large institutions that would benefit from the higher fees that would occur were the free competition provided by these small firms removed from the market-place while the small trader would suffer. Large brokerage firms that have direct access to customers through alternative investment relationships such as an equity account would especially benefit from their in-house customer list.
C. CFTC Regulations in Contrast to Industry Direction
In contrast to this emphasis on free trade, immediately after the Barings, Daiwa, and Sumitomo fiascoes of recent history, arguments were advanced to "increase regulation" by such advocates as former CFTC Chairman Mary Shapiro who claimed that the very existence of the fiascoes justified increased international regulation.
These arguments are questionable and suspect at best. Sumitomo, for instance, presumably met its margin calls despite those calls totalling some $ 2.6 billion. Certainly, any brokerage firm holding positions for Sumitomo forced the liquidation of positions the moment the positions moved below maintenance margin requirements and funds were not forthcoming. Such action was presumably taken due to one of the most powerful forces present in economics - the firm's own self-interest. To not take action was to place at risk the firm's own solvency. Such action was assumedly further dictated by the clearing house(s) who shared the same self-interest and was further monitored and enforced by CFTC. Is this not but a good example of how free markets contain the actions of a "villain"? If Sumitomo was willing to risk $ 2.6 billion, of what concern is it of the CFTC so long as the margin calls due in any one jurisdiction are met? And surely the CFTC with its hundreds of pages of detailed and specific rules and regulations which have been available for decades did not allow these firms to domicile assets and liabilities in different jurisdictions?
To speculate was Sumitomo's own free choice. Others, who played with greater skills, presumably collectively profited by this same amount. Are these participants to be denied the opportunity to profit if Sumitomo is to be denied the opportunity to lose? Why does CFTC only focus on the losers in this instance?
I write of the Sumitomo matter because of its occurrence despite numerous CFTC rules and regulations to the contrary and because it is indicative of how CFTC uses normal market fluctuations to expand its regulatory empire. Sumitomo also serves to evince CFTC's constantly restrictive registration requirements as is shown in the history of its interpretative letters.
Perhaps if CFTC had not been wasting time in pursuit of small unregistered publishers and had been focusing its attention on IMPORTANT matters such as the Sumitomo debacle, this major "black eye" would not have occurred.
The real question, to this consumer, thus becomes, if the CFTC truly wants to help the small investor, should it not, instead of constricting free access to information, be taking steps to encourage that free flow so that more might share in the opportunities that such information provides? Or is the CFTC's mission to protect the right of only large institutions to have and disseminate this information?
CFTC's entire approach is contrasted with that of the Securities and Exchange Commission which has recognized that the internet has the " . . . potential to provide shareholders with greater liquidity in their investments" (CFTC Interpretative Letter, page 2). At a time when the SEC is moving to EXPAND competition and open alternative avenues on the electronic investment highway, the CFTC is moving in the opposite direction and attempting to control the free flow of information.
As a consumer, I would find MUCH more helpful CFTC action encouraging immediate and accurate volume and open interest reports at the end of the day, immediate and accurate volume and open interest reports continuously throughout the day, daily reporting of the Commitment of Trader's information, accurate daily trading audit trails, and other such electronic enhancements whose goal is to present the market accuarately to ALL. If CFTC feels it is unable to introduce policies encouraging the availability of these reports to the general public, then perhaps it should consult with some of the foreign electronic exchanges that apparently are already able to accomplish some or all of these tasks. Another alternative would be to allow those new and private competitive forces that can provide such information to compete with established interests including introduction of new exchanges when those existing interests are unwilling or unable to move forward.
The results and benefit to the small trader of these efficiencies can be further seen in the SEC's approach as reported by "The Wall Street Journal" ("Your Money Matters : Weekend Report", "On-Line Investing Flourishes as Brokers Slash Commission on Computer Trades", September 27, 1996). The report states that a "stunning 1.5 million accounts" (twice the projected number) are now trading stocks on the net and that the number should increase to 10 million by 2001 when assets managed increase to $ 524 billion. "Within 18 months, commissions - now $ 12 to about $ 35 for as many as 5,000 shares of a listed stock - may drop to as low as a few bucks, or even zero". Talk about benefit to the small consumer! But rather than encourage competition in similar fashion, CFTC appears to prefer to block the road with its restrictive approach which attempts to preserve old-money exchange interests and to micromanage web sites to such an extent that even the word processor a registrant should use in preparing a web site is specified (IV.C.(5), page 27). If a consumer is attempting to locate a CTA or CPO, the CFTC's restrictive process makes a quick, initial survey much more difficult when, as an example, the consumer's initial filter is those managers who have been in business for X years or more or manage Y amount of funds. Again, from a consumer's view, the easiest and most efficient procedure is that Disclosure Document acknowledgment should be attested to by the client only when an account is actually opened and funds invested. Attesting to such each time a site is visited and having to follow CFTC's dictated route is an inconvenience and encumbrance. Changing even this simplest of proposed requirements would be of far greater benefit to consumers, would likely result in far more funds invested, and, consequently, would provide greater market liquidity than the difficult process CFTC has proposed.
V. CONSUMER PERSPECTIVE
Congress and the CFTC have provided no evidence that they have EVER surveyed a representative sampling of small investors who participate in the nation's futures markets when formulating rules and regulations. Instead, the views and interests of large institutions and exchanges and those of government regulators are ASSUMED to coincide with those of the consumer. Instead of coinciding, however, the vested interests of these large political lobbying organizations are usually in direct opposition and in conflict with those of small investors since the large institutions are attempting to extract commissions and fees from the consumer.
A. Free Flow of Ideas
As not only a small financial publisher, but also a consumer of many of the newsletters, books, tapes, seminars, software products, and so on produced by other small financial publishers, I see absolutely no value added when the publisher or product is registered with the CFTC, NFA, or both. In fact, the exact opposite is the case. If I seek a specialist's analysis of the bond market, I not only want to be assured that the analyst's interpretation is not skewed by government censorship, but that the analyst's interpretation truly expresses the specialist's free thoughts and that those thoughts are not influenced by even the POSSIBILITY of government regulation and censorship. I want to be assured that the specialist's time is spent analyzing markets and not subordinating study time to readings of the indecipherable CFTC manual.
I further add, as a consumer, that large publishers and brokerage firms do not fill the void of market information as small financial publishers do. As an example, who at Merrill Lynch provides spiral analysis? Who at Morgan Stanley provides Inversion Cycle analysis for the live cattle market? And even if such an individual can be identified, how does a small trader gain access to these individuals at large, INSTITUTIONALLY-ORIENTED firms when the price of admission is a large account and rapid turnover at high commission levels? Further, if information on both subjects were available at the two firms cited, would most small traders have the resources to maintain two extremely large accounts at two different firms? And what of the trader with many more informational requirements? If the small trader does not have the resources required to gain access at any ONE large institutional firm, how will (s)he be able to gain needed access at SEVERAL firms? The result of the Commission's attempt to control the players in the market-place thus becomes subject to the "Law of Unintended Consequences" and damages the very consumers it purports to protect by depriving them of that which consumers most desire - unfettered access to ideas and information. The availability of such ideas and information is decreased when some small financial publishers are driven from the market-place or choose not to meet the government's required registration requirements and fees (or perhaps these ARE the "INTENDED" consequences)?
B. Availability of Ideas
Different consumers gravitate towards different investment theories and approaches. My personal experience has been that a trader who is comfortable using one approach will prefer it over others. This individual preference is the likely reason proponents of varying and widely diversified trading techniques each has a following since each consumer must, over time, search for that which is compatible with his temperament, investment goals and objectives, age, family environment, business environment, tolerance for risk (both financial and emotional), and numerous other factors all of which may or may not be of importance to any one individual. An example would be the attraction of Elliott Wave interpretations to one individual and disinterest in moving averages while the reverse might be true for another. To decrease the availability of approaches is thus to harm a portion of the trading crowd by removing that approach which might "best fit" a portion of the crowd OR EVEN ONLY A SINGLE INDIVIDUAL THEREIN. The most useful policy the Commission can thus follow is to encourage, to the greatest extent possible, a wide smorgasbord of publishers' trading approaches, newsletters, books, software products, and other methods upon which free people communicate their theories and opinions to others. Such an approach would likely lead to a better-informed public, many varied and diversified approaches and, thereby, increased diversification and liquidity of markets.
Such a climate of free speech and free press unfortunately does not exist today in the United States of America for futures market commentators under the CFTC's interpretation of existing regulations.
