United States: CFTC Enforcement Considerations For 2017

At a Glance: Change is in the air and the political landscape may significantly affect the U.S. Commodity Futures Trading Commission's enforcement agenda. Last month, Commissioner J. Christopher Giancarlo rose to the position of Acting Chairman and announced a number of staffing changes at the Commission, including a new Acting Director of the Division of Enforcement. Meanwhile, the U.S. Congress is considering legislation that could pare back a number of Dodd-Frank Act reforms to the Commodity Exchange Act. In this client alert, we review recent enforcement trends in light of the new political agenda and highlight important developments at the CFTC, including its potential enforcement priorities for 2017.

Shortly after President Donald J. Trump was inaugurated on January 20, 2017, Commissioner J. Christopher Giancarlo ascended to the position of Acting Chairman of the U.S. Commodity Futures Trading Commission ("CFTC"). In less than a week, Giancarlo announced a number of staffing changes, including the appointment of Vincent McGonagle as Acting Director for the Division of Enforcement. Meanwhile, the Commodity End-User Relief Act, which would reauthorize the CFTC through 2021 with a budget of $250 million a year and pare back some of the Dodd-Frank Act reforms to the Commodity Exchange Act ("CEA"), passed in the House of Representatives and similar legislation will now be considered in the Senate. Furthermore, President Trump's transition team continues to work on broad policy guidelines for the reform of U.S. financial markets.1

  In short, change is in the air and the political landscape may significantly affect the CFTC's enforcement agenda. Market participants should expect:

  1. Enforcement of Current Laws and Regulations. The CFTC must and will continue enforcing the CEA and the regulations that are currently in effect;
  2. Greater Cooperation with the SROs. The National Futures Association ("NFA") and commodities exchanges will continue enforcing the law that is in effect and, given budgetary constraints, the CFTC will push more on-the-ground enforcement responsibility and authority to these selfregulatory organizations ("SROs");
  3. Focus on Money. Because the CFTC is assessed by its effectiveness as a regulator and by how much money it brings into the U.S. Treasury, the CFTC will continue prosecuting and imposing sanctions for violations of the CEA and its rules; and
  4. Given that it is unlikely that the CTFTC will ease up on enforcement actions in 2017, market participants should be aware of the following new guidelines and developments.

The Division of Enforcement Updated its 2007 Enforcement Advisory

Like other regulatory agencies, the CFTC acknowledges companies' and individuals' cooperation with its investigations when determining appropriate penalties for misconduct. The day before Acting Chairman Giancarlo assumed his new role, the Division of Enforcement issued updated advisories on how companies should behave during CFTC investigations to receive maximum cooperation credit (the "Cooperation Advisories").2 The Cooperation Advisories, which update a previous 2007 advisory,3 offer helpful guidance and best practices to companies under investigation.

The Cooperation Advisories specify that the CFTC considers the following factors in determining the appropriate monetary penalties and other sanctions: (1) the value of a company's cooperation to the CFTC's investigation(s) and enforcement actions; (2) the value of a company's cooperation to the CFTC's broader law enforcement interests; and (3) the balancing of the level of a company's culpability and history of prior misconduct with the acceptance of responsibility, mitigation and remediation.

The Cooperation Advisories also explicitly indicate which actions by a company or individual may offset the credit that could be achieved through other cooperative actions. These include conduct that "impedes the Division's investigation or inappropriately consumes government resources." The CFTC indicates that such activities include, but are not limited to: (1) failing to respond to Division requests in a timely manner; 2) misrepresenting or minimizing the extent of the company's misconduct; (3) failing to preserve relevant information; and (4) inappropriately advising employees not to cooperate fully with the investigation.

Market participants should review the Cooperation Advisories and implement compliance programs that facilitate cooperation. In addition, market participants should advise their employees that if they become aware of an issue that may prompt an investigation, they should contact the company's compliance department. Additionally, if employees are contacted by the CFTC in connection with an investigation, they are not obligated to discuss any matters with the staff of the CFTC, the NFA or the SRO without a lawyer present.

