On September 25, 2017, James McDonald, the director of the Division of Enforcement (Division) of the U.S. Commodity Futures Trading Commission (CFTC or Commission), delivered a speech at New York University School of Law announcing the Division’s updated self-reporting and cooperation policy. The policy speech was accompanied by the release of a written enforcement advisory. Following the speech, Director McDonald took questions from the room and provided additional color on the policy.
Purpose of Policy: Incentivizing Self-Reporting
The CFTC’s updated policy is aimed at better incentivizing self-reporting of detected misconduct at the earliest possible date, as well as subsequent cooperation with Division investigations. The policy is an attempt to change a company’s cost-benefit analysis when weighing whether to self-report (including consideration of likely treatment by the regulator) or whether not to do so (including consideration of likelihood of detection and likely treatment if detected). Under the new policy, the Division will recommend “the most substantial reduction” in penalty for self-reporters—significantly more of a reduction than for subsequent cooperation alone. In addition, the Division pledges to provide transparency throughout the investigative process regarding what will be required to obtain that recommendation.
Director McDonald stated that the Division’s ultimate goals are to obtain “buy-in” from regulated companies and, through that buy-in, “optimal deterrence” in the regulated markets; and to put the Division in a better position from which to identify specific individuals involved in wrongdoing and to bring enforcement actions against those individuals. Specifically, the Division is seeking cooperation “up” the corporate ladder, so that it can civilly prosecute the supervisors who directed or made the decision underlying the wrongdoing.
Requirements To Receive “Most Substantial Reduction”
To be considered a “self-reporter,” a company (or individual) must do three things: (1) self-report, (2) cooperate, and (3) remediate. If the company does all three, the Division will recommend that the Commission consider “the most substantial reduction” in the otherwise applicable civil penalty, and in “truly extraordinary circumstances” may recommend declining to prosecute. The advisory cites as an example of “extraordinary circumstances” a situation in which the misconduct is “pervasive across an industry and the company or individual is the first to self-report.” According to the policy, self-reporting, cooperation, and remediation mean the following:
1. Self-Reporting: The company must “voluntarily report wrongdoing” to the Division before any “imminent threat of disclosure or of a Government investigation,” and “independent of any other legal obligation.” The report must be made “within a reasonably prompt time” of becoming aware of the wrongdoing. The report must be “designed to notify” the Division of the misconduct—a vague reference in a compliance report, for example, will not suffice. The report must include “all relevant facts known to the company” at the time, including facts regarding individuals’ involvement. However, as the Division recognizes that the company may not know all the relevant facts or the full extent of the wrongdoing at the time of the initial disclosure, it will recommend full credit if the company made its “best efforts to ascertain the relevant facts” and “fully disclosed” those known at the time of the first report, “continued to investigate,” and then “disclosed additional relevant facts as they came to light.” Additional color on this requirement, derived from Director McDonald’s responses to questions asked after the delivery of his speech, is provided below.
2. Cooperation: The company must fully cooperate throughout the Division’s investigation. Separate written guidance, issued in January 2017, describes the factors that will be considered when determining whether a company or individual has fully cooperated (as amended by this September 2017 updated policy regarding self-reporting). Director McDonald stated that full cooperation includes, for example, disclosing all relevant facts as the company learns them via its own internal investigation, again including facts related to individuals’ involvement. The guidance further suggests that full cooperation may require a company to use “all available means” to preserve relevant electronically stored information and other documents; to make employee testimony, documents, and other data available in a timely manner; and to respond quickly to requests and subpoenas for information, among other things. Importantly, the cooperation must be proactive, not reactive. “[T]he Division looks to what a company voluntarily does, beyond what it is required to do.” However, precisely what will be expected in terms of full cooperation is case-specific—and Director McDonald pledged that, upon a self-report, the Division will “clearly communicate” the cooperation expected given the particular circumstances.