As an example, highly regarded market researcher Tom Demark, in discussing mechanical trading system design of which Mr. Demark has many years of experience, independently of this letter states, "The only problem is what is the exact trigger for a buy or sell. I've purposely stayed out of that realm because of the National Futures Association (NFA) and the CFTC" ("Commodity Trader's Consumer Report", September, 1996, page 11, paragraph 17).
Added commentary could no further elucidate the painful reality of the extent to which NFA and CFTC's restrictive regulations have dampened free discourse in this industry and deprived the consumer of the right to freely obtain desired speech. Mr. Demark's comment should further NOT be treated as an isolated example.
The alternative to these independent small press publishers lies, again, with large brokerage firms or with the small investor managing his own affairs. But even for those who self-manage, the CFTC appears to be broadening its regulatory scope which will, thereby, increase the small financial publisher's costs and, consequently, raise the cost to the consumer of those software services, books, chart services, and so on upon which the independent investor relies. Further, whereas the small financial publisher has an incentive to provide the best advice possible, the incentive for a brokerage firm is to issue opinions that result in rapid turnover of account equity and, thereby, increased commission revenue. This emphasis on commission revenue instead of performance causes a greater percentage of small traders to lose and leave the market. The investor's and the large institutional firm's interests are thus, by definition, in conflict. Yet this is the direction the CFTC apparently prefers to drive the consumer with its restrictive approach and mandates.
Burma (Myanmar) recently announced that "prison terms of 7 to 15 years would be meted out to individuals caught in the unauthorized possession of a computer with networking capability. Similar punishments now face any Burmese found guilty of using a computer to send or receive information on such broad topics as state security, the economy, or national culture." (Joshua Gordon, "East Asian Censors Want to Net the Internet", November 12, 1996, "The Christian Science Monitor", p 19).
The United States' equivalent is being pressed by the CFTC. "Futures regulators are cracking down on newsletter publishers they say are printing financial trading advice without being registered to do so . . . The CFTC may file suit against those publishers refusing to comply, officials at the commission said. In such cases, the CFTC could seek monetary damages or cease-and-desist orders." ("CFTC urges financial newsletters to register as advisers", July 3, 1995, "News Media Update", www.rcfp.org/NMU/950730).
The CFTC could also seek to criminally prosecute the individual for violating CFTC's interpretation of the CEA. Say, perhaps, imprisonment for 5 years and a $ 500,000 fine (Section 9 (a), CEA) plus the publisher's "crime" being recorded as a felony thereby preventing reentry into the profession for 5 years to life and also preventing the citizen from employment in many other occupations.
To one who engages in "pork belly" speech, what difference is there if the oppressing government is here in the United States or overseas in Burma when the exercise of free speech produces the same (or similar) result?
A rather stiff penalty for having exercised one's First Amendment rights!
How has this citizen been protected by the First Amendment when (s)he is subject to such constant turmoil, harassment, and the written threats and promises of the United States government itself ("CFTC urges financial newsletters to register as advisers", July 3, 1995, "News Media Update", paragraph 6, www.rcfp.org/NMU/950730)?
C. Liquidity of Markets
Another important requirement of small trader participation - liquidity of markets and its accompanying reduction of slippage - is further reduced as players exit the United States markets and shift their activities overseas. As an example, Paul Tudor Jones, a fund manager and American citizen, and many others apparently do not accept accounts in the United States anymore due to regulatory costs and layered bureaucracy but do accept accounts overseas. For similar reasons, other foreign advisors, such as former Hungarian citizen George Soros, also apparently refuse to bring their potential liquidity to the shores of America. Again, the "Law of Unintended Consequences" caused by CFTC's restrictive policies drives its own citizens and other competition abroad and thereby deprives the United States citizen from receiving the benefits the increased liquidity those offshore fund managers provide and further deprives some citizens from investing funds with those whom the citizen believes possess greater talent. Talent of equal ability at any given level thus gains a competitive edge offshore by not having to incur the mandated expense of United States regulation. Again, what do NFA and CFTC do to inform United States citizens of the existence of this overseas, less expensive, more efficient investing environment? And if they do not so inform the American investor of his(her) alternatives, then can this withholding of information not be seen as a major conflict of interest and disservice to those whom the Commission is directed to serve and protect? Is not the resulting decrease in liquidity in U.S. markets a detriment to the trading public, especially the small trader? Who does the CFTC serve, the exchanges and large FCMs or the consumer?
Although some of the decline of the U.S. share of world futures markets is possibly attributable to overseas growth, the restrictive practices of the NFA and CFTC have certainly contributed to the decline from 78 percent to 40 percent over the past few years of the share of world markets the U.S. now claims. Is it the CFTC's objective to also drive newsletter, video tape, software, book publishers, and similar vendors offshore? Is it the CFTC's objective to so control the free flow of ideas and information that small traders might no longer have access to the whole spectrum of ideas in America? Would such policies not further encourage the continued withering and reduced importance of U.S. futures markets and related U.S. business? Unregulated currency and derivative markets have experienced stupendous growth over the past few years. Is such growth due to the absence of NFA and CFTC presence? Is it a coincidence that the most rapid overseas growth that has occurred has generally taken the most rapid leaps forward in those areas of commerce where government restrictions are least involved and free trade and democratic processes are concurrently and rapidly advancing? Is CFTC's direction not in contrast to that in these more-rapidly growing areas?
D. Solvency of Firms
Small investors are especially fearful that another Great Lakes Commodities (a fraud which again occurred right under the nose of NFA and CFTC regulators and which occurred in spite of hundreds of pages of NFA and CFTC specific and detailed rules to the contrary) might remove another $ 70 million of their funds from their wallets. NFA and CFTC apparently allowed this theft and fraud committed by a registered and NFA / CFTC approved and supervised market participant to perpetuate itself for over a year.
All consumers especially seek assurances that the Commission can adequately assure the solvency of those of its members who hold customer funds and are far less concerned (if concerned at all) whether a potato farmer in Idaho writes "buy" or "sell" in his newsletter or on the net.
Small traders would rather that the CFTC do something really meaningful for the small investor. An example would be the policing of the exchange floor and / or moving the floor into the electronic age instead of accommodating the numerous delays that large institutional exchanges continue to extract from a compliant Commission.
VI. SMALL FINANCIAL PUBLISHER PERSPECTIVE
Congress and the CFTC have provided no evidence that they have EVER surveyed a representative sampling of newsletter, book, software, seminar, video tape, audio tape, and other small financial publishers who participate in the nation's futures markets when formulating and enforcing rules and regulations. Instead, the views and interests of large institutions and exchanges along with government regulators are ASSUMED to coincide with those of the small financial publisher. The interests of this group are therefore represented by large political lobbying organizations who have vested interests that are usually in conflict with those of the small financial publishers.
A. Small Financial Publishers Driven From Marketplace
Some small financial publishers with whom I have spoken would rather close shop than submit to regulatory purview over the written word. The reasons for such a decision are numerous and vary from one small financial publisher to another.
Regulation is simply too expensive and restrictive for others who consider themselves as engaged in free artistic or scientific expression and who want no hindrances repressing the free-flow of their creative energies. When these small financial publishers are driven from the market-place, it is the consumer who loses when no alternative exists or when the alternative is not as insightful as the publisher who refuses to submit to CFTC's regulatory dictates.
Other publishers simply consider it their DUTY as United States citizens to oppose incursions on First Amendment freedoms.
Still others have children and realize the importance of their children being able to share in the same freedoms and Constitutional protections previous American generations have had the good fortune to share.
It is for these and many other reasons that many United States citizen publishers demand the right to freely express their thoughts and opinions, for compensation, about "pork bellies" and the like and to as many in the market-place who will freely pay to hear those opinions WITHOUT being required to have to constantly incur the burden of defending their Constitutional right to freely express that opinion (as is having to be done in this letter) and without the requirement that they first register their opinions with the government.
B. Small financial publisher Objections to Registration
1. Reason for Government Registration in Question
Some small financial publishers do not consider NFA / CFTC registration as synonymous with a badge of honor and believe the public to be unaware of the reasons for their conclusions. As an example, many consider the forced liquidation of long silver contracts in 1980, condoned by the Commission, as legalized thievery. How was the small trader, long silver contracts in January, protected by the exchange's "liquidation only" order which caused numerous consecutive "locked limit down" days from which the small trader could not escape and which purportedly was issued to bail out favored exchange interests caught short? How was this "emergency" action order condoned by CFTC? How can CFTC EVER seek claim to moral authority after this action? How many small traders saw their accounts turn to deficits because of CFTC's inaction? How many small traders are even aware of how our supposed "free and open" markets are, instead, and with the blessing of the Commodity Futures Trading Commission, fixed and tightly controlled with the rules stacked in favor of special interests? What effort has the Commission made to inform the small speculator of these obscure rules?
