The Division of Enforcement of the US Commodity Futures Trading Commission (CFTC or Commission) published on October 17, 2023 an advisory to assist its staff in recommending future enforcement resolutions to the Commission (the Advisory). The Advisory primarily focuses on the adequacy of civil monetary penalties, determining the need for oversight by corporate compliance monitors or consultants, and the recommendation of admissions in specific enforcement cases.

Between the Advisory [1] and Division of Enforcement (Division) Director Ian McGinley’s speech at New York University announcing the Advisory, the CFTC is flexing its muscles with a stern approach to enforcement, favoring penalties over incentives. As the implementation of this guidance unfolds, its practical impact will become clearer. Firms should take note of this new robust and aggressive enforcement posture and consider what this means for their culture of compliance.

CIVIL MONETARY PENALTIES

The Advisory demonstrates the Division’s desire to determine appropriate penalties and assess the need for deterrence in legal matters. “At the end of the day, penalties need to exceed the costs of compliance,” Director McGinley said as the agency announced changes to its enforcement approach. [2]

To date, the Division has prioritized various factors in developing resolutions, including the effect of civil monetary penalties both on the general public and on a specific offender, otherwise known as general and specific deterrence, respectively. [3]

In this spirit of deterrence and recidivism, the Division will now recommend higher penalties in cases of “déjà vu”—that is, those involving repeated violations as well as cases where the violator, law, and manner in which it was violated are similar, and particularly when multiple similar cases occur over time. This should come as no surprise given CTFC Commissioner Christy Goldsmith Romero’s statement last month in an enforcement action against a swap dealer—the fifth action brought against this swap dealer in approximately two years. [4]

When determining who is a recidivist, the Division will consider such factors as (1) past and current violations that overlap, with a focus on the root cause and subject-matter similarities, (2) time between offenses, (3) overlapping management, (4) the pervasiveness of the new misconduct, and (5) the effectiveness of the remedy implemented since the prior resolution.

Although the existing Division policy considers recidivism as an aggravating factor that could increase the amount of monetary penalty imposed, the Division has observed significant repeated violations by the same respondents, often during a short period of time, and have thus concluded that such recidivists are not adequately committed to compliance.

As such, going forward recidivism can lead to higher penalties and affect cooperation credit. Additionally, for recidivists, the Division may impose the appointment of a monitor or consultant as part of the resolution to a matter.

MONITORS AND CONSULTANTS

The Advisory signals an increase in the imposition of corporate compliance monitors and consultants with guidance on their roles and responsibilities. Under the Advisory, the Division is expected to recommend monitors in cases with severe or pervasive compliance and control failures that reflect a lack of commitment to compliance. The Division will recommend consultants in less severe cases where a neutral third party’s advice is needed for remediation, but oversight is not deemed necessary.

Monitors will be selected with Division approval and will test the adequacy of a firm’s policies, procedures, and controls to prevent recurrence of the misconduct. They will then make recommendations based on the tests and assess the effectiveness of those recommendations and enhancements over time. Finally, they will report the progress of the remediation plan, as well as any recommendations of the monitor that the firm chose not to adopt and the reasons why, to the appropriate operating division within the Commission.

Appointment of consultants typically will not require Division approval. They will advise firms on implementing remediation-related undertakings, with a firm reporting periodically to the Division on its progress. The firm must certify completion of the remediation plan or undertakings adopted at the recommendation of the monitor or consultant, as applicable.

ADMISSIONS

Currently, the vast majority of enforcement actions brought by the Division are settled on a “neither admit nor deny” basis, which basis plainly has the benefit of potentially reducing the collateral consequences of settling with the Commission.

The Division will no longer default to “no admit, no deny” resolutions. Instead, Division staff will discuss with respondents whether admissions are appropriate on a case-by-case basis. Factors influencing this decision include whether there is a parallel criminal proceeding, the existence of conclusive evidence of misconduct, the extent of cooperation credit sought, and whether the offense is a strict liability violation.

On the other hand, factors weighing against admissions include the risk of criminal exposure resulting from the act of admitting the misconduct and legitimate factual disputes that pose significant litigation risk. This is because an admission could jeopardize a firm’s defense in a criminal case or private right of action. Where factual disputes exist, admissions are less likely to be required than they will be in enforcement actions involving strict liability offenses or where evidence establishes the misconduct.

The Advisory highlights the significance of admissions in certain cases to promote accountability, serve as a form of deterrence, and facilitate post-resolution cooperation.

Ultimately, the decision to require admissions will depend on the unique circumstances of each case, and the Division intends to apply the outlined criteria when recommending resolutions to the Commission. The discretion lies with the Division’s Director and staff, and the Advisory does not require the Division or Commission to consider specific factors or waive any privileges related to their deliberations and decision-making.

Notably, the criteria for requiring a respondent to admit misconduct seems to hinge on how the admission may affect the respondent and the CFTC’s ability to prove its case at trial rather than the nature and extent of the wrongdoing and its consequences.

Accordingly, respondents should carefully examine the legal consequences of any admissions. They should evaluate and balance whether the risk of admitting to misconduct and the resulting collateral consequences of criminal liability or private rights of action arising out of an admission outweigh the litigation risks should the CFTC opt for a courtroom showdown.

WHAT’S NEXT?

The new guidance signals a more aggressive approach to enforcement by the CFTC, perhaps a product of having a former law enforcement official as one of its commissioners. [5] Director McGinley discusses the need to balance incentivizing settlements and deterrence, but it is clear that the Advisory’s goal is deterrence, particularly among repeat offenders. Firms that are in the Division’s crosshairs should expect larger penalties and increased costs associated with retaining monitors and consultants.

Depending on the nature of the case, respondents will continue to be confronted with the dilemma of whether the cost of admitting to the wrongdoing is so significant that going to court might be a more appealing option.

Law clerk Leila M. Diallo contributed to this LawFlash.

[1] CFTC, Advisory Regarding Penalties, Monitors and Consultants, and Admissions in CFTC Enforcement, No. 8808-23 (Oct. 17, 2023).

[2] Director of Enforcement Ian McGinley, CFTC, Remarks of Enforcement Director Ian McGinley at the New York University School of Law Program on Corporate Compliance and Enforcement: “The Right Touch: Updated Guidance on penalties, Monitors, and Admissions” (Oct. 17, 2023).

[3] See id. (“[G]eneral deterrence—that is, ensuring the threat of punishment is sufficient to make misconduct generally unappealing; and specific deterrence—that is, ensuring that a punishment is sufficient to reduce the risk a particular entity or individual will break the law again.”).

[4] See Commissioner Christy Goldsmith Romero, CFTC, Statement of Support of Enforcement Case (Sept. 29, 2023).

[5] See Commissioner Goldsmith Romero, CFTC, State of Commissioner Christy Goldsmith Romero on CFTC Enforcement Division Advisory Regarding Penalties, Monitors, and Consultants, and Admissions (Oct. 17, 2023).

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