The Commodity Futures Trading Commission is putting the word out: self-reporting and cooperation may mitigate enforcement actions.
James McDonald, director of the CFTC’s Division of Enforcement, discussed his agency’s initiative in a Sept. 25 speech at New York University’s Institute for Corporate Governance & Finance and its program on Corporate Compliance & Enforcement.
“We recognize that enforcement actions alone aren’t enough to prevent misconduct in our market,” McDonald, a former federal prosecutor in the Southern District of New York, said. “It’s not enough for us to wait for violations to occur, detect as many as we can, and then prosecute as many of those as we’re able. That’s like playing a game of whack-a-mole—as soon as we bat down one violation, others just keep popping up.”
The CFTC, McDonald said, is “committed to working together with the companies and individuals we regulate to identify and prosecute wrongdoing that has occurred, and to stop future wrongdoing before it starts.”
“We’re committed to giving companies and individuals the right incentives to voluntarily comply with the law in the first place—and to look for misconduct and report it to us when they see it,” he added. Companies are well positioned to detect wrongdoing in the first instance and to report it to authorities. And once that misconduct has been stamped out, the companies are in a position to take preventative measures, to educate their employees on best practices, and to ensure the law is obeyed going forward.”
McDonald added that his agency owes it to businesses and individuals “to make sure they compete on a level playing field.” As for the CFTC’s cooperation and self-reporting program: “We recognize that no matter how much corporate leaders may want to foster compliance within the company, when they detect misconduct, their decision whether to voluntarily report it often comes down to a business decision—to dollars and cents.”
“What’s the risk that, if we don’t report, regulators will detect it? If they detect it, how much might we get fined? If we report it, what sort of treatment can we expect? Depending on how the answers shake out, company leadership may decide to voluntarily report the wrongdoing—or not.,” he said.
The CFTC, McDonald said, “want to shift this analysis in favor of self-reporting. “We think we can do it by spelling out the substantial benefit, in the form of a significantly reduced penalty, we’ll recommend for companies and individuals that self-report,” he said. “And by making crystal clear what we expect from self-reporters who want this substantial benefit.”
In laying out the new self-reporting program, McDonald outlined what the CFTC expects from a company that wants to be treated as a self-reporter.
“First, we expect the company to voluntarily report wrongdoing to the Division. This disclosure must be truly voluntary—it must be made before an imminent threat of disclosure or of a Government investigation, and it must be made independent of any other legal obligation,” he said. “It also must be a real disclosure—it has to be made to the Division of Enforcement in a manner designed to notify us of the misconduct. A company can’t simply make a vague reference to the conduct, tucked away in the depths of some compliance report, and later claim to have voluntarily disclosed. It doesn’t work that way.”
The company also must disclose the misconduct within a reasonably prompt time after becoming aware of it. A company must also disclose all relevant facts known to it at the time.
“We recognize that, at the time of the first voluntary disclosure, the company may not yet know all of the relevant facts, or even the full extent of the conduct. That’s ok,” McDonald said. “To incentivize voluntary disclosure at the earliest possible time, we’ll recommend the company receive full credit where the company made diligent efforts to figure out the relevant facts at the outset, fully disclosed the facts known to it at the time, continued to investigate, and disclosed additional relevant facts as the company became aware of them.”
Companies are also expected to fully cooperate with the Division throughout the investigation. Newly released guidance lists the sorts of things expected for full cooperation. These requirements include actions like disclosing all facts relevant to the misconduct as the company becomes aware of them during its own investigation—including facts related to the involvement of any individuals.
“It’s not enough simply to report the wrongdoing in a general narrative,” McDonald said. “Particular facts should be attributed to particular people.”
“Full cooperation requires an active effort to find all related wrongdoing, and not taking a squinty-eyed view of the facts to minimize the misconduct or avoid disclosures,” he added.
Another of the CFTC’s requirements for cooperation credit: the company must timely and appropriately remediate to ensure the misconduct doesn’t happen again.,“This means the company must work to fix the flaws in its compliance and internal controls programs that allowed the misconduct in the first place. Just like with full cooperation, the exact type of remediation is going to depend on the circumstances of the particular case,” McDonald said.
For its part, the Division of Enforcement will “clearly communicate with the company—at the outset—our expectations regarding self-reporting, cooperation, and remediation.” The self-reporting program “is not going to be a game of gotcha—where only once you’re at the settlement table do you learn there’s been one slip up in the process that takes you out of the self-reporting lane.,” McDonald said. “You’ll know right up front what we expect from you, and you’ll know if there’s a point you’re veering off course, so that you’ll have a chance to get back on track.” Remedial expectations will be similarly customized and clearly communicated.
Companies that meet agency expectations and demands “can expect concrete benefits in return for self-reporting, cooperation, and remediation.”
“If a company does those three things, the Division of Enforcement will recommend a substantial reduction in the penalty that otherwise would be applicable. In truly extraordinary circumstances, the Division may recommend declining to prosecute a case,” McDonald said.
“I want to mention here that many of these general themes—including the basic requirements of self-reporting, cooperation, and remediation—line up with other self-reporting programs, most notably at the Department of Justice,” he added. “One goal in advancing our self-reporting and cooperation program is to bring ours in line with our law enforcement partners, so companies covered by multiple regulators don’t have to work within multiple, sometimes conflicting, self-reporting and cooperation regimes.”
McDonald stressed that the program should not be interpreted “as giving a pass” to companies or individuals.
“Through this program, we’re committed to aggressively prosecuting, not just the company ultimately responsible for the misconduct, but also the individuals involved,” he said. “And this doesn’t stop with the person who actually hit the trade button. We’ll work hard to move up the chain to the supervisors who made the decision behind the act, or who directed it…This program is about gaining an insider perspective so we can more effectively prosecute all of the bad actors.”
McDonald also stressed that “to be a self-reporter, you have to tell us about the misconduct before we know about it.”
The broader program also gives credit for cooperation, after the investigation is underway, where the company or individual did not self-report in the first instance.” In those circumstances, too, the cooperator stands to earn a substantial benefit in terms of a reduced penalty,” he said. “But the benefit will be less substantial than the self-reporting benefit. The biggest reduction is reserved for those who self-report, fully cooperate, and remediate. We will continue to give substantial credit for cooperation. But all else equal, it will be significantly less than for those companies that self-report the misconduct at the outset.”
“The goal is not to insert ourselves into a company’s internal affairs, or to force a company to self-report. Rather, our goal is to emphasize that companies and individuals have a choice,” McDonald added, stressing that investigations will still be thorough and, typically, lengthy.
More information on the program is available in an interview with McDonald that was published as one of the CFTC’s podcast series.