Priorities and Areas of Focus in 2019

The Annual Report emphasizes what it described as the “consistency” of the Division’s priorities, including through a change in leadership at the CFTC, with Heath P. Tarbert taking over as Chairman in July 2019. As detailed in both the 2018 and 2019 Annual Reports, the Division’s stated main priorities are: (1) preserving market integrity; (2) protecting customers; (3) promoting individual accountability; and (4) increasing coordination with other regulators and criminal authorities. In emphasizing the consistency of its priorities, the Division noted that it is important that “market participants … know how the Government will enforce the law.”

Market Integrity. The Division’s focus on market integrity is aimed at instilling confidence in the markets, thereby allowing companies and individuals to hedge risk and allocate capital more efficiently. The Annual Report notes that actions against disruptive trading (including fraud, manipulation and spoofing cases) are designed to preserve the integrity of the markets.

Customer Protection. The Division stated that its goal to protect customers includes pursuing enforcement actions in traditional areas (e.g., precious metals, forex, binary options), as well as addressing misconduct in new markets and new asset classes (e.g., digital assets), where unsuspecting customers may be targeted.

Individual Accountability. In addition to pursuing potential wrongdoing by companies, the Division is focused on bringing actions against the individuals responsible for the conduct, including supervisors and others in control who may be culpable, rather than simply low-level employees. The Annual Report specifically references an action against the CEO of a managed fund, filed in parallel with criminal charges, involving alleged fraud and misappropriation connected to commodity futures trading. The Annual Report expresses the Division’s belief that actions against individuals serve the goals of: punishing bad actors; deterring future misconduct; incentivizing companies to emphasize compliance and report wrongdoing; and promoting public confidence in the CFTC. In FY 2019, 58% of the CFTC’s actions included charges against one or more individuals.

Coordination with Regulators. The Division continues to prioritize efforts to coordinate with other regulators and with law enforcement. The Annual Report observes that misconduct rarely is confined to the jurisdiction of a single regulator. Rather, the Division works with other regulators, as well as criminal authorities, both in the United States and abroad, to identify, investigate and prosecute misconduct. In FY 2019, the CFTC filed 16 actions in parallel with criminal authorities, breaking last year’s record of 14 parallel actions. The Annual Report notes that the record is “a trend [the Division] expect[s] to continue.”

2019 Enforcement Results

The CFTC filed 69 enforcement actions in FY 2019, which is fewer than last year’s 83 actions, but in line with the 67.5 actions the CFTC averaged annually over the past five years. This fairly consistent level of enforcement came even as the CFTC was closed during the 35-day partial government shutdown. Despite filing fewer enforcement actions than in FY 2018, the Division recovered approximately US$1.321 billion in total monetary relief this year, up 39% from last year and the largest amount since FY 2015. Specifically, the CFTC recovered over US$205 million in civil penalties and over US$1.115 billion in disgorgement and restitution.

Beyond the top-line enforcement figures, the Division reinforced its priorities through the types of actions it brought over the past year. Commodities fraud cases, the largest single category, made up over one-third of the Division’s actions. The Division also followed last year’s record number of manipulative conduct and spoofing actions with 16 such actions in FY 2019, up from an average of five per year from 2009 to 2017. In total, commodities fraud, manipulative conduct, false reporting, and spoofing matters comprised approximately 65% of all enforcement actions in FY 2019.²

The Division continued to rely on whistleblowers as key leads in its enforcement efforts, with 30 to 40% of its ongoing investigations involving a whistleblower component. In FY 2019, the Commission received 117 whistleblower claims resulting in five awards totaling over US$15 million. Since its inception, the whistleblower program has awarded over US$100 million and the CFTC’s actions associated with those awards led to over US$800 million in judgments.

First Enforcement Manual Released

In May 2019, the Division published its Enforcement Manual (Manual) for the first time, providing some insight into the policies and procedures governing the Division’s identification, investigation and prosecution of actions. The Annual Report notes that the Division decided to publish the Manual in an effort to increase transparency and consistency, and to advance the principles underpinning its enforcement program. While the Division will make changes to the Manual, as necessary, the current Manual provides information regarding the structure and operations of the Division, the life cycle of enforcement matters, self-reporting considerations, and other aspects of the Division’s work.

The Manual’s publication, along with the publication of an Annual Report over the past two years, reflects the CFTC’s apparent desire to provide more formal guidance and predictability regarding its anticipated activities. These publications resemble those of other regulators, including the SEC and the Department of Justice, which have a longer history of providing guidance to the public regarding their activities.

Looking Ahead to 2020

While the CFTC filed just 69 actions in FY 2019, there is reason to believe that enforcement may increase in the coming year. The CFTC faced multiple headwinds in 2019, including a government shutdown that lasted approximately 10% of the year and a transition in leadership, when Mr. Tarbert took over as Chairman on July 15, 2019. In the two and a half months between Mr. Tarbert’s arrival and the end of the fiscal year on September 30, the CFTC brought 70% of the entire fiscal year’s actions. In its Press Release announcing the issuance of the Annual Report, the Division pointed to this statistic as confirmation of Chairman Tarbert’s commitment that the CFTC will be tough on those who break the rules.

The Division’s actions over the past year also display several themes that will likely continue in 2020. The Division brought enforcement actions against entities and individuals that were designed to ensure adequate risk management processes under the Dodd-Frank Act. Specifically, the Division brought actions against registered and exempt Derivatives Clearing Organizations and a swap dealer for violating rules. The CFTC emphasized the ongoing responsibility to ensure market participants are fulfilling their responsibilities under Dodd-Frank, and these types of actions may be expected to continue.

The Division also has been increasingly active in the digital markets, taking action against misconduct involving digital assets that fall under the definition of commodities under the Commodity Exchange Act. The Division pointed to fraud actions against the principal of a cryptocurrency escrow fund, a Bitcoin trading firm and its principal, and a virtual currency trader. Citing the “significant increase in the number of cases involving manipulative conduct,” the Division is engaged in a “multi-year project” to develop its own data analytics capabilities to detect misconduct as markets continue to develop. As seen with other regulators, including the SEC, digital assets may be expected to be a focus of the CFTC’s enforcement efforts going forward.

The significant discussions both in the Division’s Manual and its Annual Report regarding cooperation and self-reporting suggest a continued and increasing effort to encourage entities and individuals to self-report misconduct and to cooperate with ongoing investigations in exchange for reduced penalties. In deciding whether to bring an action or what charges or sanctions to consider, the Division looks to whether an individual or entity voluntarily self-reports, cooperates fully with an investigation, and makes efforts toward full and timely remediation. In addition, the CFTC places an emphasis on ensuring that companies have strong compliance programs in place, and considers the adequacy of those programs when making decisions on penalties and required undertakings.

Conclusion

Despite the transition in leadership at the CFTC and the government shutdown, the Division’s enforcement efforts in FY 2019 were generally in line with recent years, and the trends suggest an intent to increase enforcement activity, encourage self-reporting and work more closely with criminal authorities and other regulators. Under new Chairman Tarbert, and the continued leadership of Enforcement Division Director James M. McDonald, the CFTC’s enforcement actions may be anticipated to continue apace in 2020.

Footnotes

1) The factual statements in this OnPoint are derived from the content of the Annual Report and other public sources.

2) This year’s Annual Report uses different categories than the 2018 Annual Report, making an exact comparison difficult. In addition to commodities fraud, manipulative conduct and spoofing, the CFTC included misappropriation of confidential information, trade allocation schemes and mismarking among the matters comprising 65% of all enforcement actions.