The Commodity Futures Trading Commission’s Division of Enforcement has provided guidance on how it will approach resolutions, including recommending larger penalties than have been imposed in previous cases.
On 17 October the CFTC said in a statement that it wanted to ensure greater transparency and answerability throughout the resolution process and optimize deterrence.
Ian McGinley, Enforcement Director at CFTC, said in the statement: “Accountability and minimizing future misconduct are important Commission and Division objectives. We cannot keep seeing the same entities before us with the same problems.”
McGinley, a longtime federal prosecutor, was appointed as the CFTC’s Director of Enforcement in February this year. He had spent more than a decade as a prosecutor at the United States Attorney’s Office for the Southern District of New York, where he co-led the Complex Frauds and Cyber Crime Unit, and was also a senior member of the Securities and Commodities Task Force. Rostin Behnam, Chairman of CFTC, said McGinley’s background as a prosecutor with unique experience in commodities, crypto, and cyber-crimes and frauds made him the ideal person to lead the regulator’s enforcement team.
Behman said: “The financial markets operate primarily through cyberspace, with fewer physical barriers and human interventions than ever before.”
In a speech at the New York University School of Law, McGinley said that since his appointment he has given the division two overarching goals – to ensure accountability and minimize the likelihood of future misconduct. The division of enforcement is recalibrating how it is assessing proposed civil monetary penalties which may result in recommending higher penalties than have been imposed in similar previous cases, and also factor in whether a person or entity is a serial offender.
“We don’t aim to be friendly or unfriendly when it comes to our markets; we aim to be effective in achieving accountability and minimizing future misconduct,” McGinley added.
For example, multiple swaps dealers are still failing to accurately report millions of swaps despite the swap reporting regulations coming into force more than 13 years ago after the financial crisis. Therefore, in September this year the CFTC imposed an $8m resolution with one swap dealer, a $15m resolution with another, and a $30m resolution with a third, which McGinley said were significantly higher penalties than those previously imposed in similar cases.
“Where conduct is occurring repeatedly over time, wrongdoers should expect a reassessment of the penalty size needed to deter the misconduct,” said McGinley.
Industry Perspective
Joe Schifano, Global Head of Regulatory Affairs at Eventus, was present for McGinley’s Oct. 17 speech at NYU. “The message senior managers and executives should take away here is that CFTC penalties will be higher than the cost of compliance, so proactive measures are increasingly important,” Schifano told Markets Media. “The status quo in your compliance program and related technology is no longer good enough.”
McGinley asked what should happen if a swap dealer still has significant reporting violations a year after the Commission has issued an order for significant record keeping violations.
“The Division intends to prioritize recidivism as a significant aggravating factor under our existing penalty guidance,” he said. “This means that recidivists can expect the Division to recommend increased penalties, so that we do not keep seeing the same entities with the same problems.”
If necessary, the regulator can also impose requirements related to remediation to minimize the risk of a repeat of the misconduct. For example, in the $30m resolution with the swap dealer, a monitor was required to make recommendations, test those recommendations, and report on the results of its work. If the regulator is more confident that an entity can remediate its failures, a consultant will be appropriate to provide advice.
McGinley continued that for many years the CFTC, and many other agencies, have resolved most matters on a no-admit, no-deny basis but he believes this is not always appropriate or effective as admissions can promote accountability and justice, deter future misconduct and facilitate post-resolution cooperation.
“The Division will take the following approach to admissions: in negotiations, respondents should no longer assume that no-admit, no-deny resolutions are the default,” McGinley added. “Rather, in every negotiation, we will discuss whether admissions are appropriate.”
Eventus’s Schifano said: “The prospect of admissions, particularly for CCOs, is a rude awakening. The stakes are much higher as compliance professionals consider issues like detection, mitigation and self-reporting, and the impact that has over time in an investigation with the CFTC on a potential future matter.”
If there is a realistic risk of criminal exposure uniquely tied to the act of admitting the misconduct, that may weigh against requiring admissions according to McGinley. In addition, where there is a legitimate factual dispute where the Division is persuaded it faces significant litigation risk establishing the fact at trial, that may counsel against admissions as to that disputed fact.
McGinley concluded: “Given my remarks, you may wonder why a firm would self-report and cooperate if it could result in higher penalties, a monitor, and admissions? This is a longer discussion, but the answer is fairly straightforward in my mind. If you self-report, fully cooperate, and remediate, it is likely you will receive a substantial reduction in the penalty that would otherwise be appropriate. It is also less likely the Division will recommend the imposition of a Monitor.”
