On September 25, 2017, CFTC Director of Enforcement James McDonald described an enforcement approach that emphasizes self-reporting and cooperation by regulated financial institutions.
In remarks before the New York University Institute for Corporate Governance & Finance, Mr. McDonald described a continuing dedication to vigorous prosecution combined with a new emphasis on cooperation and self-reporting in order to best achieve the mission of the CFTC to “foster open, transparent, competitive and financially sound markets.” In addition to pursuing enforcement actions, Mr. McDonald stressed the importance of receiving buy-in from the companies regulated by the CFTC in order to safeguard these markets and achieve meaningful deterrence. The CFTC self-reporting and cooperation program, Mr. McDonald explained, is intended to incentivize companies to report violations and cooperate in CFTC investigations by making clear the “substantial” benefits of cooperation, such as “significantly” reduced monetary penalties. Mr. McDonald also emphasized the commitment of the CFTC to working with industry members to facilitate voluntary compliance and contribute to a cooperative business environment.
Mr. McDonald outlined the kind of cooperation that might lead to CFTC special consideration and reduced penalties:
- Voluntarily self-reporting of wrongdoing to the CFTC Division of Enforcement. This includes disclosure of all relevant facts within a reasonably prompt time.
- Full cooperation throughout the CFTC investigation. This involves proactive disclosure of all relevant facts and participating individuals as a company becomes aware of them. The CFTC focus on individuals reaches not only traders, but also the supervisors who directed or made decisions underlying a violation.
- Remedial measures to prevent future misconduct. This includes fixing problems with compliance and internal programs that led to the misconduct in question.
In return, Mr. McDonald stated that the Division of Enforcement will clearly communicate all expectations, facilitate and help the self-reporting company with remediation efforts, and offer concrete benefits. Mr. McDonald explained that if a company complies with all three criteria, the Division of Enforcement will recommend a substantial reduction in penalties, and, in extraordinary circumstances, may decline to prosecute a case. Cooperation in the absence of a self-report may also warrant a lower penalty, albeit one that involves a significantly smaller reduction.
Mr. McDonald said that his remarks reflected his “own views and not necessarily those of the Commission or its staff” and should not be interpreted as a softening in the CFTC stance on the enforcement or prosecution of corporate misconduct. He indicated that the CFTC will continue to aggressively pursue bad actors. The Director expressed hope that the CFTC’s commitment to encouraging self-reporting will add another layer of deterrence to misconduct by market participants and help to prevent future misconduct.
Lofchie Comment: There are few policy decisions that are as significant for a regulatory agency as determining how to handle firms and individuals that come forward with admissions of their own legal violations. It often seems to outside observers that the desire of regulators to chalk up an easy win, or to be acclaimed for collecting a fine, overwhelms any inklings of common sense (or compassion). This is unfortunate because when a firm comes forward, particularly with information as to unintended violations, it often provides notice to other market participants of areas where they may need to shore up their own compliance procedures or, very significantly, their technology. In any case, the proof of the CFTC’s word will be in the pudding (or in the Cabinet news) and, as enforcement actions are reported, individual firms will continue to make their own assessment of whether to come forward.