James McDonald, the recently appointed Director of Enforcement for the Commodity Futures Trading Commission, said in a speech last week that potential wrongdoers who voluntarily self-report their violations; fully cooperate in any subsequent CFTC investigation; and fix the cause of their wrongdoing to prevent a re-occurrence will receive “substantial benefits” in the form of significantly lesser sanctions in any enforcement proceeding and “in truly extraordinary circumstances,” no prosecution at all. Mr. McDonald presented his views at a New York University program on Corporate Compliance and Enforcement.
According to Mr. McDonald, for a company to be credited for voluntarily self-reporting wrongdoing, the disclosure must be “truly voluntary… before an imminent threat of disclosure or of a Government investigation.” He also said the reporting must occur promptly after discovery and offer-up “all relevant facts known to [the company] at the time."
Additionally, full cooperation, said Mr. McDonald, must involve ongoing revelation of facts as a company discovers them, including facts related to particular persons. Mr. McDonald warned against revealing facts as part of a “general narrative.” Particular facts,” he cautioned, “should be attributed to particular people."
Finally, the company must “timely and appropriately” remediate the conditions that led to the misconduct “to ensure that misconduct doesn’t happen again.”
Mr. McDonald promised that self-reporting won’t be a game of “gotcha” where, down the line, a company only learns at the settlement table for the first time that it has not met the Division’s expectations. He said that to avoid that, the Division will advise a company at the beginning of the process what its expectations will be regarding self-reporting, cooperation and remediation.
Mr. McDonald indicated that one of the goals of encouraging self‑reporting and cooperation is to further the Division’s commitment to aggressive prosecution. According to Mr. McDonald,
Through this program, we’re committed to aggressively prosecuting, not just the company ultimately responsible for the misconduct, but also the individuals involved… We’ll work hard to move up the chain to the supervisors who made the decision behind the act, or who directed it.
Simultaneously with Mr. McDonald’s speech, the Division released a formal Updated Advisory on Self Reporting and Full Cooperation that memorialized and expanded the elements of Mr. McDonald’s presentation (click here to access). This updated advisory amended two enforcement advisories that were issued in January 2017 – one for companies and one for individuals. (Click here for background in the article “Cooperate and Maybe Benefit Says CFTC Division of Enforcement” in the January 29, 2017 edition of Bridging the Week.)
Legal Weeds: It is very helpful that James McDonald is making cooperation with the CFTC formalistic: voluntarily self‑report + full cooperation + remediation = substantial sanctions benefit. Moreover, Mr. McDonald has indicated that cooperation is a two-way street and not a setup for “gotcha” at the settlement table. He indicated that the Division will make clear from the outset what its expectations are regarding self-reporting, cooperation and remediation. However, he made clear that this new program “should not be interpreted as giving a pass to companies or individuals” and only under “truly extraordinary circumstances” might the Division recommend not prosecuting at all.
Unfortunately, what’s not clear from Mr. McDonald’s speech, the Division’s January 19 two cooperation advisories, and last week’s updated advisory is what type of matters this new initiative applies to. It seems the new program may be intended for only significant matters. Indeed, in the January cooperation advisory, the Division expressly noted that it “may assess the value of the company’s cooperation [in light of] the Commission’s broader programmatic interest in enforcing the Commodity Exchange Act and Regulations.”
However, substantial sanction benefits should not be accorded solely for big matters important to the Commission. For minor cases (but important to an individual company or person), potential wrongdoers should also believe they have the real option of coming clean early to materially mitigate any potential sanction – particularly where the wrongdoing does not involve customer harm or a degradation of market integrity.
Moreover, as a cautionary note, unfortunately, the CFTC is not the only regulator in town. Because coming clean with the CFTC may open the door to problems with other regulators, not to mention criminal authorities, it is important to evaluate the role of other regulators and potentially consider the pros and cons of an overall coming clean strategy as opposed to solely dealing with the CFTC.
Finally, when cooperating with the CFTC or any regulator, it is very important to evaluate the implications of turning over any information subject to attorney-client or work product privilege. A privilege once waived may have unintended consequences! Hopefully, the Division will not consider the decision of a wrongdoer not to turn over legally privileged documents or advice to be evidence of non-cooperation.