CFTC Enforcement Director McDonald Highlights Importance of Self-Reporting

In a “CFTC Talks” podcast interview with CFTC Chief Market Intelligence Officer Andrew Busch, CFTC Enforcement Director James McDonald detailed his role as head of enforcement and emphasized the need for the CFTC to incentivize self-reporting.

Mr. McDonald explained that he leads a large team of staff that investigates and brings enforcement actions for violations of the Commodity Exchange Act and CFTC rules. He remarked that an important aspect of effective enforcement is ensuring that market participants are aware of the level of supervision and oversight to which they are subjected; by holding bad actors accountable for their misconduct, Mr. McDonald said, the market knows the Enforcement Division is “on duty.”

Mr. McDonald also stressed the importance of striking a proper balance between holding violators accountable for their misconduct while also promoting cooperation. Market participants accused of wrongdoing, Mr. McDonald suggested, are more likely to be forthcoming if they know that they will receive a benefit in exchange for cooperation (such as a reduction in a civil monetary penalty). Mr. McDonald highlighted self-reporting as a particularly relevant example of incentivizing cooperation. He asserted that Division interactions with violators that self-report will not be a “game of gotcha,” and spoke to the importance of maintaining the integrity of the process:

“It’s not going to be, well, you self-reported. You told us about nine violations, but we went in and we found a tenth, so you’re not getting self-reporting credit.

We want to make it crystal clear to companies what we expect them to do in terms of self-reporting on the front end, but also what is fair for them to expect us to do on the back end.”

He vowed to make clear to market participants that the self-reporting benefits will be substantial, but also stressed that the self-report must be “real.” That is, it must not come as a result of legal obligation, or disclosure requirements, or as a result of already self-reporting to another agency.

Finally, Mr. McDonald gave a broad overview of his objective as the Director of Enforcement:

“[O]ur goal … as the Enforcement Division … is to try to figure out ways where our enforcement actions can be designed to have the broadest impact, or our enforcement policies can give the right incentives to companies so that they’ll comply with the law.”

 

Lofchie Comment: It is a cliché for regulators to tout the value of self-reporting, yet it is likewise unclear that regulators in fact sufficiently credit firms for doing so. See, for example, this recent CFTC enforcement action in which the benefits to the company of self-reporting were not so clear to outsiders as they seemingly were to the CFTC: “Japanese Bank Settles Spoofing Charges with CFTC.”

While this story happens to be about CFTC enforcement, as a practical matter the item could have been about many of the regulatory agencies. There are real societal benefits to encouraging self-reporting – in particular that the deficiencies of the self-reporting firm and the related necessary corrective actions may be communicated to the market as a whole, which could then potentially make the same corrections if needed – but these benefits are not going to be realized unless regulators are willing to provide self-reporting firms with something much closer to genuine amnesty (apart from the need to make restitution to injured parties).

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