On December 1, 2020, the Commodities Futures Trading Commission (CFTC) Division of Enforcement published its annual report for Fiscal Year 2020. According to the report, the Division filed a record number of enforcement actions in 2020 and achieved a number of firsts, despite the unprecedented challenges presented by the COVID-19 pandemic. In addition, the report provides a number of key insights into the Division's enforcement concerns in several key areas, including compliance, digital assets, anti-money laundering (AML), market surveillance and its whistleblower program.
The Division hit several records in 2020, including the most enforcement actions (113), the largest monetary penalty for a single action ($920 million), the most retail fraud actions (56), including the most involving digital assets (7). The Division also issued first-of-its-kind Guidance on Evaluating Compliance Programs in Connection with Enforcement Matters (see our prior blog post here) and updated its Cooperation, Self-reporting, and Remediation Recognition Guidance for the first time since 1994. This guidance sets forth four discernable tiers of available credit, ranging from no self-reporting or cooperation, for which no credit or penalty reductions will be recommended, to self-reporting and full cooperation, for which credit and a reduction in penalties will be recommended.
The Division's annual report also includes enforcement metrics that point to some of the Division's priorities for the coming year, none of which is surprising. For example, the Division expects an institution's compliance function to serve as a meaningful check on misconduct by ensuring proper systems are in place to detect misconduct when it occurs, and to make sure it does not happen again. The report included several examples of notable compliance failures, including failure to halt unlawful trading despite compliance staff's substantial information regarding spoofing misconduct; failure to address and correct known deficiencies in audio preservation systems; and violation of the institution's own policies and procedures involving onboarding, recordkeeping, chief compliance officer reporting and supervision. The common thread running through all of these examples is the CFTC's apparent refusal to countenance a failure to act despite awareness of actual or potential harm. But the correction should be low-hanging fruit for compliance professionals – if you see something, say something.
2020 also saw a continued focus by the CFTC on digital assets, AML and market surveillance. Through the Division's Digital Asset Task Force, the CFTC brought a record seven cases involving the fraudulent offering and/or marketing of digital assets that fit within the Commodities Exchange Act's definition of "commodity" (see 7 U.S.C. § 1a(9)). The Division also filed actions against institutions that failed to file Suspicious Activity Reports (SARs) and failed to supervise employees' handling of certain customer accounts with respect to Bank Secrecy Act, 31 U.S.C. § 5311, et seq.) requirements. The CFTC's continued investment in market surveillance has also paid off. During FY2020, the Commission's use of surveillance technology to identifying suspicious trading patterns or positions resulted in the three largest spoofing enforcement actions in the Commission's history, including a matter that resulted in the highest monetary penalty ever imposed by the CFTC.
The past year also saw the continued growth of the CFTC's whistleblower program. During FY 2020, the Commission granted 16 applications for whistleblower awards, totaling approximately $20 million, the second highest total since the program's inception in 2011. Going forward, the Division expects its reliance on the whistleblower program will continue to grow. Currently, between 30 to 40% of the Division's ongoing investigations involve a whistleblower.
Perhaps the most notable aspect of the FY2020 annual report is the extent to which it makes clear that the CFTC's Division of Enforcement is focused on basic principles. This transparency is refreshing, especially coming from a financial regulator. But it means the Commission's directives to commodities market participants are equally unambiguous: enforce your policies and procedures; file SARs; flag suspicious activity; and don't solicit fraudulent investments.
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