CFTC supervises and approves NFA's rules and regulations. Part of NFA's Congressional mandate is an educational requirement. NFA revenues are derived from the public pocket in the form of a per transaction "tax" and result in revenues of approximately $ 25 million per year when the indirect of member fees (which are paid for by the public in the form of higher commissions) are included. Instead of wasting the obscene amount of funds as it did in its recent public video, "Investor Protection Through Market Integrity" (which, no doubt, touched the hearts of those who had been trapped in the silver debacle previously mentioned especially given its unnecessary, opulent and expensive packaging), why does NFA not, instead, explain the true meaning of "fast markets", "slippage", limits, and how the price of a fill may be changed or cancelled entirely long after the fill is initially reported, exactly how the silver "liquidation only" order was lawfully issued, how wheat prices on the Chicago Board of Trade mysteriously experienced a huge increase to new all-time highs in the last few minutes of trading on May 20, 1996, and other such "nuances" of the rules? What has NFA done to inform small investors of the risks entailed when investing cash in U.S. Treasury bills at a commodity brokerage firm? Or perhaps how the consumer might obtain a copy of these rules? Such explanations would enable the consumer to better know how stacked against him the game really is. Or do NFA and CFTC so fear the possibility of further decline in liquidity that the truth might entail were the trading public so informed of how NFA and CFTC regulate the nation's markets that they instead would rather produce videos and promotional materials hypocritically proclaiming their own "integrity"? In light of the silver debacle, this video should be immediately recalled for false advertising and the National Futures Association and the CFTC should never again, in my opinion, use the word "integrity" when describing the nation's markets, NFA / CFTC regulation, or NFA / CFTC regulators.
Other reasons some do not highly regard the "integrity" and regulatory requirements of NFA and CFTC is the inability of the Commission to police such domestic catastrophes as the Stotler collapse (Stotler was a major Futures Commission Merchant (FCM)). Again, this debacle occurred right under the nose of NFA and CFTC regulators, involved an NFA / CFTC approved and supervised registrant, and purportedly involved an estimated $ 150 million. These non-registrants consider this collapse as representative of NFA's and the Commission's "look away", "cozy relationship" regulation of large institutional interests. Perhaps the Stotler insolvency, like the Sumitomo affair, also occurred because NFA and CFTC regulators were simply too busy chasing those evil, criminal, unregistered small financial publishers to notice this pending major insolvency?
2. Value of CFTC Regulation Questionable
The CFTC has been regulating domestic markets for decades. Yet the Stotler, Great Lakes Commodities and many other such incidents that have provided the industry several "black eyes" have occurred within recent history after years of regulations, years of writing regulations, and years of enforcing regulations. And yet the industry appears no safer for customer funds NOW than it did prior to CFTC's existence. Instead of expanded regulation, is the better approach not to commission an independent study to determine CFTC's incremental value to modern markets and why these debacles have occurred in spite of CFTC's presence? It is ironic that CFTC continually cries out for more regulatory power at a time when the direction of most industries in this country is to downsize and deregulate industries and markets. If CFTC is unable to protect customer funds of industry registrants, what is it doing attempting to coerce nonregistrants into registering?
CFTC has stated that its chief concern is that "some newsletter publishers are charging hefty prices and, in return, giving specific trading advice. Some of these publications also run hotline services and refer clients to brokers" ("CFTC urges financial newsletters to register as advisers", July 3, 1995, "News Media Update", paragraph 3, www.rcfp.org/NMU/950730).
On what basis has the CFTC determined that "some newsletter publishers are charging hefty prices"?
Are we to understand that it is CFTC's intent to force the registration of all newsletters so that the CFTC might correct market-place inequities and determine the prices newsletters may charge?
How shall the CFTC determine the prices for various competing products?
Which of the major institutions with whom I compete shall sit on the committee that is to determine the price of my "Almanac"?
Why has CFTC never filed a complaint in United States District Court seeking to force me to RAISE the price of my "Almanac"? Or has it never occurred to those at the CFTC who desire the authority to dictate market prices that a free market-place might also have the ability to provide products of quality at a bargain in addition to providing those of overvaluation?
Since when is it a crime for a newsletter publisher to also provide opinion over a hotline service?
Is CFTC aware that there is a difference between a random abduction and referring a client to a broker and allowing the client the free choice of whether to pursue the referral or not?
C. Newsletter Publisher Registration Impractical
As a practical matter, so long as a customer employs any of the opinions issued by a publisher by opening a brokerage account on his own and placing his own orders, how can the Commission conclude that the publisher exerts any control over the customer's account if the publisher is not part of the process of opening the account, is not placing orders daily on behalf of the customer and, further, has no knowledge of what orders the customer is placing, in what quantity, at what price, or whether or not any orders are even being placed, and so on. In fact, what usually occurs in such a relationship is that some suggestions are followed, some are not, and some are even "faded" and traded in the opposite direction. It is even possible that two subscribers might be trading the same suggestion against each other due to their own different perceptions. In short, the customer is in full charge of his own fate and makes his own decisions. Further, the customer is usually reading more than one publisher.
Hence, for the Commission to show that a publisher was exerting control over an account, it would have to show that the small financial publisher was physically placing orders in the account. Alternatively, it would have to show that each and every trade entered by the customer and all subsequent actions involving each and every trade (i.e., stops, exit targets, and so on) were placed exactly as suggested by the publisher. Anything less would leave no doubt that the customer was controlling the account himself. The Commission would further need to show that ALL such accounts were traded in the exact same manner and at the exact same time. The Commission would next need establish that no other control existed in each and every account. And even if the Commission could demonstrate the above set of circumstances, it would still be insufficient to justify registration if the advice were generic and impersonal and issued equally to others. Further, it even appears that, in cases where the advice was personal in nature, it would still be subject to First Amendment protection.
D. Software Publisher Registration Impractical
It is especially difficult to comprehend how the Commission concludes that publishers of software programs are in need of CFTC registration. Once sold, the publisher has little idea how the customer will use the software or, for that matter, whether the software will even be used. Further, would software publishers such as Futuresource, who also provide a data stream, be exempted since the analytical part of the program might be termed "incidental" to the sale of the data stream? And if Futuresource is exempted and another program that provides the same analytical capability is not exempted solely because of the data stream omission, is not this policy again an example of selective and discriminatory enforcement? Is a publisher of data streams only, such as Genesis Data Services, required to register? And how is the Commission to be able to distinguish software that is strictly used by customers for stock analysis from that which is used for both stock and futures analysis? And even if the program has futures analysis capability, is this additional capability not solely incidental to the program that performs analysis when the universe of stocks is so much greater? Again, if the registration requirement is allowed to stand, will it be sufficient to require registration if any one customer uses the program partially for futures? Or need use be shown exclusively for futures? Should the requirement be defined by the nature of usage by any one customer or by all customers in the aggregate?
E. Regulatory Power of the Market
Small financial publishers know that the market-place itself is the best arbiter of their talents and that, if they cannot produce a worthwhile product, they will not survive. In contrast, they realize that the worst of registered market competitors suffers no penalty so long as (s)he adhers to the government's rules while the best of non-registered observers must overcome the "legitimacy" that the "government-certified" label implies. They nevertheless choose to not have their good name associated with regulation when that regulation appears to be unable to adequately police the solvency of those firms that directly handle customer funds. They realize that a regulatory agency that would engage itself in the oppression of citizens' First Amendment guarantees will not hesitate to attempt to use its regulatory blanket to further smother free expression and will unlikely fairly apply the provisions of law in others.
The consumer's best protection is thus the market itself. Incompetent publisher's will simply be forced from the market-place as consumers cancel subscriptions and return defective products.
F. Political Implications
The matter further has political consequences. As small financial publishers are driven from the market-place and market share is concentrated in the pockets of large registrants because of CFTC's repressive approach, the increased revenue flow to large institutions and decreased information available from small financial publishers focuses increased political power in the hands of the few as competition increasingly morphs into similar monolithic entities. New entry for the small competitor becomes more difficult as rules are written and amended through the political process and become more complex and in favor of existing, large participants as those large participants exercise their unbalanced political influence on the legislative process. Entry fees are finally increased beyond the range of "mom and pop" instead of being calculated on a percentage-of-revenue basis. Such is the approach currently followed by the National Futures Association which has experienced such increases in the past few years as Introducing Broker membership, a fairly good proxy on the participation of small businessmen, steadily declines. The result is that the widely-touted and oft-cited "industry view" increasingly becomes that of those few remaining large industry participants.
