Key Takeaways
- On April 17, the Commodity Futures Trading Commission's (CFTC) Market Participants Division, the Division of Clearing and Risk, and the Division of Market Oversight (together, the Operating Divisions) issued an advisory to provide guidance on criteria the Operating Divisions will use to determine whether to refer a self-reported violation to the Division of Enforcement (DOE).
- Under the advisory, the Operating Divisions can refer material supervision and non-compliance issues to the DOE. Non-material supervision or compliance issues will be handled by the Operating Divisions and addressed directly with the registrant or registered entity.
- The guidance follows the DOE's February advisory which announced that registrants and registered entities who self-report violations to an Operating Division can be eligible for mitigation credit.
Background
As we previously reported,1 in February, the CFTC's DOE issued an enforcement advisory (the DOE Advisory) to provide guidance to market participants on how the DOE will evaluate a company's or an individual's conduct in the context of recommending an investigation or enforcement action. The DOE Advisory presented a first-of-its-kind credit matrix meant to provide transparency into how the DOE will now evaluate self-reporting, cooperation and remediation efforts and award credit pursuant to the nature and quality of those efforts. Specifically, this system utilizes a combination of rubrics to assess the value of the self-reporting, cooperation and remediation, including considerations of timeliness, and keys these assessments to a matrix to determine whether and how much credit will be awarded.
Following the release of the DOE Advisory, the CFTC noted that the public raised questions on how the credit matrix would operate, including perceived inconsistencies in how material non-compliance issues are referred for enforcement. In response, Acting CFTC Chairman Caroline Pham revealed that a further advisory would be issued that would speak on materiality criteria that would (1) provide clarity to those contemplating a self-report on a non-compliance issue without fear of a referral for enforcement; and (2) ensure other CFTC divisions will appropriately address supervisory or compliance issues that are not material directly with the registrant or entity.
Weighing an Enforcement Referral
On April 17, the Operating Divisions issued Staff Advisory No. 25-13, "Staff Advisory on Materiality or Other Criteria That Operating Divisions Will Use to Determine Referrals to the Division of Enforcement" (the Operating Divisions' Advisory).2 The Operating Divisions' Advisory seeks to provide further guidance and transparency on the materiality or other criteria that will be used to determine whether to make a referral to the DOE for self-reported violations or supervision or non-compliance issues.
Generally, the Operating Divisions may refer violations that are material to the DOE. Those include violations involving harm to clients, counterparties, customers, members or participants; harm to market integrity; or significant financial losses. Given this, the Operating Divisions note that registrants and registered entities should "use their own judgment" to determine whether it is appropriate to self-report a material violation, including those involving fraud, manipulation or abuse, directly to the DOE in the first instance. However, the Operating Divisions will address non-material supervision or non-compliance issues directly with the registrant or registered entity without a referral to the DOE.
The Operating Divisions' Advisory therefore provides key information on how the Operating Divisions will determine materiality of a supervision or non-compliance issue, including, for example, an issue related to systems and controls or risk management and compliance programs. The analysis considers:
- Especially egregious or prolonged systemic deficiencies or material weakness of the supervisory system, controls or program;
- Knowing and willful misconduct by management, such as conduct evidencing an intent to conceal a potential violation, or supervision or non-compliance issue; or
- Lack of substantial progress toward the completion of remediation for an unreasonably lengthy period of time, particularly after a continuous process with the appropriate CFTC division regarding the remediation.
In all circumstances, the appropriate division, when conducting its assessment, will apply a reasonableness standard and consider the registrant or registered entity's size, activity and complexity. Notably, the Operating Divisions' Advisory says the "mere failure to meet, or extension of, a deadline for corrective action or remediation plan, on its own, will not be sufficient for a referral to [the Division]."
Conclusion
Market participants are advised to continue reviewing and updating compliance programs to account for the February and March advisories, including an assessment of which behaviors could warrant a voluntary disclosure to the appropriate Operating Division or to the DOE directly to receive the maximum benefits associated with a timely self-report. Competent legal counsel should be considered to assist participants in evaluating and/or enhancing current compliance programs and assessing whether a potential violation is material, whether to voluntarily self-report, and if so, to which CFTC division.
Footnotes
1 Michelle N. Tanney, Isabelle Corbett-Sterling, Shelleah M. Jackson, BakerHostetler, The CFTC Announces a New System to Incentivize Self-Reporting, Cooperation, and Remediation (Mar. 20, 2025), available at https://www.bakerlaw.com/insights/the-cftc-announces-a-new-system-to-incentivize-self-reporting-cooperation-and-remediation/.
2 Comm. Fut. Trad. Comm'n, Rel. No. 9067-25, Staff Advisory on Materiality or Other Criteria That Operating Divisions Will Use to Determine Referrals to the Division of Enforcement (Apr. 17, 2025), available at https://www.cftc.gov/csl/25-13/download.
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