CFTC division of enforcement issues civil monetary penalty guidance
On May 20, 2020, the Commodity Futures Trading Commission (“CFTC”) Division of Enforcement (the “Division") issued new guidance (the “Guidance”) on the factors it will consider in recommending civil monetary penalties for CFTC enforcement actions, namely, the gravity of the violation, mitigating and aggravating circumstances, and other considerations such as the total mix of remedies and monetary relief, among others. While not necessarily breaking new ground, the guidance updates past guidance issued in 1994 to improve transparency in CFTC enforcement and clearly communicates expectations to the market.
In the announcement, CFTC Chairman Heath P. Tarbet explained that “[t]his new guidance reflects my strong commitment to transparency and to the CFTC’s enforcement mission,” echoing previous statements he made on the importance of “clarity about how our statutes and rules are applied.”
The Guidance, which is binding on all Division staff, is designed to “facilitate the Division’s efforts to be tough on those who break the rules while striving for fair and consistent outcomes in doing so.”The factors outlined in the Guidance are not novel, but instead reflect Division practice that has been “refined over time as a result of changes to relevant legal authorities and precedents, as well as lessons learned from the Commission’s enforcement actions.”
Three-pronged Approach to Evaluating Civil Monetary Penalties
The Division will consider a number of factors in evaluating an appropriate penalty to recommend to the Commission, which the Guidance divides into three broad groups: (1) the gravity of the violation; (2) any mitigating and aggravating circumstances; and (3) “other considerations.”
Gravity of the Violation
The gravity of a violation is the CFTC’s primary consideration in determining an appropriate penalty. Division staff are directed to consider a number of factors in weighing the gravity of the violation, though no single factor is dispositive, and other, unlisted factors may be considered depending on the circumstances of a particular case. Thus, the following list of factors is simply “illustrative of the analysis in most cases.”
a. Nature and scope of the violations, including:
- the number, duration, type and degree of the violations;
- the Respondent’s role in the violations;
- whether the Respondent acted in concert with others;
- any efforts to conceal the ongoing violations; and
- whether the violations resulted in harm to victims and, if so, the number and type of victims;
b. The Respondent’s state of mind, including whether the conduct was intentional or willful; and
c. Nature and scope of any consequences flowing form the violations, including and:
- Harm (or risk of harm) to victims and market participants;
- Benefit or potential benefit to the Respondent; and
- Impact on market integrity, customer protection, or the mission and priorities of the Commission in implementing the purposes of the [Commodity Exchange] Act.
Mitigating and Aggravating Circumstances
Like virtually all U.S. (and other) enforcement bodies, the CFTC “has typically considered mitigating and aggravating circumstances when determining the appropriate civil monetary penalty.” In weighing those circumstances, the CFTC will consider:
a. Post-violation conduct, including:
1. mitigating conduct, such as attempts to cure, return of victim funds, or efforts to improve a compliance program; and
2. aggravating conduct, such as concealment or obstruction of an ongoing investigation;
b. Whether the Respondent self-reported the misconduct, as well as the extent of cooperation and remediation, as detailed in the Division’s Enforcement Advisories;
c. Timeliness of remediation;
d. Existence and effectiveness of the company’s pre-existing compliance program;
e. Prior misconduct, such as whether the Respondent is a recidivist;
f. Pervasiveness of misconduct within the company, including responsibility of management; and
g. Nature of any disciplinary action taken by the company with respect to the individuals engaged in the misconduct.
Finally, the Division may take into consideration additional “other considerations,” which may include:
a. The total mix of remedies and monetary relief to be imposed on the Respondent in the recommended Commission enforcement action, in addition to the remedies and relief to be imposed in parallel cases involving criminal authorities (including incarceration), other regulatory entities, or self-regulatory organizations;
b. Monetary and non-monetary relief in analogous cases; and
c. Conservation of Commission resources, including timely settlement.
While the publication of these factors does not indicate a significant shift in the CFTC’s approach to assessing civil monetary penalties, it does provide helpful clarity and guidance to the market on how the CFTC’s analysis will be framed in future enforcement actions. It also provides an analytical framework that companies and their counsel can use to advocate for the imposition of an appropriate remedy in future negotiations with the CFTC.