Blog

Source: US Commodity Futures Trading Commission

Good morning and thank you to ISDA for inviting me to join today’s conference.  It is an honor to speak to all of you this morning.  Before I begin, I need to provide my standard disclaimer:  The views I express are my own and do not necessarily reflect the views of my fellow commissioners, of the Commodity Futures Trading Commission (“CFTC” or “Commission”), or of the United States Government.

As the fall weather begins to set in, the days become shorter and colder, and the leaves change colors, it is a time to reflect on how far we have come throughout the year and to prepare for where we must go as winter and the new year approach.  In that vein, I want to speak today about enforcement and a few ideas for improvement.

Expressing Dissent

Over the past few weeks, I have had several opportunities to speak with professionals from a variety of industries on numerous topics.  While I always value these discussions, I was surprised by how many times people asked me:  “Are you enjoying the job?”  Usually, I am quick to answer, “Of course I enjoy the job.”  The work we do at the CFTC is interesting, impactful, and important.  I am constantly learning, and there is never a dull day.

I started to wonder, though, if there was a reason people were frequently asking me this question.  Maybe it was my body language; maybe I was not smiling enough; or maybe I have spent too much time with my teenage daughters and have adopted their surly demeanor.  But then it occurred to me—maybe they read my recent dissenting statements.  I have issued quite a few dissenting statements in the past few weeks[1], and I guess you could say I sounded a little frustrated, maybe even disgruntled.

Well, I am here to tell you that despite my dissenting statements, I do enjoy my job, and I am incredibly grateful for the opportunity to serve as a commissioner at the CFTC—even on Friday afternoons when multiple enforcement matters appear in my inbox, and I realize that the shortest memo is a mere hundred plus pages long.

I read every page of every document upon which I am asked to vote.  As one of five Presidentially-nominated and Senate-confirmed commissioners, I believe that it is my responsibility to do so because my fellow commissioners and I are the ones ultimately accountable for the charges we bring, the cases we settle, and the results of the CFTC’s enforcement program—and for balancing enforcement with all the other critical daily functions performed by the agency.

As was wisely stated in the 51^st Federalist Paper, “If men were angels, no government would be necessary.”[2]  And we all know that men (and women) are not angels.  Thus, government—including its enforcement function—is necessary.  Vigorous enforcement is a vital part of carrying out the CFTC’s mission.

I would be remiss if I did not acknowledge the agency’s enforcement team and reaffirm my commitment to a robust enforcement program.  I am proud of the tireless work of the CFTC’s Division of Enforcement (“DOE”), whose experienced and conscientious attorneys, investigators, and other staff members are dedicated to identifying, prosecuting, and sanctioning those who violate the Commodity Exchange Act (“CEA”) and the CFTC’s rules.  But, like everything we do in life, we should look for opportunities to improve.

Chasing Trendlines

As most of you know, a large number of the CFTC’s enforcement actions are settled during the month—sometimes the week—before the end of the government’s fiscal year on September 30^th.

This September crunch is frustrating to all involved and potentially harmful to the agency’s agenda.  First, it diverts the agency’s attention from its other important responsibilities, as matters requiring Commissioners’ attention from other divisions are postponed and deferred.  Second, it incentivizes those hoping to settle with the CFTC to wait until the fiscal year-end, knowing the agency will be eager to get another point on the board before the clock runs out and that the resulting settlement will draw less public attention as just one of the myriad cases being announced at the same time.  Third, such a crunch diminishes the time for decision making and increases the risk of promulgating faulty interpretations of the CEA and CFTC regulations.  Wrongdoing occurs year-round.  Our enforcement docket should reflect that.

After the close of each fiscal year, the CFTC’s Division of Enforcement publishes an Annual Report that typically proclaims success based on “headline stats,” such as the number of cases filed and the amount of monetary sanctions imposed during the previous fiscal year.[3]

I believe it is time for the agency to stop prioritizing volume.  Rather than focus on making the current fiscal year statistics better than the previous year’s, the agency should concentrate on where improvements can be made in our regulatory oversight functions to prevent pervasive violations and should devote more resources to educating market participants and the general public on how to avoid becoming victims of fraudulent behavior.

