Incentivizing cooperation by providing more transparency into certain aspects of enforcement determinations is a priority for Commodity Futures Trading Commission (CFTC) Commissioner Summer Mersinger.

Speaking at the ISDA’s annual Legal Forum, she was also critical of the CFTC’s rush to settle actions before the end of the fiscal year (September 30) each year. Mersinger explained how enforcement should be a last resort in achieving compliance, and how the agency must avoid advancing legal theories that go beyond its limited authority.

Incentivizing compliance

She said to foster voluntary compliance with the law and provide transparency into certain aspects of enforcement determinations regarding penalties, we must further unwind the layers around how we recognize and credit those who self-report, offer cooperation during the enforcement process, and undertake remediation.

Her criticisms revolved around two areas:

• A company is currently only eligible for a civil monetary penalty credit for self-reporting from the CFTC if it makes its disclosure to the Department of Energy (DOE) rather than to one of the CFTC’s oversight divisions. This requirement is an unnecessary layer that unduly restricts self-reporting credit, she note

• If a company self-reports, substantially cooperates, and appropriately remediates, a reduced civil monetary penalty should not be the only potential outcome. Where a company has identified the problem, disclosed it to CFTC staff, analyzed the situation, provided a report of its findings to CFTC staff, and engaged in steps to address the problem, it has essentially performed many of the CFTC’s functions. And such cooperation and remediation often come at a significant expense, which may include hiring an independent compliance consultant or monitor to investigate the company’s practices and procedures, to recommend improvements, and to ensure that remediation is completed. A full waiver of the penalty might be warranted here, Mersinger suggested.

Chasing trends

Mersinger noted how a large number of the CFTC’s enforcement actions are settled during the month – sometimes the week – before the end of the government’s fiscal year on September 30.

“This September crunch is frustrating to all involved and potentially harmful to the agency’s agenda,” she said, explaining that it diverts the agency’s attention from its other important responsibilities, as matters requiring commissioners’ attention from other divisions are postponed and deferred. 

And it incentivizes those hoping to settle with the CFTC to wait until the fiscal year-end. They know the agency will be eager to get another point on the board before the clock runs out and that the resulting settlement will draw less public attention as just one of the myriad cases being announced at the same time.

Finally, she says such a crunch diminishes the time for decision making and increases the risk of promulgating faulty interpretations of the Commodity Exchange Act (CEA) and CFTC regulations. “Wrongdoing occurs year-round. Our enforcement docket should reflect that,” she states.

Appropriately using settlement authority

Mersinger says settlement actions certainly help her agency achieve its enforcement objectives while conserving scarce resources. But she pointed out that vague settlements cause confusion and can undermine its efforts to achieve compliance.

When settling, the CFTC issues an order that can reflect a statement of the agency’s thinking, and the public may understandably consider them as precedents, she said. Plus, the agency often cites them as persuasive authority in future cases.

But remember – no court has decided on the legal theories as applied to the particular facts that the CFTC includes in its settlement orders. The legal theories advanced in settlement orders should not push the bounds of the agency’s authority. 

“Such orders should avoid theories that are novel, that are arguably beyond the limits of the CEA and its implementing regulations, or that are likely to raise additional questions or issues,” she advised. “Otherwise, the agency risks creating regulatory expectations that become difficult to follow.”

CFTC’s advisory on cooperation

In 2017, the CFTC updated its advisory on self-reporting and full cooperation to highlight the fact that it would consider the “timeliness” of cooperation in deciding how much to reduce a civil penalty, “including whether the company or individual quickly [emphasis added] made appropriate disclosure of the misconduct and notified the Enforcement Division.”

In terms of how much of a reduction is extended, the CFTC said in the advisory that self-reporting, fully cooperating and remediating, will lead to the Division recommending that the Commission consider a “substantial reduction from the otherwise applicable civil monetary penalty.”

The Division may recommend a reduced civil monetary penalty even where a company or individual did not self-report wrongdoing but otherwise fully cooperated with the agency’s investigation and remediated deficiencies in its compliance or control programs.

“But the Division will reserve its recommendations for the most substantial reductions in civil monetary penalty for those instances where a company or
individual has self-reported the misconduct and fully cooperated with the Division’s investigation and remediated,” she said.