CFTC Enforcement Advisory on Penalties, Monitors and Admissions

This week the CFTC’s Division of Enforcement issued an advisory (click here) giving enforcement staff guidance on future enforcement resolutions.

The advisory provides guidance on determining whether:

• Proposed civil monetary penalties are sufficient;
• When the imposition of a corporate compliance monitor or consultant is appropriate and what the duties and responsibilities of monitors and consultants should be; and
• Whether admission of guilt should be recommended in particular enforcement actions.

A high-level summary on these topics is provided below:

1. Deterring Misconduct Through Appropriate Penalties:

• The CFTC is re-calibrating how it assesses civil monetary penalties (CMPs) to ensure they are at the level necessary to achieve general and specific deterrence;
• This may result in the recommendation of higher penalties than may have been imposed in similar cases historically;
• Recidivism (i.e. the tendency to repeat offend) will be considered when determining appropriate penalties, and several factors are detailed which the CFTC will consider in determining whether a person or entity is a “recidivist”.

2. Monitors and Consultants – Ensuring Remediation to Reduce Likelihood of Future Misconduct:

• In cases where the CFTC lacks confidence that an entity will remediate misconduct on its own, it will require the entity to engage with a third-party (approved by the CFTC) to assist in remediation;
• This will include Monitors (i.e. third parties engaged to make recommendations, test those recommendation, and report on the results of their work) and Consultants (i.e. third parties that advise the entities regarding compliance enhancements);
• Going forward the Division of Enforcement will recommend that a Monitor be imposed for the most significant and/or pervasive compliance and control failures and a Consultant will be recommended in serious but less severe cases. 

3. Admissions – Achieving Accountability and Deterrence:

• Entities and individuals under investigation should no longer assume “no-admit, no-deny” resolutions are the default position of the CFTC;
• Going forward the CFTC will discuss with defendants whether admissions are appropriate – new guidance describes various factors relevant to the determination of whether admissions are appropriate.
• Factors in favour of admissions include:

1. Whether the respondent is entering into a parallel criminal resolution where the respondent admits the underlying misconduct;
2. Whether the evidence uncovered during the investigation conclusively establishes the misconduct;
3. Whether and to what extent a respondent seeks cooperation credit; and
4. Whether the offence is a strict liability offence in clear violation of the law.

CFTC Director of Enforcement, Ian McGinley, used a speech to the New York University School of Law (click here) as a platform to announce the new guidelines and to provide further context for it. Regarding the topic of self-reporting, an issue currently in vogue for numerous US federal agencies, Director McGinley poses the question as to why firms should feel the need to self-report given the higher penalties implied by this new guidance. He succinctly answers his own question as follows, “If you self-report, fully cooperate, and remediate, it is likely you will receive a substantial reduction in the penalty that would otherwise be appropriate. It is also less likely the Division will recommend the imposition of a Monitor.“

Finally, CFTC Commissioner Goldmith Romero issued a supportive statement (click here) in relation to the new guidance. For those familiar with Commissioner Goldsmith Romero’s stance on enforcement, the practice of “neither admit nor deny” has been a perennial bugbear of hers for some time (see her statement from September 2022 here, and in relation to a September 2023 enforcement case here regarding this practice). The Commissioner sees this guidance as the end of the routine use of neither- admit-nor-deny settlements.

In 2022, the Commissioner proposed the “Heightened Enforcement Accountability and Transparency” (HEAT) test to list factors that the CFTC should consider when requiring defendants to admit guilt. She states that, with the new guidance, the Enforcement Division is now following her proposed approach and that the guidance reflects many of the factors that she raised in the HEAT test i.e. egregious conduct, the presence of a criminal scheme, and significant harm or risk of harm to investors and markets, which includes threats to market integrity. 

 RegTrail Insights

Energy and commodity firms are advised to take heed of this significant development. It indicates a notable reset regarding their approach to setting penalties for transgressions. The effective curtailment of the “neither admit nor deny” settlement practice potentially opens transgressors up to other forms of civil litigation. Firms should consider the impact this may have on their various internal regulatory compliance risk assessments.