On October 17, 2023, the NYU Law Program on Corporate Compliance and Enforcement (PCCE) hosted Ian McGinley, the Director of Enforcement for the Commodity Futures Trading Commission (CFTC), to announce updated enforcement guidance to CFTC staff on penalties, monitors, and admissions. Director McGinley’s remarks (available here) were followed by a fireside chat and moderated Q&A with questions from the audience, and later by a moderated panel of former CFTC enforcement directors and senior enforcement counsel. The updated staff guidance is available here. In this post, the panelists from the event offer additional commentary on the guidance.

The Advisory Adds Clarity, But Leaves Unanswered Questions

by James McDonald, Kathleen S. McArthur, and Colin D. Lloyd 

The Division of Enforcement should be commended for its efforts to offer more clarity about its enforcement priorities, policies and general approach.  And so we welcome the advisory on penalties, monitors, and admissions, which will be incorporated into the Enforcement Manual.  Yet the Advisory leaves open a number of important questions, which will be addressed in its application to particular cases. 

To take one example, will the policies apply equally to regulated and unregulated markets and activities?  The Advisory and Director McGinley’s comments tie the policies to the regulated nature of the markets at issue, but the Advisory on its face does not distinguish between registrants and non-registrants, or between conduct in CFTC-regulated derivatives markets and the unregulated spot markets.

As for monitors, how will they work in practice?  The Advisory indicates that the monitor will report to CFTC Staff on the respondent’s remediation plan, suggesting that the contours of that plan will define the scope of the monitorship.  But when and how will the plan of remediation be approved, and by whom?  Because a clear scope and framework is essential for timely and efficient conclusion of a monitorship, this will be an important point to confirm in connection with any specific monitorship and additional guidance would be welcomed.

Or take recidivism.  It has long been understood that, when it comes to recidivism, violations in highly regulated markets—particularly strict-liability violations—warrant special consideration in part because of the numerous touchpoints regulated entities have with their regulators.  Thus, these violations are typically treated differently from other, scienter-based violations.  Director McGinley recognized this point in his remarks, but the Advisory does not make this distinction, at least not explicitly.  Here’s to hoping this Advisory is not applied in a way that upsets this settled understanding.

Finally, Director McGinley closed by noting the continued importance of self-reporting and cooperation in achieving a more favorable resolution.  But the Advisory offers no additional clarity regarding how self-reporting will be rewarded and suggests that cooperation could come with a price, e.g., admissions.  If the takeaway from this Advisory is increased clarity regarding the punitive aspects of enforcement (the stick), we hope it is coupled with increased clarity, through practice or additional Advisories, on the benefits of self-reporting and cooperation (the carrot).  The Department of Justice has had recent success on this score with programs—often starting as pilot programs—that provide safe harbors for self-reports.  If the Division wants to incentivize market participants to grab the carrot, it might consider instituting a pilot program along these lines or taking other steps to further clarify (and pre-commit) to the benefits of self-reporting and cooperation at the outset.

James M. McDonald is a Partner at Sullivan & Cromwell LLP. He was previously the Director of Enforcement of the CFTC and an Assistant U.S. Attorney (AUSA) at the U.S. Attorney’s Office for the Southern District of New York (SDNY). Kathleen S. McArthur and Colin D. Lloyd are partners in the Commodities, Futures & Derivatives Group at Sullivan & Cromwell LLP.

CFTC’s Latest Enforcement Advisory Makes More Monitorships Likely

by Elizabeth Davis, Thomas DeFranco, and Robertson Park

In furtherance of its stated goal to improve efforts at deterrence and accountability, the latest enforcement advisory issued by the CFTC Division of Enforcement (“Division”) declares its intention to seek admissions in lieu of its prior “no admit or deny” default in certain settlements. The Division also declared its intention to seek harsher penalties, especially for recidivists. Although the imposition of monitorships is not new for the CFTC, the advisory notably also provides that staff may seek to impose independent third-party monitors where circumstances warrant going-forward oversight of a registrant. The advisory distinguishes between “consultants,” which are characterized as third parties retained by private entities to assist with their compliance efforts, and “monitors,” which will be approved and imposed by the CFTC.

