New CFTC Enforcement Policy Increases Penalties to Deter Recidivists
The U.S. Commodity Futures Trading Commission (“CFTC” or “Commission”) — the federal agency tasked with regulating the U.S. derivatives markets, which includes futures, swaps and certain kinds of options — has recently taken significant steps to address a persistent issue of recidivist behavior in the financial industry. Over recent years, the agency has observed a pattern where various entities, ranging from individual offenders to large institutions, repeatedly violate the same regulations. This behavior persists because the penalties for such violations are perceived as insufficient to deter it effectively.
In response to this challenge, CFTC Director of Enforcement Ian McGinley announced new agency enforcement policies designed to deter repeat offenders. These policies aim to establish a more robust deterrent framework.
The key elements of these new policies include:
- Harsher Penalties: The CFTC will increase penalties across the board. This step is intended to counter the perception that penalties are an acceptable cost of doing business in the financial industry. The CFTC hopes that increased penalties will force institutions to invest in the necessary infrastructure to avoid regulatory violations. Interestingly, Director McGinley specifically cited that the higher penalties may also “empower compliance professionals to make the business case to senior management for the resources they need.”1
- Increased Use of Monitors and Consultants: The CFTC plans to make greater use of corporate compliance monitors, third parties engaged by companies to oversee and test remediation and submit reports to the Commission pursuant to a corporate resolution. In addition, the CFTC signaled that it will also rely upon outside consultants to help the Commission evaluate compliance programs and advise on compliance enhancements as a means to remediate more effectively. When an entity violates CFTC regulations and the Commission lacks confidence that the entity will remediate the misconduct on its own, the CFTC will be more likely to require the engagement of a monitor to conduct oversight and advise on compliance enhancements. The CFTC’s stated goal of the imposition of a monitor or use of a consultant is to minimize the risk of misconduct recurrence. The intrusive nature of a corporate monitorship, which can be expensive and involve significant business disruption and ongoing scrutiny of business operations, may also serve as a more potent deterrent than monetary penalties for repeat offenders.2
- Admission of Liability: The CFTC also signaled its intent to require more companies to admit liability in a more substantial number of future resolutions. The previous practice of defaulting to “no-admit, no-deny” orders is giving way to a more case-specific approach. The CFTC will consider factors like the existence of a parallel criminal case or potential criminal exposure that may make an admission infeasible for a business when deciding whether to require admissions of liability. More specifically, McGinley said that under the new policy, the CFTC will examine whether admissions are appropriate in “every negotiation” including situations where conduct is admitted in a parallel criminal case, when there are admissions in testimony to the CFTC during the investigation, and situations where there is “strict liability.”
- Encouraging Self-Reporting: Firms that self-report misconduct will be rewarded with a reduction in penalties and a greater likelihood of avoiding monitorships. The CFTC sees cooperation and self-reporting as vital elements in reducing regulatory violations.
The success of these new policies will depend on their effective implementation and the extent to which the CFTC can demonstrate the benefits of self-reporting through a structured incentive program. If these measures succeed, they may encourage financial institutions to invest more in compliance departments and back-office infrastructure to ensure regulatory compliance in the future. However, the outcome will also hinge on how the CFTC treats self-reporting businesses and whether the industry perceives the new policies as a genuine deterrent to misconduct.
What This Means for You
Under the new CFTC Enforcement Policy, companies that self-report and remediate effectively will be more likely to receive lesser penalties and escape third-party oversight by a corporate compliance monitor. Conversely, those that delay or fail to remediate will face harsher penalties and will be more likely to suffer the imposition of a corporate monitor as part of a resolution with the Commission. Financial institutions should be aware of these harsher potential penalties, especially in instances of related, but not identical, misconduct (for example, a swap dealer that has significant reporting violations would receive harsher penalties for recidivist conduct if a year earlier, the Commission had issued an order for recordkeeping violations).3
With monitorships on the table, there are more potential financial impacts on a company than just the penalties to the CFTC: the public perception of admissions of liability. Admissions can cause dramatic reputational harm and impact perceptions of a company’s integrity and could invite potential derivative litigation, as well.4 Monitorships may also uncover potential additional violations of the Commodity Exchange Act and other regulations. If evidence of such violations is discovered, the monitor could discretely investigate and report to the Commission, leading to additional penalties, breaches of settlement agreements, and even extensions of the monitorship.
With new, harsher penalties for institutions that have the same or closely related problems, the CFTC hopes that increased penalties will force institutions to invest in the necessary infrastructure to avoid regulatory violations. What this means for financial institutions is clear: “If you self-report, fully cooperate, and remediate, it is likely you will receive a substantial reduction in  penalty…. It is also less likely the Division will recommend the imposition of a Monitor.”5
1Ian McGinley, Enf’t Dir., CFTC, The Right Touch: Updated Guidance on Penalties, Monitors, and Admissions, Speech at N.Y. Univ. Sch. of Law: Program on Corp. Compliance and Enf’t (Oct. 17, 2023) [hereinafter CFTC remarks], https://www.cftc.gov/PressRoom/SpeechesTestimony/opamcginley2.
2The CFTC’s focus on monitorships stands in contrast to the decrease in the use of monitorships by other enforcement agencies, including by the Department of Justice (“DOJ”). In March 2023, the DOJ released a policy update relating to Selection of Monitors in Criminal Division Matters (“Monitor Memorandum”). The Monitor Memorandum updated the DOJ’s policies on monitor selection and management to conform with policies announced by the Monaco Memorandum (2022), such as including self-disclosure as a factor in determining whether a monitor is necessary and confirming that “prosecutors should not apply presumptions for or against monitors,” rather than looking to several non-exhaustive factors “when assessing the need for, and potential benefits of, a monitor.” For example, since 2020, the DOJ has only imposed two monitorships in FCPA-related cases. The CFTC’s decision perhaps suggests a larger trend back toward the imposition of monitorships across government agencies more broadly.
3CFTC remarks, supra note 1.
4See, e.g., New York Mercantile Exch. v. CFTC, 828 F. Supp. 186 (S.D.N.Y. 1993) (the court acknowledged that forcing NYMEX to comply with CFTC’s directive might impair its public integrity).
5CFTC remarks, supra note 1.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.