CFTC Takes an Aggressive Enforcement Tack – Commissioner Criticizes Omnibus Order of Investigation (Including Subpoenas) Approved by ‘Absent Objection’ Process

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Last week, Commodity Futures Trading Commission (CFTC) Commissioner Scott O'Malia, sharply criticized a potentially significant expansion of the CFTC Enforcement Division’s investigatory powers. In an unusual "dissenting statement" filing that appeared on the CFTC’s website, Commissioner O’Malia publicly declined to authorize the Enforcement Division’s request for an "omnibus order of investigation" from the Commission using an "absent objection" procedure. According to O’Malia, the omnibus order gives the Enforcement Division "sweeping subpoena power to investigate" what could be numerous market participants concerning broad market practices. Which markets and which participants were redacted from Commissioner O’Malia’s dissent, and the order itself is not public. By following the "absent objection" procedure (i.e., obtaining Commission approval "absent objection" of a majority of the Commissioners), the CFTC staff obtained authorization to issue subpoenas by making a summary submission to the Commissioners rather than subjecting the proposed investigation to full Commission review (at a closed meeting) – despite the fact that the Commission has already scheduled several closed meetings during early September.

As Commissioner O’Malia warned, by using the "absent objection" process, the Enforcement Division can initiate and extend a broadly scoped examination indefinitely, and avoid a full Commission discussion and review of the legal and factual basis for the investigation. Commissioner Bart Chilton challenged O’Malia’s public statement of concern, noting the limited number of times the CFTC has (at least recently) approved such "omnibus orders." However, the "absent objection" process reflects the apparent willingness of a majority of the current CFTC Commissioners to empower the CFTC Enforcement Division to conduct broad scale investigations, including issuing subpoenas, without a full Commission review of the basis for such investigation.

That delegation of authority has significant implications given that the CFTC serves as the "independent" federal agency responsible for regulating the derivatives industry and protecting market participants and the public from fraud, manipulation, and abusive practices related to the sale of futures, swaps and options. It also comes at a time when the CFTC has expanded authority to address fraud, market manipulation and disruptive practices in the swaps markets as part of the Dodd-Frank legislation. As a result of Dodd-Frank, the CFTC’s powers have broadened considerably both in terms of the scope of the products regulated as well as the agency’s ability to investigate and bring enforcement actions against new market participants.

The CFTC’s rules provide the agency’s Enforcement Division staff with the power to initiate investigations of persons suspected of having violated Commodity Exchange Act provisions. As part of such investigations, the staff may obtain evidence by soliciting voluntary statements and submissions, or by using its supervisory powers over boards of trade, reporting traders, and persons required by law to register with the Commission. 17 CFR § 11.2. The Enforcement Division Director (or his designee) can also obtain sworn testimony and/or documentary evidence by issuing subpoenas, but only if the Commission authorizes the Enforcement Division to do so. 17 CFR § 11.4.

In addition to objecting to the authorization of an omnibus investigation on an "absent objection" basis, Commissioner O’Malia also expressed his view that the CFTC’s new and untested enforcement authority put in place under Dodd-Frank requires the Commission itself to carefully assess the legal and factual basis for bringing an investigation, as well as controlling the scope of the investigation, given the potentially significant ramifications of exercising the Commission’s new enforcement authority. Other commenters have agreed, noting the cost to respond to a government investigation, and the potential for reputation damage that an investigation can cause for individuals and entities, even if the investigation does not uncover evidence sufficient to prove illegal conduct or regulatory violations.

The CFTC’s approval of omnibus investigations on an "absent objection" basis represents a new and aggressive approach for the CFTC Enforcement Division, and may subject a great number of individuals and entities to its investigatory and enforcement authority. This more aggressive investigatory approach will take place as the CFTC tests its authority over the swaps markets in a developing regulatory environment that market participants have challenged as ambiguous and unclear. Commodity producers, processors, merchants and commercial end-users who have previously had little, if any, contact with the CFTC may receive informal requests for information related to their commodity and commodity derivatives activities. Such entities may also be compelled by subpoena to give testimony and produce documents as part of a broad CFTC investigation of market practices.

Given the civil and criminal penalties associated with violations of Commodities Exchange Act provisions and CFTC regulations, any entity or individual receiving such a request or subpoena from the CFTC Division of Enforcement should carefully review the request or subpoena with experienced counsel before responding. In particular, the recipient should consider not only how to preserve records and gather the requested information efficiently, but also: its potential liability under applicable regulations; the ability to negotiate (and potentially limit) the scope of its response; whether and how to undertake an internal investigation of relevant facts and circumstances; and the possibility that any targeted employee should be advised to engage separate counsel to preserve Fifth Amendment rights.

Topics:  CFTC, Enforcement, Investigations, Subpoenas

Published In: Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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