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CFTC Enforcement Division Issues Guidance on Compliance

Client Updates

On September 10, 2020, the Commodities Futures Trading Commission’s Division of Enforcement (“CFTC”) issued public guidance regarding the factors it uses to evaluate corporate compliance programs (the “Guidance”). The release of the Guidance is notable for several reasons:

  • The CFTC has been increasingly active on the enforcement landscape in recent years. In fiscal year 2019, for example, CFTC Enforcement obtained $1.3 billion in monetary relief, an almost five-fold increase over the monetary relief it had obtained ten years prior, in 2009. In large measure, this increase is attributable of the Dodd-Frank Act of 2010, which amended the Commodities Exchange Act to expand CFTC’s regulatory reach and to explicitly prohibit more types of activity, including “spoofing,” i.e., bidding or offering for a future or commodity with the intent to cancel the bid or order before execution.

  • The Guidance is the latest in a trend of publications by CFTC Enforcement, which are aimed at increasing transparency. In May 2019, the CFTC published its Enforcement Manual and earlier this year, publicly issued guidelines on how it calculates fines.

  • The Guidance considers whether a compliance program was reasonably designed and implemented to (i) prevent the underlying misconduct at issue; (ii) detect the misconduct; and (iii) remediate the misconduct.

Below we provide more detail and analysis on several aspects of the Guidance: 

Discussion and Takeaways

As noted above, the Guidance directs the CFTC Staff to consider how the program was “designed and implemented” to ensure the (i) prevention, (ii) detection, and (iii) remediation fraud and provides considerations for analyzing each of these three factors. Without regurgitating each of these considerations, several themes emerge from the Guidance.

First, at a basic level, entities should be prepared to show not just that they had a compliance program on paper, but the compliance program was actually put into practice (“implemented”), “adequately resourced,” and “independent from the business function.”

Second, while “remediation” is a standalone factor, implementing lessons learned is a theme throughout the Guidance. Under the “prevention” factor, for example, the Guidance directs the CFTC Staff to consider, among other things, whether “a failure to cure any previously identified deficiencies, contributed to, or failed to prevent, the misconduct at issue.”

Third, perhaps not surprisingly given CFTC’s own reliance on both market surveillance technology and whistleblowers in recent investigations, the “Detection” factor focuses heavily on entities “internal surveillance and monitoring efforts” and “procedures for identifying and evaluating unusual or suspicious activity,” as well as the entity’s internal reporting mechanisms.

Fourth, the CFTC Guidance indicates that a “one-size fits all” approach to compliance will not be viewed as credible. Instead, CFTC Staff “will conduct a risk-based analysis, taking into consideration a variety of factors such as the specific entity involved, the entity’s role in the market, and the potential market of customer impact of the underlying misconduct.” In purporting to avoid such a “one-size fits all” approach, the CFTC Guidance strikes a similar theme to compliance guidance issued by the Department of Justice Criminal Division earlier this year. At the same, the CFTC Guidance is significantly shorter and more general than DOJ’s (three pages versus 20).

In sum, we expect CFTC Enforcement will continue to play an increasingly active role on the enforcement stage---particularly in light of price disruptions in the commodities markets this year and the potential for disruptions in the swaps market (as we saw following the 2008 financial crisis). The new Guidance is a welcome---if somewhat generalized---effort at transparency.

 

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