In a September 25, 2017 speech at New York University School of Law, James McDonald, the Director of the Division of Enforcement of the Commodity Futures Trading Commission (“CFTC”), announced a new self-reporting and cooperation program aimed at deterring misconduct in the commodities and derivatives industries.1 The CFTC’s Division of Enforcement also recently published an updated Enforcement Advisory (the “Updated Enforcement Advisory”), which contains additional information regarding the credit potentially available to companies and individuals that voluntarily disclose misconduct and otherwise cooperate with the Division in its investigations.2
Director McDonald’s remarks and the Updated Enforcement Advisory outline (1) the CFTC’s expectations of companies and individuals seeking full cooperation credit; (2) the Division of Enforcement’s commitment to, among other things, recommend substantially reduced civil monetary penalties in exchange for self-reporting, cooperation, and remediation; and (3) important additional points related to the new program for industry participants to consider.
As a preliminary matter, Director McDonald stated that the CFTC’s enforcement program is essential to the CFTC’s mission to foster open, transparent, competitive, and financially sound markets, and affirmed the CFTC’s commitment to enforce the law and punish wrongdoing. At the same time, he recognized that the purpose of the Division of Enforcement is “not to bring enforcement actions for their own sake” but rather “to deter misconduct.” Director McDonald stated that the CFTC is “committed to working together with the companies and individuals [it regulates] to identify and prosecute wrongdoing that has occurred, and to stop future wrongdoing before it starts.” In particular, he emphasized “giving companies and individuals the right incentives to voluntarily comply with the law in the first place—and to look for misconduct and report it to [the CFTC] when they see it.”
Against this background, Director McDonald announced that the CFTC will recommend “a significantly reduced [civil monetary] penalty” to companies and individuals that self-report misconduct and cooperate with the CFTC, and he set forth what the Division expects from companies and individuals that seek this benefit.
II. The CFTC’s Self-Reporting and Cooperation Program
The CFTC’s Expectations
Director McDonald’s remarks and the Updated Enforcement Advisory set out three main expectations for companies and individuals that seek full credit for self-reporting and cooperation:
1. Voluntary Self-Reporting. The Division’s recommendations for the most substantial penalty reductions are reserved for companies and individuals that both cooperate and voluntarily self-report.3 Such reporting must be made prior to an imminent threat of exposure of the misconduct, must be made within a reasonably prompt time after the misconduct is discovered, and must include all relevant facts known as of the time of the self-report. The Division acknowledged that companies and individuals may not have all the relevant facts at the time of their first disclosure, and it expects companies and individuals to continue to investigate and disclose additional relevant facts as they come to light.
2. Full and Proactive Cooperation. The Division expects companies and individuals to cooperate fully throughout an investigation by adhering to the terms of the Division’s January 2017 Enforcement Advisories addressing cooperation by companies and individuals.4 Referring to the CFTC’s guidance, Director McDonald emphasized the value of providing detailed disclosure of misconduct that attributes particular facts to particular people. The Division also expects cooperation to be a proactive “effort to find all related wrongdoing,” and Director McDonald indicated that simply being responsive to the enforcement staff during an investigation is not enough.
3. Timely and Appropriate Remediation. The Division expects companies to take timely and appropriate remedial action to prevent future misconduct and fix the flaws in their compliance programs and internal controls that allowed the reported misconduct to occur.
The CFTC’s Commitment
In exchange for self-reporting, full cooperation, and remediation, Director McDonald stated that the Division will do the following:
1. Communicate Clearly Regarding Self-Reporting, Cooperation, and Remediation. From the outset of its inquiry, the Division will communicate with companies regarding the Division’s expectations for self-reporting, cooperation, and remediation, and inform companies if they are “veering off course” during the inquiry so that companies can “get back on track.”
2. Provide Assistance Regarding Remediation. Without going into detail, Director McDonald stated that the Division will make clear its expectations regarding remediation and will “work with [regulated entities] on remediation” to “get it right.”
3. Concrete Benefits. The Division “will recommend the most substantial reduction in the civil monetary penalty that otherwise would be applicable.”5 Director McDonald stated that “[i]n truly extraordinary circumstances, the Division may recommend declining to prosecute a case.”6
Important Additional Considerations
In his remarks, Director McDonald articulated four additional points to consider with respect to the CFTC’s self-reporting and cooperation program. First, he indicated that the program should not be misinterpreted as leniency to companies or individuals. Rather, Director McDonald views the program as an agressive enforcement tool. He emphasized that the program requires substantial cooperation that allows the Division to bring charges against others. According to Director McDonald, it is designed to gain “an insider perspective” so the Division “can more effectively prosecute all of the bad actors.”
Second, Director McDonald stated that self-reporting and cooperation are related but distinct. He indicated that the Division will continue to award credit for cooperation even if a company or individual does not self-report, but the largest civil penalty reductions are reserved for those that self-report, fully cooperate, and remediate.
Third, Director McDonald said that, while the Division encourages self-reporting, it nonetheless will investigate the reported misconduct to confirm the scope of the reported wrongdoing. He stated that such confirmatory investigations would be expeditious and take “months, not years.”
Fourth, Director McDonald indicated that the goal of the Division’s self-reporting and cooperation program is not to coerce cooperation, but rather to emphasize that companies and individuals have a choice to self-report or not. His remarks suggest that the choice is between failing to self-report and cooperate, with the resulting aggressive enforcement and potential for full monetary penalties, on the one hand compared with self-reporting and cooperation, with the potential for an expeditious enforcement action and concrete benefits, on the other.
On its face, the CFTC’s new self-reporting and cooperation program represents a significant step toward providing appropriate incentives to self-report misconduct and cooperate with a CFTC investigation. Nevertheless, it remains to be seen whether the program will become a successful tool for deterring misconduct. Although Director McDonald and the Updated Enforcement Advisory set forth the program’s general principles, its precise contours and additional details concerning the self-reporting and cooperation requirements necessarily will be developed over time as industry participants interact with the Division to resolve enforcement actions. Still, if properly implemented, the program has the potential to benefit the CFTC and regulated parties significantly.