On October 17, the Commodity Futures Trading Commission’s Division of Enforcement released an advisory instruction to CFTC staff for future enforcement actions. The advisory provided guidance on the following: (i) whether proposed civil monetary penalties are sufficient; (ii) circumstances when the imposition of a corporate compliance monitor is appropriate; (iii) what duties and responsibilities of monitors should be; and (iv) whether admissions should be recommended in a particular enforcement action. While the guidance leaves ample room for interpretation and development over time, the unambiguous thrust is to send a message that the CFTC is seeking to increase the severity of sanctions, both in terms of the size of monetary penalties and associated undertakings, continuing a trend that the CFTC has been pushing for several years.
Deterrence through Civil Monetary Penalties
: The Division issued new guidance on civil monetary penalties to address an apparent concern that, historically, the penalties issued by the CFTC have been insufficiently high to effect general and specific deterrence. Specifically, the Division expressed a concern that if penalties are not sufficiently high, entities may choose to continue unlawful behavior and regard penalties as a mere “cost of doing business.” As such, the Division stated that it is recalibrating how to assess proposed civil monetary penalties, noting that this “may result in the Division recommending higher penalties in resolutions than may have been imposed in similar cases previously,” and “[p]articularly where the Division observes multiple similarly situated respondents violating similar laws in similar ways over time, the Division will assess whether penalties higher than those imposed previously are necessary to achieve sufficient general deterrence.” Thus, the Division made explicit that it will consider any indicia of the industry’s recidivism on a given issue when setting penalties over time.
The Division also emphasized that it will heighten its focus on a specific firm’s history of (or lack of) recidivism, stating that it “will heavily factor recidivism when determining appropriate penalties to recommend to the Commission.” In determining whether an entity or person is a recidivist, the Division will examine various factors, including:
- Whether the prior and current actions resulted from the same root cause or involve the same general subject matter.
- The timing between the offenses and weight will be given to the recent conduct in determining whether the entity or person is a recidivist.
- Whether overlapping management was involved.
- The pervasiveness of the conduct, recognizing that new conduct that is de minimis and quickly rectified is less likely to result in a finding of recidivism, in comparison to pervasive and persistent new conduct.
- The implementation of any robust remediation, if any, that was taken for the prior conduct and its effectiveness in minimizing future misconduct.
The Division made clear that a finding of recidivism will not only impact the size of a monetary penalty, but also whether the retention of an independent monitor or consultant will be required as a part of any resolution.
Monitors and Consultants for Remediation
: The Division reasserted the importance of involving independent monitors and consultants to help further the remediation of a respondent’s conduct in certain cases. The Division explained that “[g]oing forward, the Division anticipates recommending to the Commission that a Monitor be imposed in cases involving the most significant and/or pervasive compliance and control failures reflecting a lack of sufficient commitment to effective compliance, and that a Consultant will be recommended in less severe cases.” Specifically, they stated that monitors will be deemed appropriate where the Division finds that the pervasiveness and/or severity of the misconduct and/or the absence of effective controls is such that the Division lacks confidence that the entity will remediate its misconduct without the assistance of a neutral third party and oversight. By contrast, the Division will recommend consultants where the evidence persuades the Division that the entity requires the assistance of a neutral third party to advise regarding remediation, but can otherwise remediate its misconduct without oversight.
The core difference between Monitors and Consultants is the degree of continued oversight by the Division after they are retained. Monitors will be subject to Division approval, submit reports to the Division, and ultimately certify an entity’s completion of its remediation plan. Consultants will interact less frequently with the Division, so that the entity itself will report directly to the Division on its remedial progress. In practical terms, however, both are significant impositions on a settling firm.
Admissions in Resolutions:
The Division indicated that, going forward, entities should not presume the availability of a “neither-admit-nor-deny” resolution. Instead, in each case,
the Division will discuss with respondents whether admissions are appropriate to further the goals of accountability, justice, deterrence, and to facilitate post-resolution cooperation. The Division provided that the following situations will generally favor including admissions in a resolution:
- Where the respondent is entering into a parallel criminal resolution where he/she admits to the underlying misconduct.
- Where the evidence uncovered during the investigation conclusively establishes the misconduct (for example, the respondent admitted to the misconduct in testimony or documentary evidence compels the admissions).
- Where the respondent seeks cooperation credit (implying but not explicitly stating that offering an admission will be viewed as increasing an entity’s cooperation, and thus seemingly suggesting that offering an admission may be a way to reduce penalties).
- Where the offense is strict liability offense, as any potential debate over state of mind is irrelevant.
Meanwhile, the Division stated that the following situations will generally counsel against inclusion of admissions:
- Where there is a realistic risk of criminal exposure specifically arising from the act of admitting the misconduct (but not a parallel criminal resolution), in recognition that an admission could jeopardize a respondent’s ability to defend itself in a subsequent action.
- Where there is a legitimate factual dispute where the Division is persuaded it faces significant litigation risk establishing the fact at trial.
Taken together, this latest guidance from the CFTC’s Enforcement Division (the first such formal guidance under its new Director) sends a robust message: the CFTC’s recent tough enforcement is here to stay and will be only more aggressive in the coming years.