An example is provided in the "Futures World News" article of October 1, 1996, "U.S. Futures Industry Leaders Meet With CFTC Chairperson Born". "The historic meeting between top industry representatives and the new CFTC chairperson was an effort to communicate directly and jointly to the agency on the impact of regulatory costs on the futures industry . . . Among the issues the entire group discussed with chairperson Born were : changes to the Commodity Exchange Act, including equitable regulatory treatment to all futures markets, and the costs of regulation versus the benefits . . . the futures industry group said, 'Floor-based futures exchanges in the United States are micro-regulated by many outdated and cumbersome requirements and policies.'" The composition of the "Industry Leaders" group included the Chairman of the Chicago Board of Trade, the President and CEO of the Chicago Board of Trade, the Chairman of the Chicago Mercantile Exchange, the President and CEO of the Chicago Mercantile Exchange, the chairman of the Managed Futures Association, a partner of Goldman Sachs & Co., and the president and CEO of First Options of Chicago, Inc. In short, it certainly appears that large institutions were thoroughly represented. Are only " . . . floor-based futures exchanges in the United States" subject to being " . . . micro-regulated by many outdated and cumbersome requirements and policies" by CFTC? Who was representing the consumer? Who was representing the small financial publisher? When have these latter interests EVER been represented? Are the large institutional interests the only ones whose concerns are to be considered by the CFTC Chairman? It would seem that this "meeting of industry representatives" is only representative of the very concentration of political power discussed previously in this section.
The sad fact is that this discrimination has persisted because consumers and the small financial publishers are each not sufficiently powerful or organized to have gained legislative exemption similar to that afforded the strong lobbying power of special interest, large publishers and institutions. Small financial publishers further compete with large, high-dollar commission houses by providing traders with information that allows the trader to shift his account to the less expensive discounter. The large institutional interests that comprise the Board of Directors of and govern NFA are annoyed by the competitive forces small financial publishers provide and have a vested interest in preventing a level playing field due to this conflict of interest. Such is the nature of licensing schemes. The restrictive policies of the CFTC thus can be seen to only serve the large institutional interests at the expense of the free flow of information.
This citizen therefore humbly reminds the Commission that the Constitutional Amendments in the Bill of Rights were not included to protect the rights of the MAJORITY, but were included to protect the rights of the MINORITY and would further state that EQUALITY does not bespeak only to political or racial rights, but also to ECONOMIC rights which include free and equal access to the market-place for all. This truly American concept of free and equal access for all is clearly not reflected in the Commission's interpretative letter (CFTC interpretative letter, footnote # 53) which, instead, contradicts and disregards this American ideal. As much as the Commission would like to deny these rights, even small financial publishers of "pork belly" opinions are U.S. citizens and are included and protected by these rights.
G. Minority Participation
The Commissions' actions appear to be particularly repressive to prospective minority participants who are underrepresented among both small and large publishers. To the extent that the Commission has unlawfully blocked market entry and access to small financial publishers' First Amendment free speech and free press rights with its selective discrimination and increased costs, so has the Commission also made much more difficult small business access to the market-place for people of color and minority-owned businesses. The Commissions' interpretations and enforcement actions may thus even be RACIALLY discriminatory and in violation of federal law.
H. Personal Experience
Other reasons further exist that contradict the self-proclaimed "integrity" as described in government publications and pamphlets. As an example, I personally have been involved in the NFA and CFTC administrative law process and believe that the process is established to ratify the desired conclusion. I specifically cite the allegations of felonious behavior on the part of identified NFA officials (J&J Development Corporation, Petitioner vs. National Futures Association, Respondent, NFA Case No. 94-APP-001 On Appeal From NFA Case No. 92-BCC-034, Concluding Motion, July 24, 1995, IV.A.#s 2-4, pp 10-11) as alleged in a motion before CFTC Chairman Shapiro and Commissioners Dial, Tull, and Holum. To the best of my knowledge, no action has been taken against those NFA officials or the NFA itself nor has any investigation ever been initiated by CFTC. Is this lack of action perhaps because it involves high-level NFA officials? By refusing to police its "favorite child" (NFA), have the CFTC Chairman and Commissioners obstructed justice and become accomplices to a cover up? This is now the second time the CFTC has been informed of these allegations. Section 9(a)(4) of the Commodity Exchange Act clearly states that "It shall be a felony punishable by a fine of not more than $ 1,000,000 (or $ 500,000 in the case of a person who is an individual) or imprisonment for not more than five years, or both, together with the costs of prosecution, for: Any person willfully to falsify, conceal, or cover up by any trick, scheme, or artifice a material fact, make any false, fictitious, or fraudulent statements or representations, or make or use any false writing or document knowing the same to contain any false, fictitious, or fraudulent statement or entry to a contract market, board of trade, or futures association designated or registered under this Act acting in furtherance of its official duties under this Act."
If CFTC Chairman Shapiro and Commissioners Dial, Tull, and Holum are unwilling to even initiate the PRETENSE of an investigation when an enforcement matter is clearly brought to their attention for this (or any other) provision of the Commodity Exchange Act, then who shall enforce it? The Sapulpa Police Department? The Wagoner County Sheriff's Office? The Washington Post? In other words, what good is the law if no enforcement powers are provided to examine the actions of the police regardless of the depth to which it might challenge the existing bureaucracy?
VII. COST / BENEFIT ANALYSIS
It not only appears as if the concerns of small investors and small financial publishers have never been considered in the formulation of CFTC regulations, it further appears that CFTC and NFA do not, nor do they appear to have ever, performed a cost / benefit analysis regarding the impact of their regulations on various segments of the trading crowd, especially for that portion of the crowd that pertains to small traders and small financial publishers. Included in this analysis should be the actual cost of registration to a non-registrant including time expended attempting to decipher NFA and CFTC manuals, interpretative letters, and so on, installation and / or alteration of accounting systems, filing of reports, auditing fees, attorney fees, printing and postage expenses, record retention expenses, added staff expenses including fringe benefits, Disclosure Document and prospectus preparation and distribution expenses, opportunity costs when precious time is instead spent on "compliance" matters, the cost of researching and defending such issues as this one if the citizen has chosen to not register, and so on. This cost / benefit analysis should further include costs to the small trader as analysts are forced to withdraw their products or raise prices dramatically to cover increased regulatory expenses.
VIII. CFTC'S REGULATORY ASSAULT AGAINST SMALL FINANCIAL PUBLISHERS
A. Approach
CFTC appears to have initiated its selective, all-out offensive against small financial publishers only within the last few years under the regime of Chairman Mary Shapiro. This assault appears in violation of the First Amendment guarantees of the United States Constitution the provisions of which appear to have been INTENTIONALLY disregarded by Commission staff, the Chairman of the Commission, and the Commissioners. In most instances, the small financial publisher is an easy target.
The basic approach of the CFTC appears to be to inform the unregistered small financial publisher that a product is being distributed without being registered, in violation of CFTC rules. Often, CFTC regulators demand that the publisher turn over past copies of the product and advertisements. Most small financial publishers, in an effort to cooperate, wishing to minimize legal fees, and feeling innocent of any wrongdoing, provide this information voluntarily. Such is what highly respected industry observer Kent Calhoun did.
Mr. Calhoun now considers his voluntary effort to cooperate with the CFTC the biggest mistake he has made and remains unregistered.
B. 5th Amendment
CFTC's campaign appears to be an unlawful violation of publishers' 5th Amendment Constitutional right to not incriminate themselves. Are these publishers' informed of their rights when their First Amendment Constitutional rights are violated by the Commission (as in Miranda)? Are they informed of their right to legal counsel? Have any charges even been filed? If the legal expenses are such an amount as to bankrupt the firm, is a public defender provided by the Commission so that the citizens' Constitutional rights might be represented? Is reimbursement, plus interest, available to the citizen should (s)he prevail? Are punitive damages available? May damages be assessed against the individual staffers who would engage the unlimited power and resources of the government in such oppression if CFTC has oppressed the small financial publisher without cause? If not, what is to prevent such contumacious behavior from again occurring against a different, or even the same, small entrepreneur?
