A Texas-based company settled charges that it acted as a commodity pool operator ("CPO") without registering with the CFTC.
In a recent Order, the CFTC said that W Resources, LLC ("W Resources") operated several funds for the purchase of oil and gas assets and commodity options, in order to hedge the financial exposure of those assets. The CFTC alleged that in doing so, W Resources acted and continues to act as a CPO despite never registering with the Commission in that capacity. The CFTC also noted that W Resources never filed a notice of exemption with the National Futures Association or applied for any relevant exemptive relief from the registration requirements. As a result, the CFTC charged W Resources with violating CEA Section 4m(1).
To settle the charges, W Resources agreed to (i) pay a $150,000 penalty, and (ii) carry all existing positions in commodity exemptions to expiration, unless it registers with the CFTC or is granted other exemptive relief.
Commentary / Bob Zwirb
The settling respondent here is an exploration company that drills multiple wells in the Williston Basin with other major oil exploration firms. According to the CFTC, it also operates funds "to purchase oil and gas assets and to hedge the exposure related to certain of those oil assets with the purchase of commodity interests." At first glance, it is not an obvious candidate for being regarded as an operator of commodity pools. The only inkling comes from a reference in the Order that W Resources "solicited, accepted and/or received funds from investors on behalf of [such funds] to purchase oil and gas assets, including non-operated working interests in oil drilling wells, and to trade commodity options to hedge its resulting financial exposure" (emphasis added).
If the investors were outside members of the public, then W Resources was acting as a CPO. By contrast, if they were all company insiders, or business partners in a joint venture type of energy operation, then the opposite result would be warranted for they would not be the kind of investors that the CFTC commodity pool rules were intended to protect. Their capacity, however, is not identified here, so we have no way of knowing. It would be important to know why the CFTC thinks these were commodity pools run by a CPO. Both the Order and CFTC Press Release here are so terse that they are uninformative. As a result, it is not clear why this exploration company came within the agency's Part 4 jurisdiction. At a minimum, public communications from a government regulator should present all the facts relevant to a charge.
Commentary / Steven Lofchie
Requiring the company to hold positions until expiration is a questionable penalty. Doesn't that hurt the investors in the fund? Why not at least permit unwinding transactions?
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