CFTC's annual enforcement report touts record-breaking year

In the waning days of 2020, the US Commodity Futures Trading Commission (CFTC), which enforces the Commodity Exchange Act and related regulations, has released the annual report of its Enforcement Division. The report highlights a year in which the federal agency set records for the number, types, and size of enforcement actions. For instance:

• The Division of Enforcement filed 113 enforcement actions, surpassing the prior annual record of 102 actions, set the previous year.
• The Division obtained total monetary relief of over $1.3 billion – the fourth highest sum in its history.
• CFTC also filed its largest-ever spoofing and manipulation case, ordering monetary relief in the amount of $920 million. This represented the largest monetary relief the CFTC has ever ordered in a single case, “reflecting the gravity and scope of the violations.” The case was also notable for the CFTC’s cutting-edge use of technology-assisted data analytics to enable more sophisticated market surveillance.
• Retail fraud enforcement also hit a record with 56 actions, including a record number of actions involving digital assets.
• This year also saw a continued increase in CFTC’s coordination with other federal agencies, with 16 actions brought in parallel with federal criminal authorities. Such coordination has been on the rise in recent years, with the number of parallel actions over the last three fiscal years nearly doubling the number brought over the prior seven fiscal years combined.
• CFTC’s coordination extended to state regulators as well. The CFTC filed one enforcement action jointly with 30 state regulators, the largest number of partners in a single case in the agency’s history.
• In addition to these regulatory actions, CFTC litigated over 140 cases pending against both corporate and individual defendants in various courts, covering the gamut of violations for manipulation, spoofing, fraud, misappropriation of confidential information, illegally offering new products, and others.

Beyond enforcement actions, the Enforcement Division also issued two key guidance documents for the regulated community. The Division’s Civil Monetary Penalty Guidance outlines the Divisions considerations in recommending civil monetary penalties – the first public guidance on this topic in nearly 30 years. The Division also issued the first-of-its-kind Guidance on Evaluating Compliance Programs in Connection with Enforcement Matters, which advises the regulated community on how the Division will consider a company’s compliance program in connection with an enforcement matter.

Looking ahead, the CFTC expects to continue prioritizing four key areas:

1. Preserving market integrity. Given the importance of market integrity and market participants’ confidence to the proper functioning of commodities and derivatives markets, the Division is particularly focused on detecting, investigating, and prosecuting misconduct with the potential to undermine that confidence and integrity.
2. Protecting customers. The Division will continue to leverage new technologies to support its ongoing commitment to protecting customers of the commodities and derivatives markets from fraud and other abuse.
3. Promoting individual accountability. The report emphasizes the Division’s view that individual accountability is integral to deterring violations, and that holding companies accountable for wrongdoing must be accompanied by holding flesh-and-blood individuals responsible for their roles in that misconduct.
4. Coordinating with other regulators and criminal authorities on parallel matters. The Division highlights the importance of coordination with other regulators at the state and federal level, but also with the international regulatory community, because “[b]ad actors do not conform their misconduct to the technical boundaries of different regulatory jurisdictions, nor do they pause as they cross international borders.”

Finally, the report emphasizes the commitment of CFTC and the Enforcement Division to transparency, which is seen as key to promoting clarity, one of four core agency values articulated in CFTC’s 2020–2024 Strategic Plan, along with commitment, forward thinking, and teamwork. CFTC’s view is that greater transparency about the Division’s procedures and decision-making criteria will serve “to change behavior in a positive way by deterring misconduct before it happens.”

The Enforcement Division’s increased activity in 2020 showcases both the agency’s determination to punish and deter violations of the Commodity Exchange Act and the increasing need for such enforcement. Healthy markets remain of central importance to a healthy economy. At the same time, some market participants are taking advantage of ever more sophisticated technologies to subvert market rules and reap illicit gains. CFTC and the Enforcement Division are rising to the challenge by stepping up enforcement and by using those same technologies to fight fire with fire. If 2020 was any indication, market participants and the public can expect more of the same from the CFTC Enforcement Division in 2021.

Prudent steps

Prudent commodities marketing and trading firms are being proactive in mitigating this regulatory risk by reviewing their compliance programs, paying particular attention to the training and trading surveillance components of their compliance program. Appropriate and regular regulatory compliance training is one of the simplest ways to mitigate regulatory compliance risk. Trading surveillance, on the other hand, may be more complicated, being based in algorithms and statistics, but it does not have to be. Even if only as simple as manually reviewing a sampling of transactions, trading surveillance is an important mechanism to mitigate regulatory compliance risk.

Additionally, commodity marketing and trading firms should ensure that their compliance programs both are fit-for-purpose and meet industry standards. A compliance program that is truly fit for purpose makes compliance with its requirements, policies, and procedures easier for the employees. Such a compliance program mitigates more regulatory risk than one that does not make clear to employees either (a) how to comply or (b) why they need to. Further, compliance programs that meet industry standards not only preemptively mitigate regulatory risk but can also mitigate regulatory penalties in enforcement situations.

Even if a commodities marketing and trading firm is quite confident that its compliance program is fit for purpose and meets industry standards, regularly auditing adherence with the compliance program is prudent. Regulatory risk increases if the commodities marketing and trading firm has a comprehensive compliance program with poor or inconsistent adherence. An audit can help to identify components of the compliance program that are not being followed and facilitate changes or adjustments to the compliance program to increase compliance.

DLA Piper advises commodities marketing and trading firms on the CFTC’s increased enforcement activity by helping them focus on their regulatory compliance policies.  Find out more by contacting any of the authors.