It would appear by the Commission's interpretative letter and by the Commission's actions of the last few years that these publishers are to be accorded no such protection and are, instead, treated as second-class citizens or, worse, as non-citizens to whom First Amendment guarantees are to not be extended merely because they happen to publish "pork belly" opinions and do not also sell garter belts and fishing lures in their publications.
C. Customer Lists
Eventually, the publishers' customer lists are requested. If these are voluntarily provided, the CFTC apparently uses the publishers' own lists to contact the publishers' prospects and customers in an attempt to obtain information that can be used to coerce the publisher into "voluntarily" registering.
1. Importance of Customer Lists to Case Development
The CFTC will be able to find customer complaints with the cleanest of products. Even a product that achieves an exceptionally high rate of 99 percent customer satisfaction will still have 1 percent unsatisfied purchasers (an appropriate exercise to demonstrate this effect would have the Commission survey non-registered small financial publishers to obtain the level of satisfaction with CFTC itself). It appears that the Commission's "modus operandi" is to locate this 1 percent or so and file, or threaten to file, a complaint against the small financial publisher on the basis of that customer dissatisfaction even though said dissatisfaction may be minuscule, entirely erroneous, or unfounded.
Faced with defending a complaint that might be entirely winnable solely on First Amendment grounds, many small financial publishers are, instead, coerced into surrendering their civil and constitutional rights rather than incur the six-figure (and higher) expense of asserting those rights in Federal Court where legal expenses might easily exceed annual gross revenues of "mom and pop's" business.
2. Consumer Perspective Regarding CFTC Use of Customer Lists
As a consumer, I do not want my name, address, phone number, and so on provided to a government agency by another small financial publisher, and especially do not want this information provided without my knowledge AND APPROVAL. If for no other reason, it is because I value the PRIVACY and EXCLUSIVITY of this information. Once one government agency possesses this information, it is, apparently, legally available for dissemination to any and all other government entities. I believe that United States citizens would be most concerned regarding the implications of CFTC's actions and those of registered participants if they knew how much it exposed their privacy. "Filegate", for instance, is certainly not an example to the contrary. One grapevine rumor even has the CFTC seeking other means to obtain customer lists when they are not voluntarily forthcoming. In the Greenwald matter, for instance, CFTC purportedly obtained a list of telephone calls from customers to Greenwald without his knowledge and from the phone company without a warrant in order to pursue his customers and entrap the publisher by attempting to generate customer complaints.
D. Subpoena Authority
One of CFTC's most powerful weapons is its Subpoena authority.
Amendment 6, US Constitution, provides that the accused has the right to be informed of the nature and cause of the accusation and to be confronted with the witnesses against him.
When citizens are Subpoenaed by the Commission, are they informed as to whether or not the Subpoena was issued because of a complaint and, if so, is the nature of the complaint stated and the complaining parties identified? How does the Commission know that a complaining party is not but an envious peer or that the Complaint is not entirely false? Are these Subpoenas issued as an excuse to gather information on a small financial publisher in an effort to coerce the small financial publisher into registering or in the hope that "something might turn up" in the Commission's vague fishing expedition?
And when these subpoenas are issued, is it established that the small financial publisher is subject to the provisions cited in the Subpoena / Complaint?
United States v. Security State Bank and Trust (CATX 1973), 473 F2d 638, established that government agencies such as CFTC must provide the burden of proof and demonstrate (1) that the small financial publisher is subject to the provisions of the Commodity Exchange Act and (2) that each subpoenaed document sought is relevant to an authorized investigation.
Are "mom and pop" informed of these requirements?
When demanding the production of information, are the provisions of the First Amendment and Lowe taken into account?
Is the "investment advice" provided in the publishers' products of generic or personal nature? And, even if of a personal nature, is that advice still not subject to First Amendment protection if no public funds are managed? Is such not what the First Amendment mandates? Does the small financial publisher carry trading authorization over any public accounts or execute customer orders? If not, then how is the small financial publisher subject to the provisions of the Commodity Exchange Act?
CFTC has issued Subpoenas and oppressed small financial publishers despite the available knowledge of the arguments, cases and examples I have cited in this letter.
If such is the case, were these Subpoenas and oppressive actions not intentionally malicious?
It would further appear that the Commission's assaults upon small financial publishers' Constitutional rights were initiated while CFTC had information contradicting its authority to issue the Subpoenas and to engage in its oppressive actions but that CFTC intentionally ignored its lack of authority in order to provide these publishers maximum aggravation and distress.
I further believe that the Commission's assault is continuing against other small industry participants to this very day in spite of CFTC's intimate knowledge of how its assaults are compromising the Constitutional rights of those citizens, some of whom, again, do not possess the resources to stand against such government oppression.
If such is the case, are CFTC and some members of its staff not intentionally negligent, and, even, possibly criminally negligent for violations of both citizens' Constitutional AND civil liberties?
CFTC's Subpoena requests for document production from unregistered citizens are outrageous when they request such items as unrelated personal financial statements for the past 10 years. Reconstruction of these and other records would likely cost tens of thousands of dollars and countless weeks of nonproductive effort.
If CFTC is on a vague fishing expedition in such assaults intent on entrapping United States citizens with their own evidence and testimony, CFTC should be prepared to pay for the aggravation it causes citizens and should compensate them to meet the Commission's demands. Amendment 5 would again appear to provide the authority for this compensation.
As an example, Mr. Calhoun was reportedly contacted at 9:30 at night by CFTC employee Terrance Hilliard who demanded his customer list be immediately surrendered. When Mr. Calhoun did not provide the list, this army veteran was again later contacted while in the hospital recovering from surgery and told that he would be "handcuffed, dragged into court, and thrown into jail" if he failed to immediately provide the names, addresses, and phone numbers of his clients. He reportedly filed a complaint with CFTC to John Rooney and Linda Noey but was still forced to attend a deposition in San Antonio May 25, 1995. No charges were ever filed and no accuser ever came forth, according to Mr. Calhoun.
Mr. Calhoun was forced to document all advertising claims since 1986 at the deposition. The questioning suggested that another vendor had provided erroneous information.
Mr. Calhoun thereafter included the exonerating results of CFTC's investigation in his advertisements whereupon he was purportedly told that the CFTC was especially upset and that it had specially targeted him. This later assault was apparently headed by CFTC employee Dennis Rob.
In this example, CFTC appears so zealous in its persecution of a United States citizen and military veteran that it may have allowed itself to have been duped by a competitor of Mr. Calhoun's. If so, is it not CFTC's responsibility to now turn the attention to the information originally provided by CFTC's mole and, if misleading, to prosecute the mole for fraud? Or is this mole a paid CFTC informant?
Do United States citizens really want the government to be allowed the power to pry into their most private of secrets, financial or otherwise, based on the mere appearance of activity that some other citizens do not approve? How does CFTC screen its complaints to determine those that are frivolous or intentionally misleading from those that are not?
How can CFTC staff defend a system that persecutes the innocent while allowing such fraudulent schemes as Great Lakes to extract $ 70 million from the public's wallet over the course of an entire year?
Is this entire area of consumer fraud enforcement not the providence of the Federal Trade Commission?
Further, when the CFTC is unable to obtain the documents required to develop its case, or when the CFTC is confronted with legal action contesting jurisdiction, CFTC's recent approach appears to gain access to the power of Federal Court subpeona by simply alleging fraudulent conduct against the small financial publisher regardless of whether or not it has any basis for its allegation of fraud.
Such was the tactic CFTC apparently used in its assault against Larry Williams, a noted industry participant. Williams' objection to CFTC's oppression on First Amendment grounds was purportedly rejected in Federal District Court and sustained on appeal because of CFTC's allegation of fraudulent conduct.
CFTC has thus acquired the unlimited ability to harass United States citizens who wish to engage in "pork belly" speech.
Registered or not, First Amendment or not, CFTC need only allege suspicion of fraud to gain the power to meddle in and invade every detail of a citizen's private and public life under power of court order.
CFTC appears to be assaulting small financial publishers NOT on the actual basis of complaints or actual instances of fraud, but merely because the small financial publishers exist as unregistered participants. Mr. Williams, for instance, apparently quickly saw the "fraud" allegation dissipate as subpeoned information was provided.
CFTC's oppression of citizen's rights is thus a matter of policy, not a matter of law violations. Such is suggested by CFTC's own statement "The Commodity Futures Trading Commission sent letters in early June to several newsletter publishers to urge them to register as commodity-trading advisers. Registration requirements include submission to a background check and fingerprinting" ("CFTC urges financial newsletters to register as advisers", July 3, 1995, "News Media Update", paragraph 3, www.rcfp.org/NMU/950730).
