On September 25, 2017, the Division of Enforcement (Division) of the US Commodity Futures Trading Commission (Commission) issued an “Updated Advisory On Self Reporting And Full Cooperation.”1 The Enforcement Advisory was accompanied by remarks from Director of the Division of Enforcement James McDonald.2 The advisory updates a pair of January 19, 2017, advisories addressing “Cooperation Factors in Enforcement Division Sanction Recommendations” for individuals and companies.3 The update and the Director’s remarks are an effort to encourage more self-reporting and cooperation from wrongdoers subject to the Commission’s jurisdiction.
The January advisories set forth the factors that the Division considers in assessing cooperation by individuals and corporations that may be or have been charged with violations of the Commodity Exchange Act or Commission Regulations. This assessment covers the following three areas: (1) the value of cooperation to the Commission’s investigation or enforcement action, including the timeliness, nature and quality of the cooperation; (2) the value of cooperation in connection with the Commission’s broader enforcement interest, including the importance of the investigation and conservation of enforcement resources; and (3) relative culpability and other factors such as mitigation and remediation.4 The rewards for such cooperation range from recommendations of no enforcement action to reduced charges or sanctions in an enforcement action.5
These advisories lack an effective means by which companies and individuals can measure the benefit, in terms of reduced charges or sanctions, resulting from cooperation. In part, this is due to the opaque process by which the Commission calculates civil monetary penalties. The dollar amounts that can be applied per violation are known but the myriad ways in which violations can be counted creates considerable uncertainty.
The updated advisory and the Director’s remarks attempt to offer greater transparency about what the Division expects and how meeting those expectations will result in substantially reduced penalties or, in “truly extraordinary circumstances” (e.g., self-reporting misconduct that is pervasive in an industry), decisions not to prosecute.6 Implicit in the Director’s remarks is a recognition that the prior cooperation program did not provide sufficient guidance to enable companies to answer the question of “what sort of treatment can we expect” if we self-report.7 The Director believes that providing answers to these types of questions will shift this decision making in favor of self-reporting.8 While the updated advisory still does not provide these answers, it does identify three expectations that the Division has of companies seeking to self-report and receive cooperation credit.
First, wrongdoing must be voluntarily reported to the Division “before an imminent threat of disclosure” and “within a reasonably prompt time after becoming aware” of the wrongdoing.9 To incentivize disclosure at the earliest possible time, the Division will recommend “full credit where the company made diligent efforts to figure out the relevant facts at the outset,” discloses what it knows at the time, continues to investigate and makes follow-up disclosures.10
Second, there will be an enforcement investigation to confirm the scope of the wrongdoing, and the company must fully cooperate in accordance with the January advisory throughout the investigation.11 This cooperation includes “cooperating up, not down” so that the Division can bring charges up the chain of supervision.12 According to Director McDonald, the Division will clearly communicate its expectations after the self-report, and the resulting investigation will take months, not years.13
Third, the company must take timely and appropriate remedial measures to fix the flaws that allowed the wrongdoing to occur.14 The Division commits to working with the company on remediation and making its expectations clear.15
Companies that meet these expectations in accordance with the terms of the January advisory can expect “concrete benefits” in return.16 How do these “concrete benefits” differ from the reduced sanctions identified as the reward in the January advisory? That question is not answered in the update or the Director’s accompanying comments. However, insight may be gleaned from two enforcement releases from the CFTC under Director McDonald’s watch. The first involved the use of non-prosecution agreements by the Commission for the first time.17 In the release, the Director noted the importance of this tool in the Division’s cooperation program.18 The second involves a settled matter involving spoofing over a five-year period that resulted in a monetary penalty of $600,000.19 In that matter, the settling party self-reported, cooperated and received a “substantially reduced penalty” according to Director McDonald.20 Given the Division’s focus on prosecuting spoofing and the scope of the settling party’s trading activity, the sanction appears to be less severe than could have been expected absent the self-report.
The decision whether to self-report is still a difficult one to make. It remains to be seen if these efforts to reinvigorate the Division’s self-reporting and cooperation program lead to more self-reporting and the promised “concrete benefits.” Going forward, if the Division can clearly demonstrate that these substantial benefits are attainable, then maybe it will see the shift in self-reporting that it seeks.