Tuesday, June 02, 2020

CFTC enforcement director expounds on penalty guidance in fireside chat

By Brad Rosen, J.D.

In a recent fireside chat, Futures Industry Association (FIA) General Counsel Allison Lurton interviewed CFTC Division of Enforcement Director James McDonald. Their discussion focused on the CFTC’s recently revised civil monetary penalty guidance, the first such update since 1994, as well as an update on the Division’s current priorities. McDonald and Lurton discussed particular changes in the updated guidance, why these updates were a priority for the Commission, and explored how it might impact market participants and their counsel.

The guidance’s main objective. In his prepared remarks, McDonald observed that over the past several years, the Commission has regularly brought cases commanding eight, and sometimes nine figures in monetary relief, stretching across an ever-growing range of market activity, often involving new rules, new conduct, and new CFTC market participants. However, the agency had not made a clear public statement as to how it arrived at particular penalties, or what it hoped to accomplish by imposing those penalties. Consequently, the agency saw the time as ripe to issue the revised penalty guidance.

McDonald expounded, “On a big picture level, this penalty guidance reflects our view that the ultimate goal of our enforcement program is to deter misconduct. Indeed, the guidance explains that, in considering the appropriate penalty, staff will be guided by the overarching consideration of ensuring the proposed penalty achieves the dual goals of specific and general deterrence.”

On the ground benefits emanating from the guidance. McDonald also pointed to specific pragmatic benefits he saw flowing from the revised guidance. These include:
  • It would be informative and useful on a practical level.  Consistent with the CFTC’s history as a principles-based regulator, the penalty guidance sets forth those principles and factors that will be instrumental in guiding staff action.
  • The document is short enough that the people affected—business leaders, compliance professionals and market participants—should be able to easily read it, understand it, and implement any lessons learned. Importantly, the guidance will also bind division staff, ensuring consistency across teams.
  • By making clear to the outside world those factors the CFTC considers in assessing penalties, the guidance should streamline any discussions it has with defense counsel and market participants about sanctions.  To the extent a party is preparing for discussions with staff about penalties, those preparations should focus on the factors laid out in the guidance.  
Questions, answers, and clarifications. In response to the series of questions posed by Lurton during the fireside chat portion of the program, McDonald noted the following:
  • The revised civil monetary penalty guidance is not intended to supplant the guidance provided in 1994. Rather, it seeks to provide additional context and lessons learned that further incorporated the implementation of Dodd-Frank reforms.
  • The CFTC, as a principal-based regulator, did not view setting forth a prescriptive formulaic approach to penalties as being appropriate.
  • While the CFTC may be in contact with a company during the course of an internal investigation, the agency is careful not to make any registrant out to be a de facto arm of the Enforcement Division, and the agency strives to stay on the right side of that line.
  • The most severe penalties will not necessarily be reserved for the most egregious acts. The gravity of a violation will be taken into consideration, as well as the harm to market integrity and whether the violations were known up the chain of command. 
There is but one U.S. government. In response to an audience question inquiring whether the CFTC would consider the DOJ’s dismissal of a parallel criminal proceeding as a factor when considering penalties in the resolution of a corresponding civil enforcement action, McDonald indicated the Division would indeed take such circumstances into account. He noted, “We are all part of the U.S. government and should take into account what they are doing.” However, he added that while the agencies have different mandates, they should still be marching in parallel. Many industry observers are interested in this very issue, as an announcement of the final resolution in CFTC v. Thakkar has remained pending since January 2020.

Enforcement trends remain intact. McDonald also confirmed that trends and priorities noted in recent annual reports from the Division remain in place. Accordingly, the director suggested more cases involving spoofing and market manipulation will be in the offing. Additionally, more reliance on the use of sophisticated data analytics and continued collaboration with the Department of Justice can also be expected. McDonald also anticipates continued growth in the agency’s whistleblower office, as well as further focus on firms’ compliance undertakings and remediative efforts when problems are detected. The entirety of the fireside chat is available on YouTube.