CFTC deceptively omitted in its public statement the fact that its registration requirement also dictates surrender of one's Constitutional rights and submission to CFTC and NFA administrative procedure.
The actual basis on which each of these and all other investigations were initiated can be determined from CFTC's own internal investigative report. Those that were initiated only to coerce "voluntary" registration, especially those that were coerced under the threat of the allegation of fraud, can be determined from these reports.
It would thus appear that the CFTC is using misleading and deceptive tactics in order to force through the power of subpeona and the judiciary the voluntary registration and surrender of citizens' Constitutional rights.
F. Personal Experience
Founding Father Benjamin Franklin would likely have had to register his "Poor Richard's Almanac" under these draconian dictates.
Were any of the other Founding Fathers alive today, would they beam with pride at the government's use of public funds, resources, and uncontrolled police power or would they shake their heads in amazement?
In consideration of the government's registration demand and my resolve to not surrender my First Amendment rights, and fearing the worst of possible outcomes from a wayward government agency determined to enforce its will, I did, literally, teach my children how to stand, motionless, palms pressed flat against the wall, should the door of our house come crashing down.
To this very day, every knock on the door or ring of the door bell has its effect.
IX. IMPLICATIONS OF VOLUNTARY REGISTRATION
The majority of citizens will voluntarily submit to the CFTC's registration demands when confronted by CFTC. Many reasons exist for this voluntary registration including patriotism, not wanting to appear uncooperative, not wanting to create the impression that the citizen is hiding information, believing that the citizen is lawfully required to register, coercion, and so on.
Left unchecked, these registration demands are eventually likely to envelop all small financial publishers and, according to CFTC's interpretative letter, eventually all individual traders.
Registrants are usually unaware of the implications registration might entail.
A. Requirement to Exhaust All Available Administrative Law Remedies
Once registered, the small financial publisher has unknowingly submitted to the jurisdiction of CFTC and, most likely, NFA administrative law. This jurisdiction means, for example, that, when customer mailing lists are demanded, the lists must be provided regardless of the subscriber's privacy rights lest the registrant be in violation of NFA / CFTC rules and subject to the penalties of CFTC's and / or NFA's administrative law procedure. All administrative remedies must now first be exhausted and the publisher subjected to CFTC / NFA adjudicative procedures before entry into Federal Appellate Court becomes available. If an NFA member, two levels of adjudication must be mounted prior to entry in federal court. Rights have inadvertently been surrendered as a condition of membership.
Legal costs are incurred and multiplied before the targeted citizen can even enter Federal Appellate Court. If the new
registrant's registration is revoked, CFTC will have confiscated one's chosen profession.
As an example of how long this administrative law procedure can continue, it has taken almost four years in the J&J matter previously cited to reach the Tenth Circuit where initial pleadings have still not yet been filed. What "mom and pop" small financial publisher can possibly fund such a litigative orgy or find the required time to defend their own freedom?
Such is the discriminatory power of licensing schemes established to protect the entrenched interests of large political powers.
As an example of how CFTC registration can lead to unanticipated regulatory requirements, former attorney Bruce Babcock of Commodity Trader's Consumer Reports (CTCR), a publication purporting to follow and report the results of several industry newsletter publishers, innocently chose to voluntarily register as a CTA. Mr. Babcock perceived the expense of registration to be less than that of not registering. Thereafter, Mr. Babcock was required by CFTC to provide documents for one of the newsletters he followed. Had the targeted publisher wished to evoke 5th Amendment protection, said protection had been exempted by CFTC's end run document request and Mr. Babcock's voluntary compliance. Mr. Babcock was required, by CFTC regulations, to cooperate or face a lengthy and expensive administrative law proceeding that may possibly have resulted in his deregistration. Had such occurred, Mr. Babcock may have been forced into the sale of his business or, lacking a purchaser, to close the business entirely. The small investor was thus faced with the possible loss of a valuable industry resource as a result of this innocent registration. Further, an uninvolved third party American small businessman had documents provided, apparently without his knowledge or consent, that he otherwise might not have provided.
As a reviewer of other industry products, I have no desire to spend endless hours copying and providing documents to the CFTC regarding another's lifetime work and would especially resent this requirement were I a registrant.
But what of another reviewer? Stan Angrist, for instance, is as astute, insightful, and fine a reviewer as there is in the industry. Mr. Angrist periodically reviews for "The Wall Street Journal" where he receives the protection extended to large publishers. If Mr. Angrist were, however, to write a review for, as an example, "Club 3000", a non-registered, highly-regarded consumer "chat room" newsletter, would he be subject to CFTC's registration requirement? And if he foregoes the income provided by a non-registered publisher due to this very registration issue, then is not such deprivation a 5th Amendment taking? And does the market-place again not suffer as small investors are deprived of Mr. Angrist's insights and opinions?
Simply knowing of this potential cost and risk is sufficient in and of itself for this reviewer to decline CFTC's registration requirement. The further uncertainty of how many other such "requirements" might exist is further inducement against registration.
B. Cost of Other Regulatory Requirements
Can the Commission guarantee that the next Chairman or the one after will not so broadly interpret the Commodity Exchange Act as to require preparation of a full Disclosure Document or prospectus for each newsletter, book, seminar, video tape, software product, and so on sold? Or for each product even OFFERED FOR SALE? The cost of providing these documents would be prohibitive and would likely be far more than the gross revenues produced by the product.
Before this concern is discounted, it should be noted that CFTC now mandates such a Disclosure Document when the product sold (or, even, offered for sale) is a managed account (CFTC interpretative letter, footnote 81, page 40). What is to prevent the Congress or the CFTC from dictating that ANY product sold or offered for sale by a registrant must also be accompanied by a Disclosure Document? To what other industries would this precedent spread?
How can a large publisher, having just read the preceding, not rush immediately to lobby for the introduction of legislation requiring the delivery of such Disclosure Documents (large publishers exempted, of course, under Section 1a(5), the large publisher's exemption) KNOWING in advance that the requirements are so harsh as to economically eradicate unregistered small financial publishers from the market-place. Such legislation would leave the remaining business only to the large, institutional, REGISTERED interests.
And if such a lobbying effort was launched, who would oppose it? The CFTC, which is beholden to large institutional interests? The non-existent small financial publishers' lobby? The non-existent small trader's lobby?
Besides the small financial publisher, would it not be the public that would most suffer as numerous educational products become unavailable in the market-place?
If so many small industry participants are so uninformed about even the EXISTENCE of CFTC's Interpretative Letter, how would they ever know of pending legislation requiring production of a Disclosure Document?
C. Indecipherability of NFA and CFTC regulations
Because I have stated that the regulations are indecipherable, it is incumbent upon me to support my statement. I therefore review my own personal experience with agency regulations.
In the J&J matter, CFTC regulation 1.10 (b) was disputed and reads, in part, as follows;
(b)(1) Except as provided in paragraphs (b)(3), (h) and (i) of this section, and except for an introducing broker operating pursuant to a guarantee agreement which is not also a securities broker or dealer, each person registered as a futures commission merchant or as an introducing broker must file a form 1-FR for each fiscal quarter of each fiscal year unless the registrant elects pursuant to paragraph (e)(2) of this section to file a form 1-FR for each calendar quarter of each calendar year. Each form 1-FR must be filed no later than 45 days after the date for which the report is made : Provided, however, That any form 1-FR which must be certified by an independent public accountant pursuant to paragraph (b)(2) of this section must be filed no later than 90 days after the close of each registrant's fiscal year.
(2) The form 1-FR filed pursuant to paragraph (b)(1) of this section as of the close of the registrant's fiscal year must be certified by an independent public accountant in accordance with (section) 1.16. A registrant who has elected to file its forms 1-FR for each calendar quarter of each calendar year pursuant to paragraph (e)(2) of this section, must nonetheless file a form 1-FR so certified as of the close of such registrant's fiscal year.
To J&J, this requirement meant that a quarterly form 1-FR had to be filed each quarter, that each form 1-FR was due 45 days after the end of each quarter, that the final quarterly form 1-FR had to be certified by an independent public accountant, and that the final quarterly form 1-FR was not due for 90 days after the end of the final quarter. No filing requirement is stated for the document certifying the final quarterly form 1-FR.
J&J has since had several attorneys read this regulation who all interpret it in the same manner. What does the reader think?
Would it surprise the reader to find that the Panel's interpretation in the J&J matter was entirely different than the interpretation just presented?
