CFTC Enforcement Replaces Previous Cooperation Guidance With New Mitigation Credit Matrix

The Division of Enforcement of the US Commodity Futures Trading Commission (CFTC or Commission) recently issued an advisory revoking prior guidance for its staff in recommending enforcement resolutions (the Advisory) and providing a new mitigation-credit calculation to incentivize firms to self-report potential violations and cooperate in investigations.

With the Advisory, [1] the CFTC’s Division of Enforcement has, for the first time, revoked six prior guidelines, including as contained in the 2020 Enforcement Manual, [2] and replaced them with a new statement on self-reporting, cooperation, and remediation. The Advisory is in furtherance of Acting CFTC Chair Caroline Pham’s stated goal of “ensur[ing] accountability through transparency” [3] as well as President Donald Trump’s directive to the heads of federal agencies to refocus “limited enforcement resources.” [4]

The Advisory breaks with prior guidance in several ways, including by crediting self-reports to Commission divisions other than Enforcement, crediting self-reports that may already be required by regulation, offering a safe harbor for self-reports that are later corrected, and, perhaps most notably, providing a framework for calculating rewards for voluntary self-reporting, cooperation, and remediation. The Advisory is likely to change the calculus by which firms consider the timing or extent of their self-reporting or cooperation with Enforcement Division investigations.

GUIDANCE ON SELF-REPORTING

The Advisory sets out levels of self-reporting and various factors staff may evaluate when determining the appropriate discount to a civil monetary penalty to recommend in an enforcement resolution. [5] The Advisory sets forth three tiers of self-reporting: (1) none, (2) satisfactory, and (3) exemplary.

The discount increases based on the completeness, quality, and materiality of the information provided. Enforcement Division staff are also advised to reward providing additional information that enables the conservation of investigation resources. Staff consider factors such as timeliness and voluntariness—i.e., whether the self-report was made “reasonably promptly” upon discovery of the potential violation and without the imminent threat of public exposure.

Specifically, staff will determine whether it was reasonable to assume that the Enforcement Division could have learned of the violation from the public record or the knowledge of another government actor, as in the knowledge gained from a parallel investigation by the US Department of Justice (DOJ) or another federal agency. The Advisory does not, however, address treatment for what staff may learn from self-regulatory organizations such as the National Futures Association or futures exchanges.

In considering the factors, Enforcement Division staff are to assign a tier of self-reporting, as in the following examples:

1. None: The firm notifies the Commission of a potential violation but refuses to provide any relevant information about the date of the occurrence, method of discovery, root cause of the event, or remediation. The self-report is not reasonably designed to provide notice to the Commission.
2. Satisfactory: The firm notifies the Commission of a potential violation and includes sufficient information about the occurrence, but the firm does not provide all “material” information reasonably related to the potential violation and known to the firm at the time of making the self-report.
3. Exemplary: The firm notifies the Commission of a potential violation, includes all material information known to the firm at the time of the self-report, and provides additional information that saves the Enforcement Division from having to expend investigatory resources in developing the factual circumstances of the occurrence.

The Advisory differs from prior guidance on self-reports in several respects. Detailed and prompt self-reporting is favored over a firm’s providing general notice of a potential violation or waiting to ensure the self-report is full and complete. Enforcement Division staff are also advised to credit self-reports made even where the firm’s own internal investigation is still ongoing, so long as the firm used “best efforts” to determine relevant facts and disclosed all facts known at the time.

To further incentivize firms, material and timely self-reports are protected under a safe harbor even when the firm later corrects inaccuracies. This is significant as staff has previously considered charging the to-be-corrected information as a false statement under Regulation 180.1 [6]. The Advisory also provides credit for timely self-identification of potential violations even where such reports are already required pursuant to CFTC regulations. As recently clarified, this includes timely identification made in the annual CCO report, which itself may warrant self-reporting credit. [7]

Self-reports no longer need to be made only to Enforcement and will be credited when made to the CFTC division that is the primary division responsible for interpreting and applying the applicable regulations that are the subject of the potential violation (Operating Divisions). The Advisory does not, however, specify whether and how an Operating Division should notify the Enforcement Division of a self-report, nor does it specify whether the Operating Division will have input on evaluating the appropriate tier for the self-report.

GUIDANCE ON COOPERATION AND REMEDIATION

The Advisory also expands on prior policies regarding a firm’s “substantial” cooperation and remediation, [8] which may serve as a strong signal as to how the administration wants to provide firms a cognizable carrot and not only the opaque stick. Now, staff are to assess cooperation based on a four-tier scale: (1) none, (2) satisfactory, (3) excellent, and (4) exemplary. At tiers (2) through (4), staff consider whether the cooperation was timely, substantial, voluntary, thorough, and consistently offered with “high-level” and substantial assistance. For example:

1. None: The firm only complies in accordance with established legal obligations.
2. Satisfactory: The firm substantially assists by providing documents and information, including the arrangement of witness interviews. The firm also provides analysis on the legal and factual issues identified as a part of its internal investigation into the potential violation.
3. Excellent: The firm provides consistent, substantial assistance by presenting thorough analysis of the root cause of the occurrence and corrective action for remediation. The firm may also offer up internal or external expert testimony.
4. Exemplary: The firm goes above and beyond by providing consistent, material assistance. The firm significantly expends its own resources in identifying and remediating the problem. Indeed, the firm has already significantly completed its remediation plan.

