NIBA - Compliance Alert - New Guidance on Future CFTC Enforcement Resolutions

The Commodity Futures Trading Commission (CFTC) Division of Enforcement recently released a new advisory to its staff related to penalties, corporate compliance monitors and consultants, and admissions in CFTC enforcement actions (the Advisory).¹ The Advisory reflects Enforcement’s focus on achieving accountability and minimizing future misconduct when negotiating a proposed resolution to recommend to the CFTC. The Advisory also applies to proposed resolutions of federal court or administrative enforcement actions.

Our key takeaways are:

We expect Enforcement to recommend significantly higher penalties than have been imposed in similar actions previously, particularly in matters involving similar conduct across multiple market participants or matters involving perceived recidivism.
Enforcement will likely recommend monitors and consultants more often, especially for perceived recidivists.
We anticipate demands for admissions will become more common when negotiating settlements with the CFTC.

In announcing the Advisory, Enforcement Director Ian McGinley noted that “approaching resolutions requires consistent calibration to achieve the right balance between incentivizing settlement and deterring misconduct” and that the new Advisory was “important to striking that balance properly.”² Chairman Rostin Behnam noted that approaching resolutions consistent with the Advisory will “ensure greater transparency and answerability throughout the process,” consistent with the CFTC’s “duty to ensure that every enforcement action aims to elevate compliance and optimize deterrence.”³ Commissioner Goldsmith-Romero supported the Advisory, focusing her statement on the Advisory’s approach to admissions, which “adopt[s] [her] proposal of replacing the routine practice of neither-admit-nor-deny settlements with a case-by-case decision on requiring settling defendants to admit their wrongdoing.”⁴

The Advisory is consistent, in various respects, with other federal agency guidance. For example, the Advisory’s approach to monitorships aligns with the Department of Justice’s (DOJ) March 1, 2023 Revised Memorandum on Selection of Monitors in Criminal Division Matters, which outlines the factors the DOJ considers when evaluating the necessity and potential benefits of a monitor.⁵ The Advisory is also consistent with statements by Securities and Exchange Commission (SEC) leadership regarding the importance of admissions.⁶

Please contact a member of the WilmerHale Futures and Derivatives Group for more information.

1. Civil Monetary Penalties (CMPs)

The Advisory declares that, going forward, Enforcement is “recalibrating” how it is assessing proposed CMPs “to achieve general and specific deterrence,” warning that this may lead to “higher penalties in resolutions than may have been imposed in similar cases previously.” In particular, the Advisory cites to the need to assess higher penalties where “multiple similarly situated respondents violate similar laws in similar ways over time.” The Advisory also makes clear that Enforcement will heavily weigh recidivism by the same respondent when determining the appropriate CMP to recommend to the Commission.

To determine whether a person or entity is a recidivist, the Advisory notes that Enforcement will consider various factors, including (i) whether prior and current Commission actions involve the same or similar kinds of violations or subject matter or result from the same root cause; (ii) the time between offenses, with more recent conduct being given more weight; (iii) whether overlapping management was involved; (iv) the pervasiveness of the new misconduct; and (v) the robustness and effectiveness of remediation taken since the prior resolution.

The Advisory’s focus on general deterrence and recidivism suggests that Enforcement expects to demand significantly higher penalties than might be expected given prior precedent. We expect that this trend will be the case where Enforcement observes similar violations across numerous market participants and is seeking to send a signal to the market or believes the firm does not “get it” and lacks the culture of compliance necessary to remediate and prevent future misconduct. The CFTC’s aggressive approach to even relatively minor compliance lapses and the growing trend of industry-wide investigative sweeps create an environment where registrants of any significant size will be in front of the CFTC more frequently, thereby increasing the risk of higher penalties on account of perceived “recidivism.”

2. Corporate Compliance Monitors or Consultants

The Advisory highlights that Enforcement anticipates recommending a monitor in “cases involving the most significant and/or pervasive compliance and control failures reflecting a lack of sufficient commitment to effective compliance” and where Enforcement lacks confidence that the entity will remediate on its own.⁷ Consultants will be recommended in less severe cases, specifically where Enforcement believes the entity requires advice regarding remediation but can otherwise remediate its misconduct without oversight. The Advisory identifies the responsibilities of a monitor or consultant as including (i) testing to identify, address and prevent future misconduct; (ii) drafting specific recommendations to address issues identified during testing; and (iii) testing the sufficiency of enhancements to implement recommendations.

For a monitorship, Enforcement must approve the selection of the monitor. Enforcement will receive reports from the monitor describing the remediation plan and implementation of the remediation plan. If an entity chooses not to adopt a monitor’s recommendation, it must state the reasons for non-adoption in writing to Enforcement. The monitor and the entity must certify the entity’s completion of a remediation plan.

For a consultant, Enforcement approval typically will not be required. The consultant will be expected to advise the entity regarding implementation of remediation-related undertakings and periodically report to Enforcement on progress of implementation. The entity will certify completion of remediation-related undertakings at the conclusion of the consultant’s engagement.

In connection with the CMP discussion, the Advisory notes that, for recidivist entities, Enforcement will be inclined to recommend a monitor or consultant be imposed. This approach could make resolving certain matters with the CFTC significantly more challenging, given that a resolution increases the likelihood that the entity will be treated as a recidivist in the future and thus a candidate for a monitor or consultant.

3. Admissions

Finally, the Advisory makes clear that “respondents should no longer assume that no-admit, no-deny resolutions are the default”; rather, in each case, Enforcement “will discuss with respondents whether admissions are appropriate.”

The Advisory identifies certain factors that Enforcement will consider when assessing whether admissions are appropriate. The Advisory notes that certain factors “may be more or less relevant” and “no factor . . . is dispositive,” and that additional factors may be relevant.

Factors in favor of admissions include (i) the respondent’s entry into parallel criminal resolution with admission of misconduct; (ii) evidence conclusively establishing the misconduct, for example, a respondent admission via testimony or documents compel the admission; (iii) whether and to what extent the respondent seeks cooperation credit, since admissions are evidence of cooperation; and (iv) whether the offense is a strict liability offense in clear violation of the law and state of mind is not relevant. Factors counseling against admissions include (i) whether criminal exposure may arise from an admission and (ii) whether there is a legitimate factual dispute that persuades Enforcement that it faces significant litigation risk establishing the fact at trial.

We note that several of these factors militate in favor of demanding admissions based on Enforcement’s assessment of the strength of its own case and its read of the evidence. In fact, the Advisory suggests Enforcement may seek admission in more cases than not. Given this dynamic, we expect that demands for admissions will become increasingly more common when companies are negotiating settlements with the CFTC.