Non-registrants need be aware of the regulations to which they submit when they voluntarily register with NFA and / or CFTC. Is any such explanation provided by either of these two agencies to a volunteer registrant BEFORE registration (sort of like a Registrant's Disclosure Document)? Or is the registrant simply handed an indecipherable manual?
Several of these regulations are quite complex as are the Internal Revenue Service Regulations. For example, the above regulation, CFTC 1.10, in its entirety requires eight pages of extremely small print in the CFTC Manual.
This complexity and the extensive amount of time required to decode it adds another reason many small financial citizen publishers prefer to not join CFTC's regulatory umbrella.
D. Fairness of Agency Administrative Law
Having stated that, in my opinion which is based upon my own personal experience, NFA / CFTC administrative law is established to arrive at the desired conclusion and that this adjudicative procedure is therefore another reason for this citizen wanting to remain a non-registrant, it is incumbent upon me to explain the reasons for my conclusions.
In the J&J matter, the Panel of Robert Martyn, Donald Biddle, and Charles Collier appeared so confused by the regulation cited in the previous section that it, in fact, admitted in its Decision that it had incorrectly interpreted the provisions of the regulation at the Hearing. The Panel further contradicted NFA's own Compliance Department by stating that the filing of the final quarterly report was not required when the regulation itself clearly states that the final quarterly form 1-FR is due 90 days after the end of the final quarter. The Panel also claimed that a certified report was required to be filed 90 days after the final quarter when there is clearly no such requirement stated in the regulation. These and other contradictory readings of the regulation were advanced by the Panel, NFA's prosecuting attorney, Ronald Hirst, NFA's Compliance Department, and CFTC's Compliance Department.
Regardless of the number of different conclusions, however, do not the divergent opinions between the people charged with enforcing the regulation in itself suggest that the regulation itself is unclearly written?
As another example, NFA Compliance Rule 3-6 (a) states that, if a hearing is held, "The Respondent shall be given reasonable advance notice of the hearing date and shall be entitled to reasonable pre-hearing examination of all evidence in NFA's possession or under its control that is to be relied upon by the Compliance Office or that is relevant to the Complaint".
In the J&J matter, only 4 of 10 documents introduced at the hearing were provided for pre-hearing examination. J&J established that NFA's failure to provide the lawfully required evidence prejudiced J&J by depriving J&J of the opportunity to establish several inconsistencies, contradictions, and misrepresentations in NFA's evidence. J&J's attorney was so incensed he read, verbatim, NFA Compliance Rule 3-6 (a) into the Record of the Proceeding. By NFA's own law, this case should have been over because of NFA's obstruction and refusal to comply. Despite J&J's vigorous protests, however, the Panel of Martin, Bidgood, and Collier did not even address NFA's unlawful activity in its Decision.
Upon appeal before NFA's Appeals Committee, Chairman Wilbur Williston (sp?) and those others who served on the Committee further covered over NFA's law violation by changing the wording and requirements of NFA Compliance Rule 3-6 (a) from "pre-hearing examination of all evidence in NFA's possession or under its control" to "copies and / or descriptions of the documentary evidence" so that NFA would not again be found in violation. Again, this INTENTIONAL obstruction allowed NFA to skirt its lawful requirements.
Upon CFTC appeal, CFTC Chairman Shapiro and Commissioners Tull, Dial and Holum admitted that "We agree that NFA erred by failing to permit pre-hearing examination of the date-stamped financial reports it introduced as evidence at the hearing" and, thereby, also admitted that NFA's Panel had erred by failing to review the issue and that NFA's Appeals Committee had also erred with its failure to correct the Panel's error and with its obstruction of justice when it changed the words and meaning of the governing rule. In spite of its admission, however, CFTC failed to reverse claiming that J&J was not prejudiced by the error even though the law requires no such showing of prejudice and despite J&J's showing of prejudice.
CFTC's requirement is similar to the police having to show that an accident occurred in order to hold the driver who ran a stop sign in violation of the law.
If the injustice of NFA / CFTC administrative law is still not clear to the prospective registrant who might read this letter, consider that, during the entire hearing, the NFA Associate General Counsel, Kathryn Camp, sat at the same bench as the Panel and, throughout, whispered in secret, hushed tones what appeared to be instructions for the Panel to follow. Although identified by name, she was deceptively introduced by the Panel as merely a ministerial clerk with her true position as the powerful Associate General Counsel for the National Futures Association concealed from J&J. Conveniently, her secret advice was not recorded in the Record of the Proceeding although such recording is required, by law, in Section 17(b)(9) of the Commodity Exchange Act.
Although it might be possible that this was but the one bad apple in the barrel of CFTC cases, this citizen's personal experience with the fairness of NFA / CFTC administrative procedures was sufficiently disappointing as to suspect a whole orchard. The experience serves to provide another reason submission to CFTC's regulatory umbrella appears to not be in the best interests of United States citizens.
E. Private / Public Relationship of Attorneys
When the case against my "Almanac" arose, I noticed that the opposing attorney soon thereafter left the agency and entered private practice. I also noticed my own attorney's repeated recommendation that I succumb to government requests and register my book. To do so, of course, would have meant surrendering my Constitutional rights and, had I acquiesced, may have served to establish precedent against the rights of others.
Many small financial publishers will rely on their attorney's advice in attempting to decide how they should address CFTC's interpretative letter or even if the letter should be addressed. But do attorneys who specialize in securities law not have a vested interest in directing their clients towards CFTC's "briar patch" of indecipherable rules and regulations? Once registered, will the small financial publisher not become more reliant upon the attorney's advice for direction and to extricate the citizen from those entanglements that later arise are sure to arise because of the complexity of the regulations? Would it be a surprise if the attorney directed the small financial publisher towards registration especially if the attorney's training had focused on the study of agency rules and regulations and compliance therewith with little training in Constitutional law? Are these conflicts disclosed to the small financial publisher prior to engagement of the attorney? If the attorney maximizes long term revenue by guiding the small financial publisher to voluntary registration, should it be surprising if many small financial publishers do not respond to CFTC's request for comment but, instead, voluntarily register?
In my opinion, most small financial publishers are not only not aware of CFTC's interpretative letter, broadened regulatory scope, and request for comments, but are further unaware that CFTC's expanded regulatory blanket dictates that the day will arrive when the knock on the door will be the CFTC presenting its registration mandate. This mandate will be (and is being) presented, one-by-one, throughout the industry. Each small financial publisher has and will have the right to seek to enforce his Constitutional rights in court, register, or withdraw from the business.
What steps has the CFTC taken to inform the citizen-publisher that such is the eventual ultimatum?
X. PROPOSED SOLUTIONS
Not wishing to merely criticize, this citizen proposes the following solutions;
A. Voluntary Registration for Publishers
All those who desire NFA membership or CFTC registration and further desire to hold out said membership / registration to the public and advertise the advantages of said membership / registration may freely do so while those publishers who do not manage or otherwise directly handle the public's investable funds may abstain from such membership / registration.
B. Voluntary Registration for Managers
Even the role of the CFTC as purportedly mandated by Congress is counter productive.
As an example, if a consumer or group of consumers desire that an individual manage their funds, why should they not have the right to engage that individual regardless of whether or not that individual wears the badge of government approval? If the selected manager is unwilling to surrender his constitutional rights in order to be granted government's license, the result is that government has deprived both citizens of their right to freely enter into a private agreement. The consumer is denied the right to have one's funds managed by the individual of choice and is thereby deprived of the opportunity of experiencing the fruits of the manager's ability. The prospective manager is deprived of the opportunity to improve his lot in life by employing his talents as desired by others. So long as the consumer is aware of and is willing to consent to the unregistered status of the manager, forego the "protection and integrity" afforded by government, and submit himself to the terms stated in a private Agreement, is it not the Constitutional right of both parties to freely enter into such an agreement of their own private choice?
C. CEA Exemptions
This choice is not, as described by the Commodity Exchange Act, a matter of whether or not exemptive status exists, but is a matter of whether rights once guaranteed by the Constitution are to be upheld.
The CEA does, in fact, provide exemptive status for some favored participants. The Act's exemptions are selective and discriminatory, however, as they allow exemption of SOME advisors who manage less than $ 200,000 for fewer than 16 persons, who manage for banks, insurance companies, charities of greater than $ 5 million, and so on, but not for others who do not fall within these favored and arbitrary classifications. The question again arises whether or not such arbitrary restrictions against a specified segment of the trading crowd are, again, an unlawful restraint of trade and unconstitutional prohibition that prevents participation in the market-place by a portion of the crowd unless that portion is willing to incur the increased expense of registration. For instance, why are gas station owners not included in this exemptive class? Why are charities of $ 10,000 also not included instead of just those of greater than $ 5 million? Has CFTC again confused SIZE with COMPETENCY? Do these exemptions simply not only provide the exempted class rights already guaranteed by the Constitution?
