Thursday, September 28, 2017

CFTC’s chief enforcer underscores benefits of self-reporting and cooperation in NYU address

By Brad Rosen, J.D.

CFTC Enforcement Director James McDonald reiterated and clarified the benefits that can accrue to commission registrants who elect to self-report violations and offer substantial cooperation in connection with regulatory investigations in an address he made before NYU’s Institute for Corporate Governance and Finance.

In his remarks, McDonald noted, "we at the CFTC are committed to working together with the companies and individuals we regulate to identify and prosecute wrongdoing that has occurred, and to stop future wrongdoing before it starts. In particular, we’re committed to 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 us when they see it." He continued, "[w]e know the vast majority of businesses and market participants want to obey the law. We know they work hard to do the right thing—not because they’re afraid of getting caught. But because they want to run their businesses the right way. These businesses know that misconduct within a company diminishes confidence in management. It undermines the company’s culture.

According to Gary DeWaal, special counsel in Katten Muchin Rosenman’s financial services group and long-time industry observer, the framework articulated by McDonald is a welcome development. "For many years, it has been the perception across the industry that there has been no reward for coming clean and bringing a problem to the attention of the agency. McDonald has made it clear there will be benefits for doing so," he noted.

However, DeWaal cautioned that industry participants must be mindful that self-reporting and cooperation may result in benefits with the CFTC, but exposures and liabilities relative to exchanges, foreign regulators, and the U.S. attorney may remain. Notwithstanding, DeWaal observed, "the CFTC has limited resources combined with an expanded mandate. This is a practical response to economic realities, and it is the right thing to do." To be sure, the CFTC has been encouraging registrants to embrace notions of cooperation and self-reporting for some time, even prior to McDonald’s appointment in March of this year. In January, the agency issued two advisories on cooperation that noted factors considered in providing cooperation credit to companies and individuals. In June, trader David Liew was able to completely avoid a civil monetary penalty for spoofing and manipulation in the gold and silver futures markets by providing "substantial assistance" to the enforcement division. Later that month, the CFTC entered into its first-ever Non-Prosecution Agreements (NPAs) with three former Citigroup traders who provided "timely and substantial cooperation" relating to their spoofing misconduct.

In August, McDonald noted that a $600,000 penalty imposed against The Bank of Tokyo-Mitsubishi for spoofing was a "substantially reduced penalty" in exchange for self-reporting and other cooperation. Later that month, McDonald was a guest on CFTC Talks, the recently introduced podcast hosted by Chief Market Intelligence Officer Andy Busch, where he touted the substantial benefits of self-reporting.

In his remarks, McDonald articulated specific details regarding the cooperation and self-reporting framework envisioned by the division and the benefits that could be expected including:
  • Disclosure must be truly voluntary. Cooperation must occur before an imminent threat of disclosure or of a government investigation and it must be made independent of any other legal obligation. A disclosure must also be made in a clear and prominent manner.
  • Disclosure must be made within a reasonable period of time. A company must make its disclosure in a reasonably prompt time after becoming aware of a problem and all relevant facts known at the time must be disclosed.
  • Cooperation must be complete and continue during the course of the investigation. The company must disclose all facts relevant to the misconduct as the company becomes aware of them during its own investigation—including facts related to the involvement of any individuals.
  • Cooperation must be proactive, not reactive. It’s not enough just to be responsive to Division staff during the course of an investigation. Full cooperation requires an active effort to find all related wrongdoing and not taking a squinty-eyed view of the facts to minimize the misconduct or avoid disclosures.
  • Remediation is required to ensure the misconduct doesn’t happen again. This means the company must work to fix the flaws in its compliance and internal controls programs that allowed the misconduct in the first place. The Division indicated it will work in tandem with companies to achieve remediation solutions.
  • Division of Enforcement commitments. The Division indicated it will clearly communicate with the registrant—at the outset—its expectations regarding self-reporting, cooperation, and remediation. The division noted that its self-reporting program is not going to be a game of gotcha—where only once you’re at the settlement table do you learn there’s been one slip up in the process that takes you out of the self-reporting lane.
  • Expected benefits to registrants. A registrant can expect concrete benefits in return for its self-reporting, cooperation, and remediation. If a company does those three things, the Division of Enforcement will recommend a substantial reduction in the penalty that otherwise would be applicable. In truly extraordinary circumstances, the Division may even recommend declining to prosecute a case.
In his conclusion, Director McDonald asserted that the self-reporting and cooperation program outlined should shift the incentive structure in favor of self-reporting and cooperation. If so, he believes great strides will have been made toward stopping misconduct in the markets.