Minor Revolution at the CFTC: New Enforcement Guidance Will Sharpen Settlement Terms
In Short
The Background: The CFTC Division of Enforcement ("Enforcement") recently issued an advisory on new enforcement policies that increase the agency's focus on corporate accountability through increasing civil penalties, requiring admissions in negotiated resolutions, and imposing monitors and consultants.
The Result: The advisory memorializes a more aggressive approach to admissions, monitorships, and civil penalties that Enforcement had begun to use recently on an ad hoc basis. By formalizing those practices, Enforcement is clearly signaling that they will become the default mechanisms for resolutions—even where they are inconsistent with existing CFTC policy and historical Enforcement practice.
Looking Ahead: Firms should expect Enforcement's position in settlement discussions to reflect the more aggressive approach laid out in the advisory, with limited weight given to consistency with past settlement terms in similar cases, and for overall settlement costs to increase substantially as Enforcement implements the advisory.
On October 18, 2023, the Commodity Futures Trading Commission's Division of Enforcement ("Enforcement") issued an advisory that formalizes and clarifies Enforcement policy on: (i) the role of civil monetary penalties ("CMPs") in achieving general and specific deterrence, particularly in the case of repeat violations; (ii) the duties, responsibilities, and situations calling for monitors and consultants; and (iii) the factors Enforcement will consider when deciding whether to pursue admissions by a settling party. Enforcement simultaneously released a statement by Commissioner Christy Goldsmith Romero supporting the advisory.
Increased Civil Penalties
Like other regulators and law enforcement bodies, the CFTC has sought to strike a delicate balance with sizing its CMPs in specific cases. The newly announced policy expressly contemplates the imposition of larger CMPs to produce greater general and specific deterrence, particularly in cases of recidivism or where "multiple similarly situated respondents violat[ed] similar laws in similar ways over time." Both the advisory and Commissioner Goldsmith Romero's statement expressed an underlying concern that penalties may otherwise be viewed simply as "a cost of doing business."
Under the new guidance, Enforcement will use the following five factors to assess whether a penalty should be enhanced due to apparent recidivism:
- The overlapping nature and root cause of prior and current alleged misconduct;
- The time between offenses;
- The presence of overlapping management at the time of the prior and current alleged misconduct;
- The pervasiveness of new misconduct and the speed with which it has been remediated; and
- The robustness and effectiveness of remediation since the prior misconduct.
Under this calculus, evidence of recidivism is an "aggravating factor" that may increase a CMP. It will also be a "relevant factor" in analyzing whether the entity being charged is entitled to any cooperation credit under other Enforcement settlement policies.
Admissions
The advisory makes plain that Enforcement will continue its recent trend of seeking admissions of wrongdoing in settlements. This renewed focus on admissions began late in 2022, when Commissioner Goldsmith Romero began making a series of public statements challenging the seeming default to "no admit, no deny" settlements. Since that time, a handful of settled cases have included admissions—whether to violations of law or to the underlying facts. With the advisory, firms should no longer expect "no admit, no deny" to be the baseline for settlement discussions.
In particular, the advisory sets forth the following factors that militate for and against seeking admissions in specific cases:
Enforcement's new approach reflects a dramatic change from the CFTC's decades-long practice of settlement orders, its own Part 10 Regulations, and existing formal policy statement on settlements, found in Appendix A to the Part 10 Regulations, which were adopted by Commission vote – unlike the current advisory. Consistent with Enforcement's historical practice these authorities expressly contemplate "no admit, no deny" language (Appendix A) and the settling party's consent to the CFTC's findings of violations (Regulation 10.108(b)(5)), rather than required admissions by the settling party.
Given the inherent subjectivity of most of the factors articulated in the advisory, it remains unclear how frequently and aggressively Enforcement will actually pursue admissions in settlement negotiations, particularly given the apparent inconsistency with relevant CFTC regulations and policy. The rationale for those rules—a careful balancing of speed and certainty in the business of settling enforcement proceedings—remains a compelling case for accepting "no admit, no deny" resolutions, particularly absent adoption of a new policy by the Commission via further rulemaking or public notice and comment. To the extent Enforcement does regularly pursue such admissions in settlements, however, companies facing CFTC investigation will need to prepare to contest unwarranted admissions in negotiations, and to assess whether such admissions render otherwise viable settlements unacceptable based on reputational considerations, exposure to further liability, or other concerns.
Monitors and Consultants
The advisory also clarifies when Enforcement will recommend appointment of a monitor or a consultant. Enforcement will recommend monitors for the most pervasive compliance failures, where Enforcement "lacks confidence that the entity will remediate its misconduct without the assistance of a neutral third party and oversight." Monitors will be sought in cases where severe compliance and control failures evince a significant lack of commitment to effective compliance. In contrast, Enforcement will seek appointment of a consultant "where the evidence persuades [Enforcement] that the entity requires the assistance of a neutral third party to advise regarding remediation, but can otherwise remediate its conduct without oversight." Finally, the guidance provides that Enforcement will be more likely to recommend the appointment of a monitor or consultant in cases involving recidivism.
Four Key Takeaways
- The advisory appears likely to increase the costs of settlement with the CFTC, particularly in cases involving alleged recidivism. Firms that have settled prior violations with the CFTC may wish to consider increasing their compliance focus on areas where a possible repeat offense would trigger higher costs, admissions, and the appointment of a monitor or consultant.
- The change in admissions is noteworthy, not only because of the potential for collateral consequences but for the likelihood that it will complicate efforts to settle cases efficiently. Firms should bear this in mind as they evaluate their litigation or settlement posture in future cases. The insistence on admissions may require firms to adopt a more defensive posture during investigations, and to carefully assess the risks of entering into a settlement when Enforcement is insisting on admissions.
- It remains unclear how much the advisory will actually change Enforcement practice in the majority of cases, and how it will square with current Enforcement policy on self-reporting, cooperation, and remediation. It is clear, however, that firms under CFTC investigation should be prepared to negotiate with Enforcement in terms of the advisory's guidelines, and should not expect historical practice or the results of past cases involving similar facts to be either a reliable guide to likely settlement terms or a persuasive argument to Enforcement staff.
- More complicated settlements can often lead to related violations down the line. With greater involvement of monitors and consultants, plus other associated remedial undertakings, it may be that a simple miss or small gap in order compliance becomes grounds for failure to supervise or false statement charges. More than ever, firms will have to tread carefully while seeking to comply with settlement undertakings.