Market participants should also note that the CFTC's whistleblower program is increasingly becoming more active. The CFTC announced its third and fourth whistleblower awards last year for $10 million and $50,000, respectively.

II. The CFTC Adjusted its Civil Monetary Penalties

On January 24, 2017, the CFTC issued new civil monetary penalties, adjusted for inflation, pursuant to the Federal Civil Penalties Inflation Adjustment Act of 1990.4  Notably, the rule adjusts the current maximum civil monetary penalty for market manipulation and attempted manipulation from the greater of $1,098,190 or triple the monetary gain, to the greater of $1,116,156 or triple the monetary gain. The rule also adjusts the maximum civil monetary penalty for non-manipulation violations from the greater of $167,728 or triple the financial gain, to $170,472 or triple the financial gain. Market participants should note that although the price of many commodities is not keeping pace with inflation, the CFTC's civil monetary penalties are adjusted each year and the increase is not inconsequential. All future civil monetary penalty assessments will be based on these inflation-adjusted amounts.

III. A Significant Enforcement Action Offers a Cautionary Tale Regarding Effective Compliance Programs

On January 19, 2017, the CFTC fined a swap dealer $25 million for spoofing (i.e., entering orders with the intent to cancel them) and failure to supervise.5 Following the enactment of Dodd-Frank and implementation of related regulations, the swap dealer circulated a compliance alert to its traders that included the amended statutory language prohibiting spoofing but provided no additional training or guidance on the subject. Moreover, the swap dealer did not put any systems or controls in place to detect spoofing by its traders or analyze their trading activity to detect spoofing. Five traders subsequently engaged in spoofing by entering orders they intended to cancel before execution. One trader observed others place spoof orders and began to do so himself. He incurred a loss and had to answer to his supervisor, who told him not to do it again but never reported the incident to compliance.

In addition to issuing a $25 million civil monetary penalty, the CFTC ordered the swap dealer to (1) provide annual training addressing the CEA's legal requirements with regard to spoofing to its employees who trade on designated contract markets; and (2) maintain systems and controls reasonably designed to detect spoofing activity by its traders.

This case is an example of why market participants must take compliance seriously and ensure that they adequately supervise and train their traders and employees. Simply informing them about regulatory or legal changes is usually not adequate given the complexities of the provisions. As a new year begins, market participants should verify that their compliance materials are up-to-date and that their personnel have adequate training.

IV. The CFTC is Likely to Continue to Pursue Recordkeeping and Reporting Violations

As mentioned in our previous Client Alert regarding CFTC enforcement in 2016, the CFTC continues to pursue a larger swath of recordkeeping and reporting cases each year and this trend is likely to continue. Recordkeeping and reporting violations are low-hanging fruit for enforcement and, given the CFTC's projected budget of $250 million6, the Division of Enforcement is likely to bring more of these actions in 2017.

In January alone, the Division of Enforcement has already brought three such actions. On January 17, the CFTC fined an investment and trading company $150,000 for failing to file Form 304 Cotton-On Call Reports on 53 occasions and filing late reports on 2 occasions.7 This action is consistent with the others Series '04 reporting violations cases brought by the CFTC over the past few years. These actions are likely to continue, especially if the CFTC's positionlimits rulemaking is finalized. Such rulemaking would expand the scope of the Form 204 and 304, and create new Forms 504, 604, and 704.

On January 26, the CFTC fined a dually -registered introducing broker ("IB") and futures commission merchant ("FCM") $280,000 for failing to retain required records and failing to supervise.8 The IB/FCM did not preserve and maintain audit trail logs for its customers and failed to implement policies and procedures to ensure retention of those records for roughly five years. The CFTC ordered the IB/FCM to update its policies and procedures on recordkeeping and provide appropriate training to its officers and employees regarding the CFTC's recordkeeping requirements.