As with the majority of the advisory, there is a great deal of uncertainty with regard to when the imposition of a monitorship might be deemed appropriate. The advisory notes that the Division will recommend 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 that a consultant will be recommended in “less severe cases.” Monitors will be appropriate when the Division “lacks confidence” that the entity will remediate its misconduct without the assistance of a neutral third party and oversight. The advisory offers no guidance or clarity as to the terms, such as duration and scope, under which these monitorships may be put in place. It also remains to be seen what impact the threat of an imposed monitorship will have on cooperation and self-reporting to the CFTC. The Division’s advisory is unlike DOJ’s corporate criminal enforcement policy, which incentivizes companies to implement and test an effective compliance program by the time of resolution to avoid the imposition of a monitor. Critically, DOJ’s policy involves consideration of whether a company has voluntary self-disclosed the underlying misconduct as one of the factors to determine whether a monitor should be imposed in the first instance. The Division’s advisory, by contrast, contains no such indication that self-reporting and cooperation will receive due consideration with regard to the imposition of a monitor.

The advisory’s focus on compliance monitors likely will lead to more monitors being imposed as part of the required undertakings for settlements going forward. Additional clarity and specificity in the CFTC’s future speaking orders regarding the circumstances leading to the imposition of monitors, as opposed to consultants, would provide helpful guidance to companies and staff in negotiating proposed resolutions.  

The imposition of a compliance monitor can be costly. The advisory requires certification by the entity, through its Chief Compliance Officer and relevant senior business executive, of completion of the remediation or remediation-related undertakings at the conclusion of a monitor’s or consultant’s engagement. Taken together with the harsher penalties that the CFTC will be seeking and the expense associated with the investigation itself, the cost of post-resolution compliance will go up dramatically.

Elizabeth Davis is a Partner a Davis Wright Tremaine LLP and a former Chief Trial Attorney at the CFTC and former Trial Attorney in the DOJ’s Tax Division. Thomas DeFranco is Counsel and Robertson Park is a Partner at Davis Wright Tremaine LLP.

More Clarity Is Needed on the Benefits of Self-Reporting

by David Meister, Chad Silverman, and Peter Varlan 

The CFTC Division of Enforcement highlights recidivism in its recent Advisory, announcing an intent to apply this factor more aggressively to seek higher penalties going forward.  However, the Advisory does not address how the factor will be applied in the context of a self-report.

Under prior Division guidance, when a firm self-reports misconduct, cooperates, and remediates, the firm can expect “the most significant reduction in penalty” or even a recommendation that no enforcement action will be taken.[1]  Now, because of the most recent Advisory, when a firm discovers a new issue that arguably overlaps with a prior enforcement action, it will need to decide whether the potential benefit of self-reporting credit outweighs the risk of a recidivism-enhanced penalty.

To further encourage market participants to self-report violations, perhaps the Division will consider articulating more definitively the benefits of self-reporting.  To date, the CFTC’s settlement orders have not made clear to what extent self-reporting credit reduces a respondent’s monetary penalty, and the CFTC has only very rarely issued public declinations.  Additional assurance and transparency from the Division on the benefits of self-reporting, and clarity on how self-reporting and recidivism might be considered together, would seem to serve both the CFTC’s and the regulated industry’s interests.

[1]      Memorandum from Vincent McGonagle to Division of Enforcement Staff, CFTC, Recognizing Cooperation, Self-Reporting, and Remediation in Commission Enforcement Orders, at 4 & n.8 (Oct. 29, 202).

David Meister is a Partner at Skadden, Arps, Slate, Meagher & Flom LLP and a former Director of Enforcement at the CFTC and a former AUSA at the SDNY. Chad Silverman is a Partner and Peter Varlan is an Associate at Skadden.

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