The Commodity Futures Trading Commission’s Division of Enforcement on May 20 issued new civil monetary penalty (CMP) guidance for the first time since publishing its penalty guidelines in 1994.
The guidance outlines factors the CFTC considers in recommending CMPs be imposed in enforcement actions. The update, summarized in the form of a memorandum from CFTC Enforcement Division Director James McDonald to his staff, memorializes existing practice within the Division and has been incorporated into the Division’s Enforcement Manual.
Recently, the Commission for the first time articulated a set of four core agency values: commitment, forward-thinking, teamwork, and clarity. The CMP guidance advances the core value of clarity, in particular, McDonald said.
“This new guidance reflects my strong commitment to transparency and to the CFTC’s enforcement mission,” said CFTC Chairman Heath Tarbert said in a press release. “Clarity about how our statutes and rules are applied is essential to deterring misconduct and maintaining market integrity.”
In December, Tarbert announced additional efforts to promote transparency at the agency, including in enforcement actions. McDonald said transparency in how the agency thinks about penalties helps to promotes fairness and enhances respect for the rule of law. “Ultimately, we want our enforcement program to change behavior in a positive way,” he said. “Explaining how and why we punish is a significant part of that effort.”
The staff guidance provides the following three-pronged approach to evaluate the appropriate penalty to recommend to the Commission:
The gravity of the violation: Factors may include “the respondent’s role in the violations, the respondent’s state of mind, including whether the conduct was intentional or willful, and the nature and scope of any consequences flowing from the violations,” the CFTC said.
Mitigating and aggravating circumstances: Factors may include “the respondent’s conduct—such as self-reporting the misconduct—the extent of cooperation and remediation, or attempts to alleviate the violation by returning victim funds or improving a compliance program, or at the other end, any acts of concealment, obstruction, or prior misconduct,” the CFTC said.
Other considerations: The CFTC said its recommendation “may take into account additional factors, such as a timely settlement and remedies and sanctions to be imposed in parallel actions by other civil or criminal authorities or self-regulatory agencies.”
“In applying the various factors,” the CFTC said, “staff will be guided by the overarching consideration of ensuring that any proposed penalty achieves the dual goals of specific and general deterrence.”
Department of Justice efforts
The new CFTC guidance follows the recent establishment of a new subunit within the Fraud Section of the Department of Justice’s Criminal Division that will focus on commodities fraud. Reuters has reported this unit will be led by Avi Perry, assistant chief of the Fraud Section, and that they are currently building up the staff of the subunit.
The subunit is part of a broader initiative to expand the scope of criminal prosecutions for manipulative practices in the commodities markets, including spoofing. We saw an example of this in November 2019, when financial services firm Tower Research Capital reached a combined $67.4 million settlement with the Justice Department and the CFTC to resolve criminal charges related to a scheme involving thousands of instances of unlawful trading activity in U.S. commodities markets by three former traders.
Chief compliance officers and chief risk officers should heed the broader warning and enhance compliance oversight in this area. The CFTC’s new CMP guidance, its ever-increasing and significant improvements in its data surveillance efforts, and its growing collaboration with the Justice Department’s enforcement focus in this area all signal these agencies intend to bring more prosecutions for commodities fraud and that violators are less likely to get away with shady practices.
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