Sports Betting Ban, Carbon Credit Guides at Risk With CFTC Exits

A reshuffling among President Joe Biden’s Wall Street watchdogs is set to leave the top regulator of derivatives trading shorthanded, potentially frustrating its planned crackdown on election and sports betting and other high-profile agenda items.

Two of five commissioners at the Commodity Futures Trading Commission will appear before a Senate committee Thursday, and are likely to be confirmed for new positions in the coming months, according to agency watchers.

Christy Goldsmith Romero is the White House’s nominee to head the Federal Deposit Insurance Corp. following reports of its toxic workplace culture. Kristin Johnson is the choice for a top Treasury job.

Losing two Democrats could make life difficult for CFTC Chairman Rostin Behnam, who has said he wanted to spend 2024 focused on finalizing rules.

The CFTC, which saw its powers vastly expanded after the 2008 financial crisis, has nearly two dozen outstanding rules in various stages of the process, including its closely watched proposal on election and sporting “event contracts,” according to the agency’s regulatory agenda. The CFTC has also proposed guardrails for the fast-growing market for voluntary carbon-credit derivatives, a priority for Behnam.

The White House hasn’t announced nominees to fill the potential vacancies. Senate Democrats are facing a time crunch to confirm a long list of Biden nominees who would remain in office beyond the presidential election, in addition to pending action on must-pass legislation. CFTC commissioners serve for fixed five-year terms.

Without immediate replacements, Behnam will be outnumbered by Republican commissioners and would be forced to hit pause on rule-writing plans for hot-button issues.

“To the extent that Chair Behnam wanted to do anything in the rest of this year that was potentially politically sensitive, it’s off the table to the extent that Johnson and Goldsmith Romero would no longer be at the commission,” said Holland & Knight LLP partner Alexander Holtan, who advises CFTC-regulated clients.

The CFTC declined to comment.

Communication Challenges

Even talking to one another would be challenging for the remaining commissioners.

The Sunshine Act, a nearly 50-year-old open-meeting law, generally requires agency deliberations to be held in public when a majority of the commission is present. If two of five CFTC seats are vacant, two commissioners can make a majority.

“When you’re down to potentially three commissioners, that effectively means that the commissioners themselves can’t have a conversation without having to go through the official commission meeting notice process,” Holtan said.

The CFTC ran into that problem during the Obama administration, when it had three commissioners for an extended period. The Wall Street Journal at the time reported commissioners had largely stopped speaking to each other, sometimes relying on aides to relay messages.

The CFTC is aiming to propose or finalize almost two dozen rules by early 2025, according to the agency’s most recent regulatory agenda. That includes a proposal from May that would ban using derivatives to bet on US elections and sports games.

Speaking at a conference in Boca Raton, Fla., in March, Behnam said the agency would “spend the remainder of 2024 largely focused on finalizing rules and considering a few additional proposals” being drafted.

While some issues, such as technical updates to reporting requirements for market participants, likely wouldn’t generate significant opposition, other matters could be more contentious.

Chief among them are the events contracts proposal and guidance for exchanges that want to list futures or other derivatives products based on carbon credits. US Treasury Secretary Janet Yellen had called the CFTC’s proposed carbon guidance a significant step toward promoting “the integrity of carbon credits and enabling greater liquidity, price discovery, and responsible product innovation.”

“The votes aren’t there to get those moved to a final status without commissioners Goldsmith Romero and Johnson,” said Katherine Cooper, a Bryan Cave Leighton Paisner LLP partner and former CFTC attorney.

Institutional Knowledge

Even before any potential vacancies, the CFTC under Behnam was issuing regulations at a slower pace than previous administrations.

It has finalized less than a dozen substantive rules since Behnam, a former senior counsel to Sen. Debbie Stabenow (D-Mich.), permanently took the helm in January 2022.

By comparison, Heath Tarbert, who served as chairman of the CFTC during the Trump administration, oversaw the finalization of over 30 rules in less than two years.

Some disparities between the current and previous administrations can be attributed to the 2010 Dodd-Frank Act, which called for the CFTC to write more than 60 rules, attorneys said. Many of the rules were finalized during the Obama administration, although some lingered into subsequent administrations.

The Democratic majority under Behnam, however, hasn’t always been in lockstep.

Goldsmith Romero, who led government oversight of the Troubled Asset Relief Program before joining the CFTC in 2022, joined the Republican commissioners in May in supporting an amendment to the event contract proposal. The amendment would keep the power to initiate review of potentially problematic contracts with commissioners, rather than agency staff.

How the anticipated shuffling of Democratic commissioners impacts the CFTC over the extended future will turn on who Biden picks to fill the expected vacancies.

“If the commissioners that are brought in to fill these two spots are people without experience or any knowledge of the derivatives markets or the agency, then you’ve lost a good chunk of institutional knowledge,” said David Slovick, a Barnes & Thornburg LLP partner and former CFTC lawyer. “It’s hard to see how it’s going to shake out,” he added.