Finally, on January 11, the CFTC fined a dually -registered FCM and swap dealer ("SD") $900,000 after its officers, employees, and agents overcharged customers for trading and clearing exchange-traded products.9 Although the CFTC did not pursue a recordkeeping violation, the failuretosupervise charge related to the FCM/SD's systems for receiving and reconciling invoices from exchanges. As a result of its failure to implement adequate systems, the FCM/SD overcharged customers in the aggregate amount of roughly $7.8 million.

V. Recent CFTC Rule Enforcement Reviews May Prompt More Enforcement Actions

The CFTC's Division of Market Oversight recently performed a rule enforcement review ("RER") of ICE Futures U.S.10 The RER recommended, among other things, that the exchange expand the scope of all of its trade practices investigations "as appropriate" to scrutinize for patterns of abuse. It also recommended that ICE Futures U.S. conduct trade practice reviews for all trade dates and maintain documentation sufficient to demonstrate that it conducted the reviews. Similarly, in an RER of the New York Mercantile Exchange and the Commodities Exchange, the CFTC recommended that the exchanges implement a formal review process to verify that market participants' positionlimits exemptions are legitimate.11 Given budgetary constraints and a concern with the enforcement of exchange rules, the CFTC is likely to continue to pressure exchanges to scrutinize trading practices and bring enforcement actions when appropriate. The NFA, which collected $700,000 in fines, expelled 22 members, and suspended 11 members in 2016, may follow suit.

Conclusion

With all of the political appointments and personnel changes at the CFTC, the big question is whether the CFTC will continue to aggressively pursue market participants for violations of the CEA and related regulations. We believe it will.

In his former role as a Commissioner of the CFTC, Acting Chairman Giancarlo did reveal his vision for enforcement. However, enforcement generally tends to remain consistent from administration to administration. Although some of the CFTC's regulations may change under the Trump Administration, the Division of Enforcement is likely to keep busy. The new Acting Director of Enforcement Vincent McGonagle served in the Division of Enforcement in the past and the departure of former Director of Enforcement Aitan Goelman is unlikely to affect its operations.

Congress is considering versions of the Commodity End-User Relief Act and Financial CHOICE Act that would reform the CEA, but these bills would have little effect on the CFTC's enforcement agenda. The core provisions enforced by the CFTC, including reporting, recordkeeping, market manipulation, and disruptive trading practices would largely be unaffected by the reforms. Accordingly, market participants should remain cognizant of the enforcement trends and compliance lessons as the new make-up of the CFTC continues to take shape

Footnotes

1 See H.R. 238, 115th Cong. (2017); S. 2917, 114th Cong. (2016); H.R. 5983, 114th Cong. (2016).

2 The Cooperation Advisory for Corporations is available here, and the Cooperation Advisory for Individual is available here.

3 The 2007 Advisory on Cooperation Factors in Enforcement Division Sanction Recommendations is available here.

4 Annual Adjustment of Civil Monetary Penalties for Inflation—2017, 82 Fed. Reg. 7,643 (Jan. 23, 2017).

5 See In the Matter of Citigroup Global Markets Inc., CFTC Docket No. 17-06 (Jan. 19, 2017).

6 The $250 million budget is the same as the 2016 enacted level, and $80 million below the President's Budget for fiscal year 2017 (prepared for the Committee on Appropriations, February 2016).

7 See In The Matter of CNCGC Hong Kong Ltd., CFTC Docket No: 17-05 (Jan. 17, 2017).

8 See In The Matter of E*TRADE Securities LLC and E*TRADE Clearing LLC, CFTC Docket No. 17-07 (Jan. 26, 2017).

9 See In The Matter of J.P. Morgan Securities LLC, CFTC Docket No. 17-04 (Jan. 11, 2017).

10 See ICE Futures U.S. Trade Practice Rule Enforcement Review

11 See NYMEX and COMEX Market Surveillance Rule Enforcement Review

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jennifer L. Achilles
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.