CFTC Commissioner Floats Enforcement Reforms

This week the CFTC Commissioner Summer K Mersinger delivered (click here) a speech at ISDA’s Annual Legal Forum held in New York. Her speech focussed on the need for reform of the CFTC’s approach to enforcement. Salient aspects from her speech are summarised below:

• Referencing her recent dissenting statements on enforcement cases, she acknowledges that they reflect an element of frustration with the enforcement process at the CFTC;
• Vigorous enforcement is a vital part of carrying out the CFTC’s mission, and she acknowledges the efforts of the CFTC’s Division of Enforcement (“DOE”), and reaffirms her commitment to a robust enforcement programme,;
• That said, she does believe however that the CFTC should look for opportunities to improve in the area of enforcement;
• A large number of the CFTC’s enforcement actions are settled during the month before the end of the government’s fiscal year on 30 September;
• She believes that this “September crunch” is frustrating to all involved and potentially harmful to the agency’s agenda as:

1. It diverts the CFTC’s attention from its other important responsibilities, as matters requiring Commissioners’ attention from other divisions are postponed and deferred;
2. It incentivizes those aiming to settle with the CFTC to wait until the fiscal year-end, knowing the CFTC will be eager to get another point on the board before the “clock runs out” and that the resulting settlement will draw less public attention as just one of the myriad cases being announced at the same time;
3. Such a crunch diminishes the time for decision making and increases the risk of faulty interpretations of the Commodity Exchange Act (CEA) and CFTC regulations.

• She notes that wrongdoing occurs year-round, and the CFTC’s enforcement docket should reflect this fact;
• At the end of each fiscal year, the CFTC’s DOE publishes an Annual Report that typically proclaims success based on “headline stats” such as the number of cases filed and the amount of monetary sanctions imposed during the previous fiscal year;
• The Commissioner believes that it is time for the agency to stop prioritizing volume and the focus on making the current fiscal year statistics better than the previous year’s;
• It should rather concentrate on where improvements can be made in its regulatory oversight functions to prevent pervasive violations, and should devote more resources to educating market participants and the general public on how to avoid becoming victims of fraudulent behaviour;
• She believes that enforcement should be the last resort to achieving compliance, not the first;
• She notes that in cases of fraud, manipulation, and other wilful violations of the law, enforcement is critical to punish wrongdoers and to deter misconduct by others;
• However, in other cases, oversight of the derivatives market by the CFTC’s Division of Clearing and Risk (“DCR”), Division of Market Oversight (“DMO”) and Market Participants Division (“MPD”) can achieve compliance more effectively and efficiently than bringing a costly, time-consuming, resource-intensive, and backward-looking enforcement actions;
• She believes that where CFTC regulations are vague, it should not leverage these provisions to drive annual statistics but instead communicate its expectations by writing clear, sensible, and workable rules, so that the CFTC can fairly require compliance with those obligations;
• She notes that the CFTC’s ability to achieve compliance with the CEA and the CFTC’s rules will be enhanced if it considers the underlying reasons for non-compliance, and contemplates the most effective means of addressing that non-compliance;
• Most CFTC enforcement actions settle without litigation and while such settlements enable the CFTC to achieve its enforcement objectives while conserving its scarce resources, vague settlements cause confusion and undermine our efforts to achieve compliance;
• When settling, the CFTC issues an order that sets out the agency’s findings about what the settling party did and how it violated the law – she notes that these orders are not binding precedents as a matter of law;
• Since however they reflect a statement of the CFTC’s thinking, the public may understandably consider them as precedents, and the CFTC itself often cites them as persuasive authority in future cases;
• She implores her audience to remember:

"No court has decided on the legal theories as applied to the particular facts that the CFTC includes in its settlement orders. The legal theories advanced in settlement orders should not push the bounds of the agency’s authority. Such orders should avoid theories that are novel, that are arguably beyond the limits of the CEA and its implementing regulations, or that are likely to raise additional questions or issues. Otherwise, the agency risks creating regulatory expectations that become difficult to follow."

• She believes that to foster voluntary compliance with the law, and to provide transparency into certain aspects of enforcement determinations regarding penalties, the CFTC must unwind the “layers” around how it recognize and credits those who self-report, offer cooperation during the enforcement process, and who undertake self-remediation;
• She highlights that companies are eligible for a monetary penalty credit for self-reporting if it makes its disclosure only to the DOE rather than to one of the CFTC’s oversight divisions (i.e., DCR, DMO, or MPD) - she believes that this requirement is an unnecessary layer that restricts self-reporting credit;
• She also highlights that if a company self-reports, substantially cooperates, and appropriately remediates itself, a reduced civil monetary penalty should not be the only potential outcome;
• Where a company has identified the problem, disclosed it to CFTC staff, analysed the situation, provided a report of its findings to CFTC, and engaged in steps to address the problem - it has essentially performed many of the CFTC’s functions;
• As such cooperation and remediation often come at a significant expense to firms and may include hiring an independent compliance consultant or monitor to investigate the company’s practices and procedures, to recommend improvements, and to ensure that remediation is completed;
• She notes that an enforcement action may still be appropriate in these cases to assure that the company will complete its remediation and to ensure that it reports to DOE on the status of those remediation efforts, but given that compliance objectives are being achieved often with fewer agency resources, substantial penalties may not be necessary;