On October 17, 2023, the Commodity Futures Trading Commission’s (“CFTC” or “Commission”) new Director of Enforcement, Ian McGinley, announced several updates to the Division of Enforcement’s (the “Division”) guidance to staff on enforcement resolution recommendations made to the Commission. The guidance is summarized in a written advisory (the “Advisory”) published contemporaneously with Director McGinley’s announcement.1 Notably, the Advisory provides guidance on determining whether proposed civil monetary penalties (“CMPs”) are sufficient to achieve general and specific deterrence, when the imposition of a corporate compliance monitor or consultant is appropriate, the appropriate duties and responsibilities of monitors and consultants, and whether admissions should be recommended in a particular enforcement action. Though the Advisory signals a more aggressive approach by the Division going forward, it also provides helpful insight into the steps firms can take in an effort to avoid harsher outcomes.
The Division is recalibrating how it assesses proposed CMPs, in order to ensure that CMPs are at the level necessary to achieve general and specific deterrence, which may result in the Division recommending higher penalties. Where the Division observes multiple similarly situated respondents violating similar laws in similar ways over time, the Division will assess whether higher penalties are necessary to achieve sufficient general deterrence. Increased penalties have already been imposed in recent swap dealer reporting cases. Moreover, Director McGinley continued to encourage firms to self-report as it could result in reduced CMPs, or even a declination.2
There will also be increased focus on addressing recidivism (i.e., repeated violations by the same person). The Division considers recidivism an aggravating factor that can increase the amount of a CMP imposed in a resolution. Recidivism will also be relevant when assessing whether a respondent is entitled to cooperation credit. In determining whether a person is a recidivist, the Division will consider various factors, including:
- Whether the prior and current actions involve the same or similar categories of violations, and whether the violations resulted from the same root cause or involved the same general subject matter.
- The time between offenses. More recent conduct will likely be given more weight in determining whether an entity is a recidivist.
- Whether overlapping management was involved.
- The pervasiveness of the new misconduct. De minimis new misconduct that is quickly identified and remediated is less likely to result in a recidivism finding than pervasive new misconduct that persists over time.
- The robustness and effectiveness of remediation taken since the prior resolution. Inadequate remediation reflects an insufficient commitment to addressing prior misconduct and minimizing the risk of recurrence.
Notably, the Department of Justice (“DOJ”)—Director McGinley’s prior employer—recently updated its guidance for handling recidivist corporations in the context of resolving criminal investigations. In connection with a string of policy updates aimed at providing greater transparency to corporations caught in DOJ’s crosshairs or hoping to avoid such troubles, the DOJ’s September 2022 memorandum from Deputy Attorney General Lisa Monaco (the “Monaco Memo”), clarified how DOJ would execute its commitment to consider a company’s global criminal, civil, and regulatory record when deciding on an appropriate resolution. In particular, the Monaco Memo provides that (i) the DOJ will place the greatest weight on prior US criminal resolutions, giving comparatively less weight to domestic civil and regulatory matters and any foreign matters; (ii) criminal resolutions more than 10 years old, and civil or regulatory matters over five years old, will generally be accorded less weight; and (iii) the nature of the misconduct and surrounding circumstances will be considered to help contextualize prior misconduct, including, e.g., comparing the history of corporations in highly regulated industries with others that are similarly situated.
II. Monitors and Consultants
The Division has, at times, recommended the use of undertakings involving both monitors and consultants, and intends to do so going forward. However, the Advisory now clarifies the roles and responsibilities of monitors and consultants, as well as when such persons might be appointed.
Responsibilities of a monitor will include: (i) testing the sufficiency of the firm’s policies, procedures, and controls to identify, address, and prevent future misconduct like that described in the order; (ii) drafting specific recommendations to address issues identified during testing; and (iii) testing the sufficiency of the firm’s enhancements to its policies, procedures, and controls to implement the monitor’s recommendations and the effectiveness of those enhancements over time. The monitor will submit reports to the Division describing the remediation plan and the firm’s progress in implementing the recommendations. If the firm chooses not to adopt one or more of the monitor’s recommendations, the firm will be required to report that fact to the Division along with the reasons for non-adoption.
