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CFTC backs off rule that would require registration of newsletter publishers

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From the Spring 2000 issue of The News Media & The Law, page 8.

From the Spring 2000 issue of The News Media & The Law, page 8.

The Commodity Futures Trading Commission has changed its rules to exempt newsletter publishers, software developers and Internet website operators from its registration and licensing requirements. The commission dropped an appeal of a federal trial court ruling overturning its more restrictive rule two weeks before oral arguments were to take place in the U.S. Court of Appeals in Washington, D.C.

The CFTC’s decision is a victory for the Institute of Justice, which brought the injunctive action against the CFTC on behalf of publishers that either publish Web-based newsletters or sell futures-trading software over the Internet. The Reporters Committee for Freedom of the Press filed friend-of-the-court briefs before both the court of appeals and the district court.


The Commodity Exchange Act mandates that all commodity trading advisors must register with the Commodity Futures Trading Commission. The statute defines a “commodity trading advisor” as someone who advises people “either directly or through publications, writings, or electronic media” about commodity trading. It excludes from its registration scheme only publishers of print or electronic data who enjoy “general and regular dissemination” and whose commodity trading information is “solely incidental to the conduct of their business or profession.” Failure to register with the CFTC is a felony, punishable by five years of imprisonment and a fine of $500,000.

Under the statute, the CFTC has broad discretion to grant or deny registration and revoke or suspend a publisher’s registration. The CFTC attempted to enforce the Commodity Exchange Act’s provisions by demanding registration of (a) the print publishers of nonpersonalized investment information, advice and recommendations, (b) developers and distributors of computer software for commodities traders and (c) internet publishers of nonpersonalized investment information, advice and recommendations.

The CFTC could restrict or grant registration based on the “training, experience and such other qualifications as the Commission finds necessary or desirable to ensure the fitness of persons required to be registered.” Upon registration, publishers needed to maintain copies of their publications, lists of past and current subscribers and financial records to be available on demand for CFTC audits. The publishers are also required to file reports “as prescribed by the Commission.” The CFTC could also revoke a publication’s registration if it found that such an action was “in the public’s interest.”

Larger publications such as The Wall Street Journal and Investors Business Daily were excluded from the registration requirement because their publications do not exclusively report on commodities.

The Institute for Justice, on behalf of ten small newsletter publishers, software developers and Internet users, sued the CFTC in July 1998 in federal District Court in Washington, D.C.

In June 1999, federal District Judge Ricardo Urbina struck down as unconstitutional the CFTC rule. Relying in part on the U.S. Supreme Court’s decision in Lowe v. SEC, Urbina held that the rule constituted “an impermissible prior restraint upon the exercise of free speech and runs afoul of the First Amendment.” He added that although the government can regulate a profession, including commodities trading, the CFTC’s registration requirement was an attempt to regulate speech.

Urbina noted that the publishers in the lawsuit did not go so far as to “exercise judgment” on behalf of those who purchase their products because the publishers never had any personal contact with their customers and never made trades for them. Customers must go through some other licensed broker to actually purchase securities, Urbina noted.

The CFTC appealed to the federal Court of Appeals (D.C. Cir.). It argued that Urbina had erred by indiscriminately striking all elements of the registration scheme. It claimed that even if the specific registration rules as promulgated by the CFTC violated the constitution, the general registration scheme as mandated by the Commodity Exchange Act — which Urbina also struck — clearly survived a constitutional analysis. It also argued that the plaintiffs in the lawsuit fell within the registration requirements because they were engaged in a form of “professional activity” by publishing their newsletter and that requiring the registration of professionals did not violate the Constitution.

The Reporters Committee for Freedom of the Press filed an amicus curiae brief in support of the plaintiffs. The plaintiffs and the Reporters Committee argued that the registration scheme was a prior restraint on the publishing of information about the sales of commodity futures, which is protected speech that is entitled to the highest level of First Amendment protection.

They contended that the effect of the CFTC’s attempted enforcement was twofold. First, it presented publishers with a dilemma: either register with the government and publish under the constant threat of having their license revoked in the future or refuse to register with the government and risk prosecution and imprisonment. Second, it presented specialized publishers with the aforementioned dilemma while exempting mainstream publishers such as The New York Times and The Wall Street Journal from the regulatory scheme, even if the mainstream publishers print the same material as the specialized publishers and disseminate it to a larger audience. It concluded that specialized publishing entities possess the same First Amendment rights as their larger media counterparts.

On March 7, 2000, one month before the case was set for oral argument before the Court of Appeals, the CFTC announced that it had adopted a new rule that expanded the group of publishers exempted from mandatory registration under the Commodity Exchange Act. Under the new rule, commodity trading advisors whose business is limited to distributing standardized commodity trading advice no longer need to register.

The CFTC press release trumpeting the new rule specifically included the kind of publishers included in the lawsuit: “Such commodity trading advice is typically disseminated through media such as periodicals, books, Internet web sites, electronic mail, telephone voice recordings, facsimile services, and non-customized computer software.”

The release noted that the new exemption was “designed to eliminate the legal uncertainty that has arisen from recent federal court decisions” involving publishers who have “claimed that the First Amendment protected their right to publish without registration because they did not possess discretionary control over their clients’ commodity trading accounts; they did not provide advice tailored to their clients’ particular situations; and they had no personal contact with their clients. The [amended] rule . . . reflects these considerations.”

The amended rule still mandates that to qualify for the registration exemption the publisher may not engage in directing client accounts or providing commodity trading advice that is based on or tailored to a particular client’s circumstances.

On March 28, 2000, the CFTC’s motion to dismiss its appeal was granted by the Court of Appeals.