3. Remediation: The company must “timely and appropriately remediate” the flaws in its compliance and control programs that permitted the misconduct to ensure that it does not occur again. The specific remediation required will depend on the facts and circumstances, but the Division will make its expectations clear in each instance and work with the company on case-appropriate remediation.
The updated policy makes clear that self-reporting is now considered “distinct” from cooperation. If the company fully cooperates and remediates but does not self-report in the first instance, the Division may still recommend a reduced penalty, but it would be a significantly smaller reduction than if the company had self-reported.
Director McDonald repeatedly emphasized that the Division intends to “clearly communicate” expectations regarding cooperation and remediation at the outset of the investigation, so that the company will know from the very beginning what will be expected of it in order to obtain the recommended “most substantial reduction” in penalty.
He also emphasized that the Division has no plan to “slow down” enforcement actions.
Difference from Prior Policy
Director McDonald characterized the self-reporting and cooperation policy as an “outgrowth” of the Division’s prior cooperation program. Under the January 2017 cooperation advisories, self-reporting was described as a factor considered when determining whether substantial cooperation was provided. The updated policy advisory clarifies that self-reporting is distinct from subsequent cooperation, and necessary to obtain “the most substantial reduction” in the otherwise applicable civil penalty.
Additional Discussion of Self-Reporting: Timing and to Whom Report Must Be Made
The disclosure must be made directly to the CFTC’s Division of Enforcement. This need not be the very first report regarding the issue, but should be one of the first set of reports. Director McDonald provided the following example: If upon determining to self-disclose, company counsel makes five calls in a single session, the very first of which is to the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) or the Department of Justice (DOJ), but one of which is to the Division, the company will not be precluded from receiving self-reporting credit. But if the company instead reports only to the Securities Exchange Commission (SEC), and six months later the SEC concludes that there is no issue in its market and refers the case to the Division, that may not qualify as self-reporting.
Director McDonald instructed that a company that has identified a suspicious trading pattern but has not yet determined whether it is related to wrongdoing should report that suspicious trading pattern to the Division. He said that the Division wants to be informed at the “earliest possible time.” Using the suspicious trading pattern as an example, Director McDonald recommended that a company concerned about the conduct inform the Division that a suspicious trading pattern was identified, and that the company is still investigating but wanted to “get into the self-reporting door.” Even if it turns out that the problem was more extensive than the company initially believed, the company will receive self-reporting credit so long as it did not deliberately minimize the misconduct in connection with the initial report.
Director McDonald was initially hesitant to quantify the benefit of self-reporting but eventually suggested that with self-reporting, cooperation, and remediation, the company may be looking at between a 50% and 75% reduction in the otherwise applicable civil penalty. With cooperation and remediation alone, the benefit will be less than if the company had self-reported. Director McDonald further suggested that the benefit will depend in part on the “quality” of the cooperation. He noted that if the benefit for self-reporting in a particular case would be close to a 75% reduction, the reduction likely would be closer to 50% with only cooperation and remediation.
Cooperation and Scope of Internal Investigation
Director McDonald stated that the Division will not negotiate about the scope of its investigation—if wrongdoing is perceived, it will be investigated. He emphasized that there will be an upfront conversation between the Division and the company about the scope of the investigation, and that what the Division would expect in terms of an internal investigation in connection with a $500 million case is completely different from what would be expected in connection with a $5 million case. In an appropriate, relatively small case, a full-scale internal investigation involving interviews of numerous employees may be unnecessary; it may instead be sufficient for the Division simply to review documents provided by the company to confirm what happened, and then take appropriate action. Director McDonald acknowledged, however, that in order to self-report the company must take the leap to do so without the benefit of knowing what the Division will ultimately want in terms of scope of investigation.
Director McDonald stated that the Division will not incentivize self-reporting by threatening imposition of monitors on companies that choose not to self-report. He represented that the Division does not request or recommend monitors lightly, and that failure to self-report will not tip the balance of whether to recommend or request a monitor. However, Director McDonald noted there could be a link between the reasons that led a company to decide not to self-report and the ultimate need for a monitor to address those reasons.