The consultant’s responsibility will be to advise the firm regarding the implementation of remediation-related undertakings.
Going forward, the Division intends to generally recommend to the Commission that a monitor be imposed is cases involving the most significant and/or pervasive compliance and control failures reflecting a lack of sufficient commitment to effective compliance. A consultant, on the other hand, will be recommended in less severe cases where the Division is persuaded that the firm requires the assistance of a neutral third party to advise regarding remediation, but can otherwise remediate its misconduct without oversight. When it comes to recidivist entities, however, the Division will be inclined to recommend that a monitor or consultant be imposed as part of any resolution. Moreover, Director McGinley commented that it may be more difficult to justify the recommendation of a monitor if a firm has already engaged a consultant and presented the results of the consultant’s work and a remediation plan to the Commission.3 He also encouraged firms to self-report in order to reduce the likelihood of the Division recommending the imposition of a monitor or consultant.4
The selection of the specific monitor will need to be approved by the Division. However, no Division approval of the specific consultant will typically be required. Additionally, the monitor will need to certify as to the firm’s completion of the remediation plan, while the consultant will not. However, the firm itself will need to certify its completion of the remediation-related undertakings at the conclusion of the consultant’s engagement.
Here, too, the Advisory reflects similar guidance from the Monaco Memo regarding monitors that result from corporate criminal investigations. The Monaco Memorandum sets out a new list of 10 non-exhaustive factors for prosecutors to consider when evaluating whether to impose a monitor. These include considerations around disclosure—assurance of compliance program testing and effectiveness, involvement of senior employees, pervasiveness of the misconduct, and whether there was participation of, or failures by, compliance personnel. DOJ’s criminal prosecutors are also directed to ensure that the scope of every monitorship is appropriately tailored to the compliance issues of each resolving company and in meeting the Department’s “obligations to stay involved and monitor the monitor.”
Going forward, the Division cautions that respondents should no longer assume that no-admit, no-deny resolutions are the default position of staff. The Division will discuss with respondents whether admissions are appropriate on a case-by-case basis. In evaluating whether admissions should be required as part of the proposed resolution, Division staff will consider the facts and circumstances presented by each matter as well as the following non-exhaustive list of factors.
Factors counseling in favor of admissions:
- Whether the respondent is entering into a parallel criminal resolution in which the respondent admits the underlying misconduct.
- Whether the evidence uncovered during the investigation conclusively establishes the misconduct (i.e., the respondent admitted to the misconduct in testimony or documentary evidence).
- Whether, and to what extent, a respondent seeks cooperation credit. Consistent with current Division policy, whether a respondent admits to the underlying wrongdoing is a factor the Division may consider when assessing the extent of a respondent’s cooperation.
- Whether the offense is a strict liability offense in clear violation of the law.
Factors counseling against admissions:
- Whether there is a realistic risk of criminal exposure uniquely arising from the act of admitting the misconduct. Where the respondent faces the realistic prospect of potential criminal liability relating to the misconduct, in certain cases it may be possible that admitting the misconduct could jeopardize the respondent’s ability to legitimately defend against the criminal case.
- Whether there is a legitimate factual dispute, which persuades the Division that it faces significant litigation risk establishing the fact at trial.
Recent CFTC orders already reflect that the Commission is requiring admissions to convey the significance of the alleged misconduct, such as with respect to certain recordkeeping violations. We suspect that, for many respondents, whether to settle on anything other than a no-admit, no-deny basis will be a function of various factors, including the nature of the alleged violation and the likelihood that any such settlement could result in third-party civil liability. While certain types of violations may involve a relatively low risk of collateral impact, others, such as findings of manipulative conduct, may create substantial third-party litigation risk.
1 The Advisory can be read here.
2 Ian McGinley, Director of the Division of Enforcement, Commodity Futures Trading Commission, Remarks at the New York University School of Law Program on Corporate Compliance and Enforcement: “The Right Touch: Updated Guidance on Penalties, Monitors and Admissions” (Oct. 17, 2023).