The CFTC should consider clarifying the scope of fiduciary duties that commodity trading advisors (CTAs) and other asset managers owe to their customers, CFTC Commissioner Dan Berkovitz urged in a Commission opinion. In a concurring statement, Berkovitz agreed with the majority that a customer could not recover in a reparations action for an alleged breach of fiduciary duty where there was no breach of the Commodity Exchange Act (CEA) or CFTC regulations. However, because the Commission has acknowledged that fiduciary duties may arise and state laws vary, customers could benefit from a uniform standard of conduct, said Berkovitz (Emily v. Gleichmann, CFTC Docket No. 14-R007, June 9, 2020).
Thus, the case and concurrence settled two questions, but raised a third:
- Can a relationship between a CTA and his or her customer can give rise to a fiduciary duty
- Can breach of fiduciary duty, by itself, result in liability if there is no violation of the CEA or CFTC regulations?
- What fiduciary duties do CTAs and other asset managers owe to their customers?
A CFTC judgment officer issued an Initial Decision finding that Gleichmann had not committed most of the alleged misconduct, but had churned the account. The judgment officer noted that the commissions and fees charged by Gleichmann were "well above the industry norm" and found this to be a "red flag of questionable trading practices" according to guidance from the National Futures Association (NFA). The judgment officer awarded damages to Emily.
Gleichmann appealed. Upon remand, a different judgment officer reversed the findings and damages. In an Initial Decision on Remand, the judgment officer found that the evidence did not support a claim of churning, because the commission-to-equity ratio was not high, the trading volume was too low to support a finding of excessive trading, there was no evidence the trading strategy differed from Emily’s previous seven years of trading, and Emily was an informed and sophisticated investor. Accordingly, the complaint was dismissed.
CTAs may owe a fiduciary duty. Upon appeal, Emily dropped his churning claim, conceding that churning had not occurred. Instead, he argued that Gleichmann and USIG had breached their fiduciary duty. He supported this claim with a handful of trades that he asserted were irrational.
The Commission agreed that a CTA may owe a fiduciary duty to a client. Citing a series of cases stretching back to 1978, the Commission held that a relationship between a CTA and his or her customer can give rise to a fiduciary duty. The Commission acknowledged some lack of clarity on this point, and resolved any doubt for once and for all:
"Though we have never held otherwise, we recognize that the Commission has not always been clear on this point. To the extent that any previous decisions are inconsistent with our decision today, they are superseded."
Breach not actionable without other violation. However, the Commission declined to investigate whether a breach had in fact occurred. The Commission observed that, while a fiduciary duty may exist, a breach of fiduciary duty is not in itself actionable under the CEA or CFTC Regulations. Consequently, without a corresponding violation of the CEA or CFTC rule, regulation, or order, a breach of duty is not cognizable in reparations. Because Emily had dropped the churning claim, he no longer had an actionable claim. Therefore, the Commission affirmed the dismissal.
Berkovitz raises questions. Commissioner Berkovitz agreed that Emily could not recover because a breach of fiduciary duty, by itself, is not cognizable in reparations. But for Berkovitz, the case raised important questions.
Citing a joint CFTC-SEC report, Berkovitz noted that a remedy for breach of fiduciary duty may exist under state law where the common law imposes fiduciary duties upon persons who make decisions regarding the assets of others, like CTAs. But these laws vary by jurisdiction, and customers could benefit from a uniform standard of conduct, said Berkovitz. He observed that although CFTC precedent cases identify fiduciary obligations under certain circumstances, they do not specify standards of conduct. Therefore, Berkovitz recommended that the Commission consider clarifying the scope of fiduciary duties that CTAs and other asset managers owe to their customers.
This is CFTC Docket No. 14-R007.