CFTC Announces Path to Declination for Self-Reported Misconduct

The Division of Enforcement (Division) of the U.S. Commodity Futures Trading Commission (CFTC) recently updated its policy on cooperation to provide greater clarity and consistency and to align more closely with the Department of Justice’s Corporate Enforcement and Voluntary Self-Disclosure Policy. The Policy on Cooperation (Policy) outlines potential paths to resolutions for companies and individuals who self-report misconduct, cooperate with any Division investigation, remediate the misconduct, make victims whole, and disgorge ill-gotten gains. A company or individual who satisfies all Policy criteria can expect a declination, while those who do not meet certain criteria can still expect a range of specific and meaningful reductions in calculated penalties. As with other voluntary self-disclosure policies that aim for greater clarity and consistency, the Division still retains significant discretion under the Policy.

Key Takeaways

• The Division has updated its cooperation policy to align with other federal voluntary self-disclosure and cooperation policies.
• Although other voluntary self-disclosure programs that offer declinations are aimed at companies, the Division’s Policy also provides penalty relief for individuals.
• The Policy continues to vest appreciable discretion in the Division with respect to qualification for each resolution type and the range of benefits for near-miss resolutions.
• The Policy emphasizes speed—speed of self-reporting, updating preliminary self-reports, and restitution.
• A resolution under the Policy still involves significant internal investigative work and ongoing cooperation efforts.
• A company or individual that does not seek a resolution under the Policy likely can obtain a maximum reduction of only 25% from the Division’s calculated penalty for other resolutions.

The Policy

Declinations for Fully Compliant Cooperation

Under the Policy, the Division may grant a declination to a company or individual who satisfies five criteria. These criteria include elements that are similar to other federal agency programs that reward self-disclosure:

• A Voluntary Self-Report to the CFTC;
• Full Cooperation with any Division investigation;
• Timely and Appropriate Remediation of misconduct;
• Full Restitution and/or Disgorgement, if appliable; and
• The lack of aggravating circumstances.

Although the Policy includes clearly articulated criteria, the Division maintains substantial discretion in determining whether a self-reporting entity or individual satisfies each criterion.

Voluntary Self-Report.

After implying significant areas of Division discretion when evaluating qualification, the Policy establishes six mandatory elements of a Voluntary Self-Report. The reporting company or individual must, (1) before “any known or reasonably anticipated imminent threat” of “disclosure” of the matter or “investigation” of the matter by an exchange, self-regulatory organization or state or federal entity and (2) reasonably promptly after becoming aware of the misconduct, (3) make a report to a division of the CFTC (4) in good faith (based on factors such as context, timing, completeness, and transparency) of (5) all material, non-privileged information in its possession and control about the misconduct (even if incomplete or subject to an ongoing internal investigation) while (6) timely fulfilling any statutory or regulatory obligations to report related information to the CFTC. The Policy notes that a self-report can qualify “even if the CFTC already has independent knowledge of the misconduct.” The Policy also provides a safe harbor for a report that is later determined to be inaccurate, if the report was made in good faith and supplemented or corrected promptly after discovery of inaccurate information.

Full Cooperation.

The Policy articulates a multifactor test for Full Cooperation, which the Division will tailor to the size, sophistication, and financial condition of the cooperating party. As a general matter, a party seeking a resolution under the Policy must preserve, collect, and produce documents and information, timely disclose non-privileged information concerning the misconduct, and engage in proactive efforts to ensure that the Division has or is made aware of the relevant evidence, whether or not it is in the party’s possession. If an impediment to production exists based on foreign law, the party must establish that and provide lawful alternatives for the Division’s receipt of documents and information. A company must make relevant personnel in the United States and elsewhere available for interviews and facilitate third-party interviews when possible. A party must deconflict any of its investigative steps at the Division’s request.

Timely and Appropriate Remediation.

Remediation for a company’s misconduct requires a root-cause analysis and implementation of appropriate corrective measures to address the cause of the misconduct, the implementation of an effective right-sized, risk-based compliance program, the discipline of responsible employees (including, as appropriate, those involved, those who failed in their oversight responsibilities, and those with supervisory authority over the relevant operations), and implementation of record-retention measures. For an individual, remediation, which the Division characterizes as “highly fact-specific,” could involve additional ethics or professional training, retention of professionals who will serve as a check on potential misconduct, and restrictions on engaging in certain business activities for specific periods of time.

Full Restitution and/or Disgorgement.

To receive a declination, the Division must agree that the company or individual has provided or has a plan to provide full restitution to victims and disgorgement of any ill-gotten gains. The Policy encourages expeditious restitution, which can occur wholly or partially before the Division agrees to a declination.

Lack of Aggravating Circumstances.

The Policy requires the absence of aggravating circumstances or a determination by the Division that aggravating circumstances are outweighed by a company or individual’s satisfaction of the other criteria for a declination. Aggravating circumstances may include, but are not limited to, pervasive misconduct by ownership or management, misconduct for an extended period of time, recidivism, and egregious aggregate harm.

The Policy notes that the timing of the Division’s decision to grant a declination may be impacted by two variables. First, the Division may grant a declination either before or after Timely and Appropriate Remediation. The Division will assess “the circumstances, complexity, and duration of the planned remediation.” Second, the Division may grant a declination either before or after Full Restitution and/or Disgorgement. Here, the Division will evaluate the restitution and/or disgorgement plan or its implementation to determine whether it is appropriate to wait for completion before granting the declination.

Penalty Reductions for Near-Misses and Not-So-Near-Misses

The Policy permits significant benefits to a company or individual who fails to qualify for declination on one of three bases. First, for an otherwise qualifying company or individual whose self-report does not qualify as a Voluntary Self-Report, the Division will recommend a reduction from its good-faith calculation of the penalty of at least 50% and not more than 75%. Second, for an otherwise qualifying company or individual when the matter involves aggravating circumstances, the Division will recommend a reduction of at least 25% and not more than 75%. Third, for a company or individual who satisfies the Timely and Appropriate Remediation and Full Restitution and/or Disgorgement criteria but falls short on Full Cooperation, the Division may recommend a reduction of no more than 25% of the penalty calculation.

Conclusion

Although the Policy appears to offer clear, transparent criteria for a self-reporting company or individual to know their exposure in a resolution with the Division, it places critical determinations in the discretion of the Division. The retention of experienced counsel is vital for a company or individual to successfully navigate the Policy and the Division’s reaction to a self-report to preserve the opportunity for a full declination.