CFTC Commissioner Christy Goldsmith Romero recently criticized the agency's longstanding practice of settling enforcement cases without seeking admissions of wrongdoing (so-called "no-admit/no-deny" settlements). She suggests application of a "HEAT" test (Heightened Enforcement Accountability and Transparency), which would encourage CFTC staff to push for admissions of wrongdoing in actions with one or more of the following factors:

  • Egregious conduct or the need to send a pronounced message about particular conduct or practices;
  • The presence of a criminal scheme or a recidivist defendant;
  • Significant harm or risk of harm to investors, market integrity, or market participants; and/or
  • Obstruction, lying, or concealment in an investigation by the CFTC, other federal authority, or a self-regulatory organization.

Commissioner Romero acknowledged that the HEAT test factors are "intentionally broad to result in a shift in the CFTC's current settlement practices." She stopped short, however, of calling for every settlement to require admissions. Instead, Commissioner Romero encouraged the CFTC to reserve no-admit/no-deny settlements for cases that pose more significant litigation risks, and to pay less attention to the potential collateral consequences to respondents forced to admit wrongdoing.

The collateral consequences to financial institutions of admitting wrongdoing can be significant, which may heavily incentivize avoiding admissions. These consequences can include:

  • Reputational damage;
  • Use against the admitting party in civil class-action lawsuits;
  • Risk to contractual relationships with key counterparties;
  • Loss of the ability to rely on securities offering exemptions from registration; and/or
  • Disqualification for the company or its personnel from continued participation in the securities industry.

No-admit/no-deny settlements are commonplace at the CFTC, SEC, and FINRA. They can serve as a means of efficient and expeditious resolution of what may otherwise turn into drawn out and costly litigation for the company and the regulator.

Nevertheless, Commissioner Romero is the latest in a long line of SEC and CFTC Commissioners and other leadership to question no-admit/no-deny settlements over the last decade. For example:

  • As Commissioner Romero points out in her statement, SEC Division of Enforcement Director Gurbir Grewal has indicated that his staff will "recommend aggressive use of these prophylactic tools to protect investors and the marketplace."
  • Likewise, SEC Commissioner Caroline Crenshaw has called for "enforcement for everyone" and "better outcomes" in SEC enforcement cases.
  • Last year, while serving as acting chair, former SEC Commissioner Allison Herren Lee announced that SEC Enforcement staff will no longer recommend to the Commission a settlement offer that is conditioned on granting a "bad boy" waiver (which, among other things, jeopardizes the ability for corporations to raise capital).

It remains unclear whether the CFTC staff will adopt Commissioner Romero's HEAT test. What is clear is the larger trend of US regulators aggressively pursuing enforcement actions against companies for what many would consider minor offenses. For example, the SEC recently imposed a $50,000 penalty on an investment adviser for forgetting to update a response on Form ADV (the investment adviser registration form). Many would have considered this a minor infraction, better suited for a ding during a routine exam, absent evidence of fraud or customer harm. SEC staff clearly took a different view.

We will continue to monitor for any noticeable enforcement trends coming out of the CFTC, SEC, and FINRA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.