On October 17, 2023, the Commodity Futures Trading Commission’s (CFTC) Division of Enforcement (the Division) issued an Advisory Regarding Penalties, Monitors and Consultants, and Admissions in CFTC Enforcement Actions (the Advisory) that outlines a new approach by the Division in requiring admissions of wrongdoing, imposing monitors or consultants, and assessing penalties.1 The Advisory reflects the Division’s efforts to enhance its enforcement program and hold wrongdoers accountable, while also encouraging cooperation and remediation.
Admissions
Perhaps most important, the Division will no longer accept the neither-admit-nor-deny settlement policy as the default option, but rather will discuss with respondents whether admissions are appropriate on a case-by-case basis. The Division will consider the facts and circumstances of each matter, as well as a non-exhaustive list of factors, to determine whether admissions should be required. The factors include:
- Whether the respondent is also entering into a parallel criminal resolution where the respondent admits the underlying misconduct
- Whether the evidence conclusively establishes the misconduct, e.g., through the respondent's own admission or documentary evidence
- Whether and to what extent a respondent seeks cooperation credit
- Whether the offense is a strict liability offense in clear violation of the law. The Division explained that the key question in such cases is whether activities that violated the law occurred, and that there is no need to assess the respondent’s state of mind.2
The Advisory also identifies two factors that may counsel against requiring admissions:
- Whether there is a “realistic risk” of criminal exposure if the respondent admits to the misconduct. In some cases, admitting the misconduct could jeopardize the respondent's ability to defend against the criminal case.
- Whether there is a legitimate factual dispute where the Division faces significant litigation risk establishing the fact at trial. This factor weighs against admissions only as to that disputed fact.3
Broadly, the Division will consider egregious conduct, the presence of a criminal scheme, and significant harm or risk of harm to investors and markets in requiring admissions. No individual factor is dispositive, and additional factors may be relevant in some cases.
Penalties
Under the Advisory, the Division will recalibrate penalties to address the specific circumstances of the case. The new approach to penalties aims to increase deterrence and take a more holistic view on recidivism, expanding the definition to more than just the same exact conduct violating the same exact provision.
The Advisory lists other factors that the Division will consider when assessing penalties, such as:
- The relationship between the prior and current enforcement actions. The Division will look at whether the violation resulted from the same root cause or involved the same general subject matter.
- The time between offenses. More recent conduct is likely to be given more weight in determining whether an entity is considered to be a recidivist by the Division.
- Whether overlapping management was involved. The Division will consider whether the same or similar individuals were responsible for or aware of the prior and current misconduct.
- The pervasiveness of the new misconduct. De minimis new conduct that is quickly identified and remediated is less likely to result in a finding of recidivism.
- Since the prior resolution, whether the entity has implemented and sustained meaningful changes to its policies, procedures, and controls to prevent and detect future violations.4
Monitors and consultants
The Advisory explains that the Division will continue to impose monitors or consultants as part of its enforcement actions to effectively remediate improper conduct. The Advisory clarifies the difference between monitors and consultants based on the degree of involvement and oversight they have in the entity’s remediation efforts. Monitors will address “significant concerns [. . .] about an entity's ability to remediate illegal activity without the assistance of a neutral third party and oversight"5 and are reserved for the most significant and/or pervasive compliance and control failures.
The selection of a specific monitor will require approval by the Division. The monitor's outlined responsibilities include testing the sufficiency of the entity's policies, procedures, and controls to identify, address, and prevent future misconduct like that described in the order; drafting specific recommendations to address issues identified during testing; and testing the sufficiency of the entity's enhancements to its policies, procedures, and controls to implement the monitor’s recommendations and the effectiveness of those enhancements over time.6
Monitors will continue to make recommendations, test those recommendations, and report on the results of their work to the Division. The monitor will submit reports to the Division, and if an entity does not adopt one or more of the monitor’s recommendations, the entity will be required to report that to the Division, with an explanation. Both the monitor and the entity will need to certify the entity’s completion of the remediation plan.
For serious but less severe cases where the evidence persuades the Division that the entity needs the assistance of a neutral third party but can otherwise remediate its misconduct without oversight, consultants will be used. The consultant’s responsibility is to advise the entity regarding the implementation of remediation-related undertakings. The entity is responsible for reporting to the Division on the progress of such implementation and for appointing appropriate internal personnel to certify the entity’s completion of the remediation-related undertakings at the conclusion of the consultant’s engagement.
The Division’s prior advisories on self-reporting, cooperation, and remediation remain in place, and generally state that such actions may result in recognition in a Commission enforcement order and a reduction in the penalty imposed.
- Commodity Futures Trading Commission, Advisory Regarding Penalties, Monitors and Consultants, and Admissions in CFTC Enforcement Actions (Oct. 17, 2023), [hereinafter Advisory].
- Id. at 6.
- Id.
- Id. at 2-3.
- Commodity Futures Trading Commission, Statement of Commissioner Christy Goldsmith Romero on CFTC Enforcement Division Advisory Regarding Penalties, Monitors and Consultants, and Admissions (Oct. 17, 2023).
- Advisory at 4.
Client Alert 2023-237
