CFTC guidance details path to reduced enforcement penalties

The CFTC guidance lays out four scenarios outlining how, and under what circumstances, its staff will recognize self-reporting, cooperation, and remediation in enforcement orders and how the different levels of cooperation may lead to reduced penalties:

• The first scenario is for a company that does not self-report the violation and is not being recognized for its cooperation or remediation actions. This scenario does not describe a subject of the CFTC investigation that is uncooperative or obstructive, but it does indicate “the respondent did not cooperate in a manner that materially advanced the Division’s investigation or otherwise met the factors,” the guidance said. There would be no consideration of a reduced penalty under this scenario.
• In the second scenario, a company does not self-report but does cooperate with the investigation and remediates the violation in a way that 1) deserves recognition and 2) goes above what is required by law. In this scenario, a company would receive a public acknowledgment from the CFTC on its cooperation but no reduction in the penalty.
• The third scenario again involves no self-reporting of the violation, but the company does provide substantial cooperation that “materially advanced the Division’s investigation,” as well as “substantial remediation to address the misconduct and materially develop or strengthen related internal controls.” Under this scenario, the company would receive a public acknowledgment and detailed description of its cooperation and remediation responses and would receive a reduction in penalty.
• In the fourth scenario, a company that self-reports a violation, cooperates with investigators, and remediates the violation through strengthened compliance policies and procedures and internal control measures would receive “the most significant reduction” of a penalty.

“Ultimately, the purpose of the CFTC’s enforcement program is to foster a culture of compliance within the marketplaces we regulate,” CFTC Chairman Heath Tarbert said in a press release. “This staff guidance furthers that goal by ensuring the public understands the levels of recognition the CFTC may provide in its enforcement orders.”

The CFTC announcement of the enforcement action and penalty would include language that said, “The Commission’s recognition of Respondent’s self-reporting, substantial cooperation, and appropriate remediation is further reflected in the form of a substantially reduced penalty.”

Other regulatory agencies have long offered similar penalty reductions for violators who cooperate and will acknowledge that the cooperation led to a reduced penalty.

In 2018, the Securities and Exchange Commission (SEC) instituted the Share Class Selection Disclosure Initiative, which encouraged advisory firms to disclose failures regarding their mutual fund share class selection practices. Firms that self-reported were required to return funds to harmed investors but, in many cases, were not required to pay civil penalties or paid a substantially reduced fine. Firms that were found to have disclosure failures that did not self-report them had to pay civil fines of up to $300,000.

In April, the SEC announced 95 firms had self-reported violations through its initiative, and the agency had returned $139 million to harmed investors.

The Office of Foreign Assets Control recently reduced a fine against Berkshire Hathaway for “egregious” Iran sanctions violations from $18.4 million to $4.1 million, in part because Berkshire self-reported the violations, cooperated in the subsequent investigation, and remediated issues found within a Turkish subsidiary.

Last year, the Financial Industry Regulatory Authority indicated “extraordinary cooperation” by a financial institution accused of a violation could merit enforcement credit.

Other factors have recently come into play during the coronavirus pandemic. For example, the Department of Justice is weighing a company’s financial situation when deciding whether to impose a large fine, as it did earlier this year in the case of a penalty against asphalt company Sargeant Marine for bribery violations.