The Commodity Futures Trading Commission Division of Enforcement (the division) issued a memorandum late last month providing guidance on cooperation in enforcement actions. The CFTC’s focus on cooperation can be seen as part of an emerging trend of regulators and law enforcement agencies offering transparency about how cooperation can materially impact potential sanctions.
Offering insights into how credit is apportioned informs regulated firms about the potential benefits of self-reporting. The utility of such guidance, however, depends on its clarity and detail—firms are likely incentivized when the case for credit is clear and compelling.
Overall, the goal of the “Recognizing Cooperation, Self-Reporting, and Remediation in Commission Enforcement Orders” memo, issued Oct. 29, is to outline “in what circumstances Division staff will recommend recognizing self-reporting, cooperation, and remediation in Commission enforcement orders.”
Three Questions for Determining Credit
The division poses three questions, the answers to which will guide a decision to offer credit:
- Was the conduct self-reported?
- Did the firm cooperate during the investigation?
- Was there evidence of substantial remediation of the violative conduct?
Of course, there are no guarantees that answering yes to these questions and engaging with the CFTC will result in reduced sanctions. The division is careful to state that positive responses “may result in recognition in a Commission enforcement order and a reduction in the penalty imposed.” (Emphasis added)
Having outlined these criteria, the division steps through a few possible outcomes to demonstrate how it makes credit determinations.
Dispensing with the obvious, the division first discusses firms that have not self-reported, cooperated, or remediated issues, noting that “the Division will not recommend that the Commission’s enforcement order publicly recognize” the firm for having offered any assistance. Not a surprise.
‘Cognizable’ or ‘Subtantial’ Cooperation, Remediation
The next two scenarios envision situations where a firm has not self-reported an issue, but offered “cognizable” or “substantial” cooperation or remediation.
The division considers “cognizable” assistance as that which “would not have materially assisted the Division’s investigation in the manner required to warrant a recommended reduction in penalty.” In a footnote, the division explains the potentially mercurial nature of “cognizable” assistance, stating that cooperation and remediation can be “uneven” during the course of an investigation.
On the other hand, “substantial” cooperation is defined as assistance that “materially advanced the Division’s investigation in accordance with the Advisories, and/or engaged in substantial remediation to address the misconduct and materially develop or strengthen related internal controls.” The key differentiator appears to be the consistency and extent of cooperation and a firm’s ability to evidence proactive efforts responding to an issue—the more demonstrably helpful, the more likely the firm’s engagement will be considered “substantial.”
Although this guidance is not particularly nuanced, it confirms that the division views “cooperation” as an ongoing, engaging process—firms must dedicate consistent efforts to cooperation, and can’t view it as a “report and be done with it” exercise.
The division also provides examples of specific language it will include in relevant enforcement orders reflecting the level of cooperation and whether credit was provided.
These standard disclosures are effectively the division’s equivalent of a nutritional label—in each order the CFTC will provide an indication of cooperation as well as the actions taken by the firm that influenced the CFTC’s determination. Look for these in coming enforcement orders to understand the factors influencing the CFTC’s stance on credit in a particular context.
Most Significant Penalty Reductions
The fourth and final situation covered in the memo is where all three elements—self-reporting, cooperation, and remediation—are satisfied. In these instances, “the Division will recommend the most significant reduction in penalty,” which, again we learn in a footnote, may in “extraordinary circumstances” result in no penalty at all. Presumably, the self-reporting of an issue situates the potential cooperation credit in a wholly different realm than the other outcomes envisioned in the memo.
It is worth quickly comparing the CFTC’s methodology with the Financial Industry Regulatory Authority’s approach as outlined in Regulatory Notice 19-23. FINRA’s criteria for evaluating cooperation is roughly the same with the exception that it also considers credit restitution to customers as a key component.
In contrast to the CFTC, FINRA highlights specific situations where the severity of fines were diminished and illustrative examples of the types of conduct that might constitute “substantial assistance.” FINRA’s approach allows for rough benchmarking by including granular details about actions that could materially move the needle on credit.
Enforcement Orders Will Provide Insights
So runs the gamut of the credit for cooperation calculus. Clearly, self-reporting offers the most upside in terms of potential reduction of penalty, however the gray area between “cognizable” and “substantial” cooperation leaves ambiguity about how much credit might be offered in a given instance.
As the CFTC issues credit over time, enforcement orders will provide insights into the types of behaviors and actions that will suffice for meaningful consideration. For practitioners, making unbiased assessments of the willingness and ability of an organization to cooperate with the CFTC—as well as the steps it might take to meaningfully remediate issues—will influence decisions to self-report.
As quantitative details about cooperation credits emerge, the likelihood of self-reporting may increase as a result.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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Marc Gilman is general counsel and vice president of compliance at Theta Lake Inc. He is also an adjunct professor at Fordham University School of Law. Follow him on Twitter: @marcwiki.