On October 17, 2023 the U.S. Commodity Futures Trading Commission (CFTC) Division of Enforcement (the Division) issued an enforcement advisory providing guidance on how Division staff will assess whether to impose civil monetary penalties, require monitors and consultants, and require admissions in recommended enforcement resolution.1 The enforcement advisory foreshadows a more aggressive Division going forward and warns those involved in Division investigations that they should carefully assess their strategies to account for a higher likelihood that the Division will seek increased penalties, the imposition of monitors and consultants, and admissions in negotiated Division resolutions. The enforcement advisory also warns compliance departments at firms that have past Division resolutions: Recidivist violators can expect the Division to seek more severe penalties.
The Division’s action is consistent with a general trend among regulators and self-regulatory organizations toward more aggressive enforcement and little tolerance for repeat violators.
General and Specific Deterrence Key Factors in the Division’s Recalibrating of Recommended Civil Monetary Penalties
The enforcement advisory sends a message that the Division will be ratcheting up civil monetary penalties in its recommended resolutions. The Division’s belief is that (i) higher penalties will empower compliance professionals to make the business case to their senior management to devote resources necessary to do their jobs effectively, and (ii) higher fines will result in companies’ cooperating more with the Division and not accepting potential fines as a cost of doing business.
The result of the Division’s recalibration of civil monetary penalties that seek to achieve general and specific deterrence is that higher penalties in resolutions are likely, even though prior similar cases may have had lower penalties. Whether this means precedent is out the window remains to be seen.
Not surprisingly, the Division considers recidivism an aggravating factor that can increase the civil monetary penalty in a resolution. In recommending a civil monetary penalty, recidivism is a key area where the Division will consider specific factors that include
- the overlapping nature of the prior and current action, including whether the same or similar violations are present and whether the violations resulted from the same root cause or similar general subject matter
- the time between offenses — recency of the offenses being a key factor in assessing whether the conduct is recidivist
- whether overlapping management was involved
- the pervasiveness of the new misconduct
- the robustness and effectiveness of remediation taken and maintained since the prior resolution
Frequency of the Imposition of Monitors and Consultants Is Likely to Rise in Division Recommended Resolutions
The enforcement advisory states that the Division is inclined to recommend that a monitor or consultant be imposed as part of any resolution involving recidivists.
In addition, monitors are likely to be imposed where the pervasiveness and/or severity of the misconduct and/or the absence of effective controls is such that the Division lacks confidence that the entity will remediate its misconduct without the assistance of a neutral third party and oversight.
Furthermore, consultants are likely to be imposed where the evidence persuades the Division that the entity requires the assistance of a neutral third party to advise regarding remediation but can otherwise remediate its misconduct without oversight.
When a monitor is imposed, the Division must approve the monitor; however, in those instances where a consultant is imposed, Division approval is not typically required. In resolutions where a monitor is imposed, at a minimum, it appears that the monitor’s responsibilities will include
- testing the sufficiency of the entity’s policies, procedures, and controls to identify, address, and prevent future misconduct as described in the order
- drafting specific recommendations to address issues identified during testing
- testing the sufficiency of the entity’s enhancements to its policies, procedures, and controls to implement the monitor’s recommendations and the effectiveness of those enhancements over time
Monitors will be required to submit reports to the Division setting forth their recommendations and detailing the company’s progress in implementation. Companies that disagree with a monitor’s recommendation(s) will need to substantiate their basis for not following the recommendation and why the lack of implementation does not violate the order. The monitor and the entity (through an appropriately designated person, e.g., a chief compliance officer) will need to execute a certification of completion.
Consultants’ responsibilities will be to advise the entity regarding the implementation of remediation-related undertakings. The company will be required to periodically update the Division on the progress of the implementation of the remediation and to certify its completion.
Knowing the scope of the monitorship or consultancy is key to the negotiation strategy with the Division. The enforcement advisory’s description of minimum responsibilities expected of both monitors and consultants provides potential respondents with an initial view of what will be required in either situation.
Fewer No-Admit/No-Deny Resolutions
The enforcement advisory suggests that the default of “no admit/no deny” language in resolutions with the Division is not “automatic” any longer. Instead, in each recommended resolution the Division will discuss whether admissions are appropriate. The enforcement advisory signals that more resolutions are likely to see admissions, particularly where there is no dispute about the facts. Notwithstanding, in addition to the facts and circumstances of the matter, the Division will consider the following when deciding whether admissions are required:
- whether the respondent is entering into a parallel criminal resolution where the respondent admits the underlying conduct through a guilty plea or otherwise
- whether the evidence uncovered during the investigation conclusively establishes the misconduct
- whether and to what extent a respondent seeks cooperation credit; admission of underlying wrongdoing can be a factor in Division staff recommending cooperation credit in the resolution
- whether the offense is a strict liability offense in clear violation of the law
Companies and individuals negotiating an enforcement resolution should look closely at these factors to position their resolution such that the Division does not recommend admissions.
While making efforts to avoid the imposition of admissions in a Division-recommended resolution, entities and individuals should also look to the enforcement advisory for the factors the Division will consider in not recommending admissions. They are
- instances where the admissions may jeopardize the respondent’s ability to legitimately defend against a criminal case (where there is a realistic risk of criminal exposure uniquely arising from the misconduct that is the subject matter of the Division-recommended resolution)
- instances where there is a legitimate factual dispute where the Division is persuaded it faces significant litigation risk establishing the fact at trial
Companies and individuals facing potential Division resolutions should consider this recent enforcement advisory as creating potentially new hurdles in negotiations. The Division appears to be signaling that it sees a need for increased civil monetary penalties generally; an increased need to look at recidivist and matters that involve significant failures such that monitors and consultants become more frequent in resolutions; and that admissions are on the table in every potential resolution. As a result, effective and strategic assessments during investigations remains important. Companies should be considering the items in the enforcement advisory from day one of any investigation to better position themselves in the event of an enforcement referral and potential resolution. Companies should also consider the increased likelihood of severe penalties for a second (etc.) violation when deciding how to respond to Division inquiries related to a first violation and how aggressively to pursue remediation in connection with a first violation.
1 CFTC Release Number 8808-23, CFTC Releases Enforcement Advisory on Penalties, Monitors and Admissions (Oct. 17, 2023), available at https://www.cftc.gov/PressRoom/PressReleases/8808-23. The Division stated that the enforcement advisory supplements earlier advisories including those related to self-reporting, cooperation, remediation, and reductions in civil monetary penalties as result of any of those items. See Self-Reporting, Cooperation, and Remediation, available at https://www.cftc.gov/About/CFTCOrganization/SelfReportingCooperationandRemediation (listing advisories and guidance); Enforcement Manual, available at https://www.cftc.gov/media/1966.
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