Compliance in Focus: New Roadmap for Discussions with the CFTC

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May 21, 2020

On May 20, 2020, the Division of Enforcement (the “Division”) of the Commodity Futures Trading Commission (“CFTC”) issued new guidance on the factors it considers in recommending civil monetary penalties. This is the first penalty guidance issued publicly since the CFTC published its penalty guidelines in 1994, and it supplements a number of recent publications describing the cooperation factors the Division considers in recommending increases and decreases to penalties, as well as the Division’s first publicly available Enforcement Manual published in 2019.

The new Guidance states that it is meant to reflect the existing practices within the Division as well as lessons learned from prior enforcement actions. The maximum penalty per violation is capped by the Commodity Exchange Act at an amount that is based on the nature and time period of the violation, and is imposed per violation (which can add up quickly to the extent each act is treated as a separate violation) or up to triple the monetary gain – whichever is greater. The Guidance explains the factors the Division will consider in its considerable discretion to determine what penalty to seek within that range.

In determining what amount of penalty to apply, the Guidance explains (consistent with the 1994 Guidelines) that the gravity of the violation is the primary consideration, and that includes considering the nature and scope of the violation, the respondent’s state of mind (including whether the conduct was intentional or willful), and the nature and scope of any consequences flowing from the violation.

What differs from the 1994 Guidelines, is that the new Guidance has a stronger emphasis on the mitigating and aggravating circumstances that the Division will also consider. Those circumstances include post-violation conduct, self-reporting of the conduct, cooperation, timely remediation and mitigation, effectiveness of a pre-existing compliance program, prior misconduct, pervasiveness of the misconduct, as well as the nature of any disciplinary actions taken by the company in response. Mitigating conduct that may be considered includes attempts to cure the violation, efforts to return victim funds, and efforts to improve a compliance program. Aggravating conduct that may be considered includes any concealment of the violation or obstruction of an ongoing investigation.

Finally, the Guidance states that the Division will also evaluate the total mix of remedies and monetary relief to be imposed in any parallel cases, the penalties imposed in analogous cases, and the extent to which a timely settlement helped to conserve the Commission’s resources.

It bears mention that the Guidance does not reference any considerations surrounding the financial worth of the respondent or ability to pay. Those considerations previously were identified in the Commodity Exchange Act, but were removed from the language of the Act through prior amendments. Since that time, the Division has taken the position that it will not consider ability to pay. By comparison, the Securities and Exchange Commission may in its discretion consider evidence concerning ability to pay in determining whether a penalty is in the public interest.

The Division’s decision to issue guidance on key subjects such as its Enforcement Manual, cooperation policies and the new penalty guidance provides helpful transparency for industry and market participants. It can be difficult at times to determine how a penalty imposed in a settlement order relates to the violations charged. It remains to be seen whether further details and specificity will be provided as new settlement orders are published by the Commission. In the meantime, the Guidance provides a roadmap to follow during the investigation process in order to maximize mitigating factors such as remediation and cooperation, and hopefully minimize circumstances the Division will view as aggravating. The Guidance also provides key points to focus on in discussions with Enforcement staff about resolution and potential penalties.