XI. IMPLICATIONS SUGGESTED BY CFTC'S REGULATORY ASSAULT
Of paramount importance to the general public are the implications of CFTC's regulatory assault and disregard for the most basic of American freedoms on other aspects of American life should CFTC's interpretation be sustained. In short, who would be next?
My "$upertrader's Almanac" was accused of offering "practical trading advice". Will Martha Stewart have to register with the Environmental Protection Agency for offering a book on "practical gardening advice" should the EPA demand such registration? Will auto mechanics have to register with the Consumer Protection Agency before they can offer a book on "practical auto advice"? And how long would it then be before "talk radio" or "C-Span" was forced to register with the Federal Election Commission (FEC) for having provided "practical political advice"?
What the CFTC requires is no less than a speech license.
Our nation has prospered for almost 200 years prior to the formation of the CFTC. Could any participant, shortly after the turn of the century, have envisioned a forthcoming day when ANY government agency of the United States would seek to enjoin a publisher from stating his(her) opinion in writing as the regulatory agencies have sought to prevent my "Almanac"? And just as preposterous as this scenario once was perceived then is the perception now that Martha Stewart might one day have to register with some government agency her ideas regarding tulips just as difficult to conceive?
If she and others ever are forced to submit to such registration, is it possible that the findings and conclusions established in this matter will be cited as precedent in her case?
XII. COMPENSATORY DAMAGES
When small financial publishers' and their products are targeted for government assault, what becomes of the damage done to those products and the publishers' reputation?
In my personal experience, although the matter has absolutely NOTHING to do with anything in my "Almanac" being WRONG or with my having absconded with customer funds or with my having misled purchasers or with my having ill-informed the public or with my having issued bad advice and so on, the impression IMPLIED by the mere EXISTENCE of the government's action is that something wrong WAS done or that something IS wrong with the product.
When Ken Roberts was forced to register with the CFTC this past year, the CFTC publicly announced its "achievement" near and far. The forced registration was even printed in "The Wall Street Journal" and apparently was intended to serve as an example and thereby coerce others into such registration.
Knowing of the provisions of the First Amendment (and exclusive of the precedent established in Lowe), does CFTC's continual oppression of "mom and pop" industry participants not constitute CRIMINAL activity? And having already been admonished of CFTC's unlawful harassing activities, do these activities not subject both the agency and the individual staff members who engage the resources of the agency in its unlawful action to damages? And are not those staff members who not only engage in this oppression, but fail to strongly oppose it, equally guilty as accomplices? Does this attempt to deprive citizens of their civil and constitutional rights constitute a conspiracy? Are CFTC's actions subject to RICO?
Government immunity in the face of such negligence and deliberate malice is not a defense.
Fairchild, Arabatgis & Smith, Inc. v. Sackbein (DCNY 1978), 451 FS 1189 (aff'd 591 F2d 1330) approved a damage action against agency employees for retaliatory investigations following a complaint against their harassing activities. How many complaints have similarly been filed against CFTC and staff members regarding Civil and Constitutional violations? Where, in the NFA or CFTC manuals, are rules allowing for citizens to file complaints against NFA and/or CFTC or individual staff members or directing citizens who have been unjustly oppressed to those sections of the United States Code that provide appropriate remedies? Where is the independent citizens' protective organization that would police and investigate these government agencies and adjudicate ensuing complaints? Where are the penalties stated that are to be assessed against overzealous regulators and agencies? Self-policing is not sufficient as organizations are directed by the good and bad intentions of the individual members of those organizations. The individual members are merely people and, like all people, possess the same aspirations and frailties regardless of the organization for which they are employed be that organization private or public. Whereas one CFTC Chairman, for instance, might recognize the protections afforded by the First Amendment, the next Chairman might choose to ignore those same protections and subordinate them to the agency's or the Chairman's own personal agenda.
If ethics courses can be dictated for NFA members / CFTC registrants, why should regulators not be required to attend the same ethics classes AND, ESPECIALLY, courses on the meaning of the United States Constitution and the precious liberties that our Constitution guarantees? Is it not the law of the land and superior to both the CEA and CFTC / NFA rules and regulations?
Because I am not familiar with all CFTC cases related to these matters, I am repeating my request that a list of all non-registered industry participants CFTC has attempted or is attempting to oppress with its First Amendment assault, each initial CFTC Investigative Report that gave rise to the investigation, any charges that were filed or threatened, and the resolution of each and every case CFTC has initiated within the last 120 months be provided to all those who have suffered such oppression by CFTC.
I would further like to invite all CFTC staff members who feel the need to speak out against CFTC's agenda and assault to contact such outlets as their congressional representative, the Newsletter Publisher's Association, or the media.
CFTC's actions have caused me personally, both as a consumer and a small financial publisher, to expend an enormous amount of time and resources in the preparation of this letter, in defense of my right to freely publish my publications, in defense of others' rights to freely publish their publications, in defense of consumers' right to freely enjoy those publications, and in other issues related to these subjects. This unwarranted assault has now continued, in various manner, for approximately one decade.
Amendment 5, United States Constitution, states " . . . nor shall private property be taken for public use, without just compensation."
Amendment 10 would even suggest that both NFA and CFTC are unconstitutional organizations.
CFTC's unwarranted and unlawful oppression has caused me to expend my private property in defense of my First Amendment rights and appears to qualify as a "taking" in violation of Amendments 5, United States Constitution. I am quite confidant that others who have been similarly oppressed by the CFTC have also had their Constitutional and civil rights violated by CFTC's oppression.
Should CFTC not be prepared to provide immediate compensation to each of those small financial publishers who have been coerced into registration or have been driven from the market-place as a result of the Commission's regulatory takings and civil rights / Constitutional violations?
How many of these small financial publishers are further delaying the introduction of web sites pending resolution of this matter and assertion of rights already guaranteed them by the Constitution? How much income are they being forced to forego by this delay and how many expenses are they being forced to incur in asserting rights that are guaranteed simply by their American birthright? Should these small financial publishers not be compensated for income forgone and expenses occurred as a result of CFTC's unlawful opposition for the period from roughly August 1, 1996 to whenever CFTC agrees that it lacks regulatory authority over non-registrants?
XIII. DILEMMA OF THE SMALL FINANCIAL PUBLISHER / REGISTRANT
A. Duplicity of roles
Some small financial publishers both manage money and distribute their opinions, comments, and insight in books, newsletters, and such. CFTC has taken the position that, in cases where such duplicity exists, the regulatory blanket is to also extend to all of the publisher's activities.
If Lowe and the First Amendment apply to publishers who do not manage money, the same words, principles, and concepts equally apply to those who do. CFTC and NFA requirements thus, again, appear to have exceeded their authority and to have oppressed the Constitutional rights of United States citizens.
In those instances where small financial publishers distribute their products from separate business entities (corporations and so on), the matter appears especially clear despite CFTC's opinion to the contrary.
As an example, how would CFTC handle a money management subsidiary of "The Wall Street Journal"? Would it also attempt to regulate the newspaper?
B. Acknowledgment of Disclosure Document
The Commission appears concerned that the manager's publication might cause newsletter customers to open accounts with the manager. Even if this statement is true, the customer must still review and provide a signed acknowledgment letter stating that he has reviewed the manager's Disclosure Document.
C. Consumer Viewpoint
A consumer will gain a fairly good idea of the manager's insight to market moves from reading the manager's newsletter. Not allowing the manager to convey the fact that the manager also guides accounts / pools deprives the consumer of discovering information that improves market efficiency. Such information is similar to the price discovery process of futures themselves. It is thus in the interest of consumers that registrant managers also provide consumer newsletters and other products even when those products are provided through non-registrant publishers. Will all consumers be so advantaged? Probably not. Those who will, however, should not be denied the opportunity to use those "manager discovery" approaches they most prefer.
The average consumer is also far more likely to gain insight from the manager's newsletter regarding the manager's perspective as to why a particular market is expected to move in a particular direction and how the manager plans to avail himself of the move than is likely to ever to be gained from the lightly-read, seldom understood, prospectus provided by the manager. The newsletter thus can also educate both the manager's customers and non-customer consumers besides providing valuable perspective to prospective customers about the manager's abilities.
CFTC's restrictive regulations thus