Notably, this includes potential credit for cooperation that is often typical such as voluntarily providing documents without a subpoena, i.e., what prior Enforcement Division staff used to denigrate as “lowercase ‘c’ cooperation” as compared to more extraordinary efforts that were deemed to be “capital ‘C’ cooperation.”

Mitigation credit is only available when an Operating Division, in consultation with the Enforcement Division, has concluded that the potential violation has either been remediated or the firm has a remediation plan in place. The remediation plan, in accordance with the Operating Division’s determination, may include the use of a compliance monitor or consultant, which is consistent with prior practice. [9] The Advisory makes clear that remediation is the touchstone. Indeed, the highest tier of cooperation-based mitigation credit—called “exemplary cooperation”—is awarded only when the firm has already engaged in “significant completion” of the remediation plan. [10]

The Enforcement Division’s assessment, even under the new Advisory, remains subjective and highly fact-intensive. Staff are to evaluate the appropriateness of the remediation plan. Staff also are to weigh uncooperative behavior by the firm against any prior cooperation, no matter how substantial. A firm’s untimely compliance with subpoenas, attempts to obscure the discovery of documents, or improper shaping of witness testimony may be deemed uncooperative, even if the efforts did not result in the “unnecessary expenditure” of Enforcement Division resources.

Additional markers of uncooperative behavior include a firm’s “willful blindness” and a failure to self-report in the face of willful misconduct, harm suffered by a customer or counterparty, or significant financial losses. Staff are to evaluate uncooperative conduct by employing an “objective reasonableness” standard. Though not expressly defined in the Advisory, “objective reasonableness” under the law generally requires analyzing what a reasonable person would have done under the circumstances.

MITIGATION CREDIT MATRIX

The Advisory maintains the Enforcement Division’s prior-stated policies of rewarding self-reporting and cooperative firms with recommendations for reduced penalties. But, for the first time, the Enforcement Division provides a mitigation credit matrix by which staff can determine a presumptive discount to a recommended penalty. [11]

The Calculation

Under the Commodity Exchange Act, civil monetary penalties for nonregistered entities [12] are the greater of $140,000 or triple the gain for nonmanipulation violations (and up to $500,000 per violation for registered entities), [13] and for manipulation or attempted manipulation, the greater of $1 million or triple the gain for nonregistered entities (and up to $1 million per each violation for registered entities). [14] For the first time, the Advisory offers credits off civil monetary penalties up to 55% depending on the tiers of self-reporting and cooperation.

Staff retain the discretion to deviate from the mitigation credit matrix. In extraordinary circumstances, the Enforcement Division may even recommend a declination of the penalty entirely, however, declination in this respect is a difficult bar to reach: requiring firms to be the first to self-report pervasive fraud, manipulation, or abuse causing harm to multiple parties before consistently providing material assistance as an exemplary cooperator.

Challenges of Implementation

Notwithstanding the statutory requirements for calculating penalties, the Commission has rarely used a precise calculation in determining civil monetary penalties, and the framework set forth in the Advisory is not without its challenges in implementation. The matrix could be viewed as analogous to guidance set out by DOJ in calculating discounts off penalties, such as for violations of the Foreign Corrupt Practices Act (FCPA), recognizing that the threshold for DOJ is the US Sentencing Guidelines. [15]

Acting Chair Pham praised the transparency of the new mitigation credit matrix as “aligned with best practices for assessing penalties followed by the [DOJ] and other US financial regulators.” [16]Under the DOJ’s tiered system of self-disclosure and cooperation, potential FCPA violators can receive a full declination of criminal charges or reduced criminal penalties up to 75% off the low end of the penalty under the US Sentencing Guidelines. Even where other aggravating factors exist, DOJ prosecutors have faithfully applied a credit to the low end of the appropriate criminal penalty under the US Sentencing Guidelines to an FCPA offender’s sentence. [17]

Here, like the DOJ policy, the mitigation credit matrix directs staff to engage in a subjective and highly fact-intensive analysis of the behavior before applying a discretionary calculation. But, distinctly, the DOJ’s credits for self-reporting and cooperation are tied to the US Sentencing Guidelines, which set forth precise figures that are traditionally used in setting the penalty. By contrast, the CFTC’s statutory limits on civil monetary penalties are not comparable and are often not used as a precise base calculation for Commission settlement orders.

Against this backdrop, it will remain to be seen how precisely the mitigation credit matrix is implemented in practice. It was criticized by CFTC Commissioner Kristin N. Johnson as posing the risk of “muddy[ing] the waters.”

WHAT’S NEXT FOR ENFORCEMENT?

The Enforcement Division is still working to clarify implementation of this policy, including by developing “criteria for enforcement referrals” from Operating Divisions to the Enforcement Division. [19] In the meantime, the Advisory remains purely discretionary and, as with prior advisories, does not require the Enforcement Division to “recommend, or the Commission to impose or authorize, a reduction of sanctions based on the presence or absence of particular cooperation factors.” [20]

Historically, the Commission has imposed eye-popping settlements in the hundreds of millions or even $1 billion. The Advisory sets forth a framework that may reduce the level of penalties overall, but experience with implementation of the Advisory will be the ultimate guide for firms anticipating or in the midst of a CFTC investigation.