Opinion ID: 478562
Heading Depth: 2
Heading Rank: 1

Heading: The Statutory and Regulatory Bans on Options

Text: 31 The Act as it existed during the period in question set out an intricate scheme of regulation of trading in options. 1 Certain options transactions were prohibited outright. Thus, Sec. 4c(a), 7 U.S.C. Sec. 6c(a) (1976 & Supp. II 1978), made it unlawful to enter into certain options transactions involving commodities that were specifically listed in Sec. 2(a)(1) of the Act prior to the enactment of the Commodity Futures Trading Commission Act of 1974 (CFTA), Pub.L. No. 93-463, 88 Stat. 1389. Prior to the CFTA, Sec. 2(a)(1) defined as commodities wheat, cotton, rice, and a number of other agricultural products. The commodities to which defendants' transactions pertained were not, prior to 1974, listed in Sec. 2(a)(1). 32 In 1974, the Sec. 2(a)(1) definition of commodity was expanded by the CFTA to include all other goods and articles, except onions ..., and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in. Options transactions in these newly included commodities were not banned outright but were subjected to regulation or prohibition by the Commission. Thus, Sec. 4c(b), 7 U.S.C. Sec. 6c(b), made it unlawful to enter into transactions involving commodities regulated but not listed in 7 U.S.C. Sec. 2 prior to the CFTA, if to do so would violate a rule or regulation of the CFTC: 33 (b) Commodities regulated but not specifically listed 34 No person shall offer to enter into, enter into, or confirm the execution of, any transaction ... involving any commodity regulated under this chapter, but not specifically set forth in section 2 of this title, prior to October 23, 1974, which is of the character of, or is commonly known to the trade as, an option, privilege, indemnity, bid, offer, put, call, advance guaranty, or decline guaranty, contrary to any rule, regulation, or order of the Commission prohibiting any such transaction or allowing any such transaction under such terms and conditions as the Commission shall prescribe 35 .... 36 7 U.S.C. Sec. 6c(b) (Supp. II 1978). 37 In 1978, the Commission, persuaded that its attempts at less restrictive regulation had failed because the offer and sale of commodity options has for some time been and remains permeated with fraud and other illegal or unsound practices, 43 Fed.Reg. 16153, 16155 (Apr. 17, 1978); see also British American Commodity Options Corp. v. Bagley, 552 F.2d 482, 486-87 (2d Cir.), cert. denied, 434 U.S. 938, 98 S.Ct. 427, 54 L.Ed.2d 297 (1977), adopted a regulation banning transactions in commodity options: 38 (a) Notwithstanding any other provision of this Part 32, it shall be unlawful on and after June 1, 1978, until further rule, regulation or order of the Commission, for any person to solicit or accept orders for, or to accept money, securities or property in connection with, the purchase or sale of any commodity option, or to supervise any person or persons so engaged. 39 17 C.F.R. Sec. 32.11. Thus, with certain exceptions not relevant here, as of June 1, 1978, all commodity options transactions were prohibited. 40 In the Futures Trading Act of 1978 (1978 Act), Congress codified the prohibition embodied in 17 C.F.R. Sec. 32.11 by enacting a similar statutory provision effective October 1, 1978. See Pub.L. No. 95-405, 92 Stat. 865, 867. The prohibition enacted in 1978 became Sec. 4c(c) of the Act, 7 U.S.C. Sec. 6c(c) (Supp. II 1978), and provided in relevant part: 41 (c) Commodity option transaction; conditions ending prohibition; excepted persons 42 Notwithstanding the provisions of subsection (b) of this section, no person may, after September 30, 1978, offer to enter into, enter into, or confirm the execution of any commodity option transaction involving any commodity regulated under this chapter but not specifically set forth in section 2 of this title prior to October 23, 1974, until (1) the Commission transmits to the House Committee on Agriculture and the Senate Committee on Agriculture, Nutrition, and Forestry documentation of its ability to regulate successfully such transactions, including a copy of the Commission's proposed rules and regulations, and (2) the expiration of thirty calendar days of continuous session of Congress after the date of such transmittal. 43 With certain exceptions not pertinent here, therefore, as of October 1, 1978, the Act itself prohibited transactions in all commodity options. 44 There is no dispute that the transactions engaged in by defendants from June 1, 1978, until they were preliminarily enjoined on July 13, 1979, were options, and that they were options on articles not listed in Sec. 2(a)(1) prior to the CFTA. Nor is there any genuine question that the commodities on which defendants bought and sold options were commodities in which contracts for future delivery are presently ... dealt in, i.e., options made subject to regulation by the CFTA. By their plain terms, therefore, CFTC Regulation 32.11 as of June 1, 1978, and Sec. 4c(c) as of October 1, 1978, prohibited defendants' transactions. 45 We see no merit in defendants' argument that the Act and the regulations did not reach their activities because defendants bought and sold options in the spot and cash markets, i.e., options on the commodities themselves rather than options on futures contracts. The terms of the statute and the regulation were all-encompassing: Section 4c(b) referred to any transaction involving any commodity regulated under this chapter, 7 U.S.C. Sec. 6c(b) (emphasis added); and the prohibitions of both Sec. 4c(c) and Regulation 32.11 applied to any commodity option, 7 U.S.C. Sec. 6c(c) (emphasis added); 17 C.F.R. Sec. 32.11 (emphasis added). The language of Sec. 2(a)(1), including within the term commodity all articles or services whose futures are or will be traded, did not, as defendants would have it, suggest that only options on futures contracts are regulated. The thrust of this definition was expansive rather than limiting. As one of our sister Circuits has stated, [b]y [the 1974] amendment, literally anything other than onions could become a 'commodity' ... simply by its futures being traded on some exchange. Board of Trade v. SEC, 677 F.2d 1137, 1142 (7th Cir.) (footnote omitted), vacated as moot, 459 U.S. 1026, 103 S.Ct. 434, 74 L.Ed.2d 594 (1982); accord 1 P. Johnson, Commodities Regulation Sec. 1.01, at 4 (1982). 46 Nor do we accept defendants' contention that the language of various cases demonstrates that Congress's only concern was to regulate trading in options on futures contracts. See, e.g., Strobl v. New York Mercantile Exchange, 768 F.2d 22, 25 (2d Cir.) (noting, in a case involving futures manipulation, that early enactments established the pattern of commodity futures regulation), cert. denied, --- U.S. ----, 106 S.Ct. 527, 88 L.Ed.2d 459 (1985). The discussions in those cases focused on the factual situations at issue, and their language is not to be taken as restricting the plain language of the statute and the regulation. 47 We conclude that the district court did not err in finding that defendants' commodity options transactions from June 1, 1978, to July 13, 1979, violated Secs. 4c(b) and (c) of the Act and Regulation 32.11.