Enforcement Should be a Last Resort

That said, I believe there is certainly a role for enforcement.  But enforcement should be the last resort to achieving compliance, not the first.  Yes, in cases of fraud, manipulation, and other willful violations of the law, enforcement is critical to punish wrongdoers and to deter misconduct by others.  But in other cases, oversight of the derivatives markets and market participants by the agency’s Division of Clearing and Risk (“DCR”), Division of Market Oversight (“DMO”), and Market Participants Division (“MPD”) can achieve compliance more effectively and efficiently than bringing a costly, time-consuming, resource-intensive, and backward-looking enforcement action.

Clear and Workable Rules as the Foundation

Where CFTC regulations are vague, the agency should not leverage these provisions to drive annual statistics.  Instead, we must communicate our expectations by writing clear, sensible, and workable rules, so that we can fairly require compliance with those obligations.

Enforcement is but one tool available to the agency.  Our ability to achieve compliance with the CEA and the CFTC’s rules will be enhanced if we consider the underlying reasons for non-compliance and contemplate the most effective means of addressing that non-compliance, in particular cases.  Where the underlying reason is an unclear expectation, the onus is on the CFTC to revise its regulations accordingly.

Appropriately Employing Settlement Authority

It is no secret that most CFTC enforcement actions settle without litigation.  While such settlements enable us to achieve our enforcement objectives while conserving our scarce resources to root out and prosecute other violations, vague settlements cause confusion and undermine our efforts to achieve compliance.

When settling, the CFTC issues an order that sets out the agency’s findings about what the settling party did and how it violated the law.  These orders are not binding precedents as a matter of law.  However, since they reflect a statement of the agency’s thinking, the public may understandably consider them as precedents—and the agency often cites them as persuasive authority in future cases, too.

But remember:  No court has decided on the legal theories as applied to the particular facts that the CFTC includes in its settlement orders.  The legal theories advanced in settlement orders should not push the bounds of the agency’s authority.  Such orders should avoid theories that are novel, that are arguably beyond the limits of the CEA and its implementing regulations, or that are likely to raise additional questions or issues.  Otherwise, the agency risks creating regulatory expectations that become difficult to follow.

Incentivizing Cooperation

To foster voluntary compliance with the law and to provide transparency into certain aspects of enforcement determinations regarding penalties, we must further unwind the layers around how we recognize and credit those who self-report, offer cooperation during the enforcement process, and undertake remediation.

First, a company is currently only eligible for a civil monetary penalty (“CMP”) credit for self-reporting if it makes its disclosure to DOE rather than to one of the CFTC’s oversight divisions (i.e., DCR, DMO, or MPD).[4]  This requirement is an unnecessary layer that unduly restricts self-reporting credit.  A self-report to an oversight division serves the agency’s interests by enabling that division to work with the company on compliance on a going-forward basis, while also referring the matter to DOE where appropriate to investigate whether an enforcement action is warranted for any violations that may have been committed.  To limit self-reporting credit to disclosures directly to DOE is to elevate form over substance.

Second, if a company self-reports, substantially cooperates, and appropriately remediates, a reduced CMP should not be the only potential outcome.  Where a company has identified the problem, disclosed it to CFTC staff, analyzed the situation, provided a report of its findings to CFTC staff, and engaged in steps to address the problem—it has essentially performed many of the CFTC’s functions.  And such cooperation and remediation often come at a significant expense, which may include hiring an independent compliance consultant or monitor to investigate the company’s practices and procedures, to recommend improvements, and to ensure that remediation is completed.

Of course, an enforcement action may be appropriate in these cases to assure that the company will complete its remediation and will report to DOE on the status of those remediation efforts.  But given that compliance objectives are being achieved often with fewer agency resources, substantial penalties may not be necessary.

The Way Forward

As I mentioned earlier, I am committed to strong enforcement at the CFTC, and I am proud of our Enforcement Division.  The agency’s enforcement professionals do an exemplary job in safeguarding the integrity of U.S. derivatives markets and those who use them.  However, there are opportunities for strategic reform.

My hope is that today begins a conversation about the path ahead for enforcement at the CFTC.

Thank you so much for your time today, and I wish you all a safe and fun Halloween.

I would like to thank ISDA once again for inviting me and would be happy to answer audience questions.

MIL OSI USA News –