This client alert was republished by New York University School of Law’s Compliance & Enforcement blog on May 31.
Intending to bring greater transparency to the operation of its enforcement program, the Commodity Futures Trading Commission’s (CFTC or Commission) Division of Enforcement (the Division) recently, for the first time, made public its Enforcement Manual (Manual).1 The Manual provides market participants, industry professionals and the enforcement bar with insights into the Division’s detections, investigations, and pursuit of violations (and potential violations) of the Commodity Exchange Act (CEA) and the regulations thereunder. According to CFTC Director of Enforcement James McDonald, this move is intended to “promote fairness, increase predictability, and enhance respect for the rule of law.”
The public release of the Manual brings CFTC practice in line with those of other enforcement agencies, including the Department of Justice and the Securities and Exchange Commission (SEC).2 The Manual provides a roadmap of the life cycle of a CFTC enforcement action, from the opening of an investigation through the Wells process to resolution. Although the Manual provides broad insight into the general policies and procedures that guide the work of the Division’s Staff, it does not provide concrete guidance on how those general policies may be applied in particular cases.
Below, we highlight several of the Manual’s more significant provisions.
Initiation of an Investigation. Unsurprisingly, the Manual notes that when faced with a tip or lead, the Staff conducts an initial review of its viability. If the Staff determines to move past the preliminary inquiry phase, the Staff begins an in-depth investigation of the relevant facts and circumstances. After completing its investigation, the Staff then decides whether to recommend an enforcement action.
Self-Reporting, Cooperation and Remediation Credit. The Manual reinforces the Division’s ongoing initiative (reflected in its 2017 guidance) to incentivize cooperation and self-reporting.3 The Manual notes that in determining whether to bring an enforcement action and what charges and sanctions to impose, the Division will consider a party’s efforts to self-report misconduct and cooperate with the investigation and remediate the alleged violations. Consistent with the 2017 guidance, the Manual further notes that in making these determinations, the Division will consider (1) the value of the cooperation in the Division’s investigation and related enforcement actions; (2) the value of the cooperation to the CFTC’s broader law enforcement interests; and (3) balancing the level of culpability and history of prior misconduct with the acceptance of responsibility for and mitigation and remediation of any misconduct.
Individuals or entities the Division deems to be cooperative may be eligible to enter into a non-prosecution agreement (NPA) or a deferred prosecution agreement (DPA) with the CFTC. The Manual sets forth the conditions necessary for each of these agreements, e.g., the individual or entity must enter into a long-term tolling agreement in the case of a DPA, and the potential implications for violation of such an agreement are listed.4
This additional detail is useful, but it remains uncertain how these updated guidelines will be administered in practice. And, while the Commission has resolved a number of recent enforcement actions through NPAs or DPAs, the Division retains broad discretion in determining when and how to award cooperation credit. As a result, the decision to cooperate will remain complicated.
Cooperative Enforcement. The Manual notes that “[w]orking cooperatively and in parallel with criminal authorities and other federal, state, or international regulators is a cornerstone” of the Division’s enforcement program. The Manual highlights the Division’s practice of referring matters to other government agencies such as the Department of Justice, including matters for criminal prosecution (e.g., matters involving willful violations of the CEA, perjury and obstruction of justice).
While the Acting Chair of the Commission recently acknowledged the value in avoiding duplicative enforcement actions and deferring, when appropriate, to “the civil and criminal capabilities of other federal and state regulators and enforcement agencies,” the Manual does not reflect that view.5 This stands in contrast to the Justice Manual, which was amended in May 2018 to memorialize the Department of Justice’s interest in reducing duplicative enforcement.6
Privilege Assertions. The Manual provides that Division Staff should not ask an individual or entity to waive the attorney-client privilege or work-product protection without prior approval of the Director or the supervising Deputy Director. Where a party wishes voluntarily to disclose certain privileged or protected materials to the Commission yet avoid waiver as to other parties or of other materials (not so disclosed) concerning the same subject matter, the Division may enter into a non-waiver agreement barring the Division from arguing that such disclosure constitutes a waiver of any privilege protections.
Such agreements, of course, only bind the Division. As the Manual notes, “some courts have held that production of documents to agencies like the CFTC, even pursuant to an agreement that purports not to waive applicable privileges or protections, nevertheless does constitute a waiver.”7 Accordingly, a party and its counsel must weigh the potential benefit of entering the non-waiver agreement with the CFTC against the significant risk that a court would nonetheless later find that a waiver had occurred.
Wells Process and White Papers. The Division has discretion to inform parties that may be named in a proposed enforcement action of the nature and substance of the allegations against them before such action is filed (i.e., the “Wells Notice”).8 The Manual outlines the factors the Division considers in determining whether to issue a Wells Notice, which must be approved by the Division Director, including:
i. Whether the Division’s investigation of the intended recipient of the Wells Notice is substantially complete;
ii. Whether immediate enforcement action is necessary;
iii. Whether provision of the Wells Notice would alert the intended recipient (and perhaps others) to a possible asset freeze or otherwise put at risk funds that the proposed enforcement action is intended to protect;
iv. Whether issuance of the Wells Notice may jeopardize any ongoing parallel criminal investigations; and
v. Whether a response (i.e., a Wells Submission) from the intended recipient would be useful to the CFTC and the Division in evaluating complicated factual, legal or policy issues.
Further, the Manual details that a Wells Notice recipient may choose to submit a Wells Submission, i.e., a written statement, setting forth its views on factual, legal or policy matters relevant to the investigation or proposed enforcement action. Similarly, persons who become involved in an investigation may also submit of their own accord (i.e., absent a Wells Notice) a written statement as to such matters, these submissions are referred to as White Papers.9
Closing an Investigation. The Manual lays out five factors that the Division should consider in determining whether to close an investigation without action, including: (1) the seriousness and scope of the conduct and potential violations; (2) the sufficiency and strength of the evidence; (3) the extent of potential harm if an action is not commenced; (4) the applicable statute of limitations; and (5) whether there are prior enforcement actions by the CFTC or other regulatory authorities or criminal prosecutions of the individual or entity.
In its discretion, the Division may send a Closing Letter notifying an individual or an entity as soon as practicable that it has determined to close an investigation as it relates to them and, thus, not to recommend an enforcement action against them to the CFTC. The Manual makes clear that although an individual or entity may receive a Closing Letter, the Division retains the discretion to reopen the investigation at any time in the future.
Enforcement Priorities. A close reading of the Manual, and any future changes thereto, may provide insights into the Division’s enforcement priorities. For example, the Manual’s “Summary of Types of Prohibited Conduct Subject to Investigation” includes, in addition to the traditional areas of enforcement interest of fraud, price manipulation, trade practice violations and illegal off-exchange activity, “use of a manipulative or deceptive device,” “misappropriation of material, confidential, non-public information,” and “disruptive trading practices.” Section 7.1.3 of the Manual also addresses CEA violations involving foreign corrupt practices.
Takeaways
As discussed above, the Manual is a useful tool for those seeking to better understand the Division’s enforcement practices as well as the general policies and procedures that guide the work of the Division’s Staff. The Manual, however, leaves broad discretion to the Staff and provides little concrete guidance on how those general factors will be applied in particular cases. In addition, the Manual provides no additional guidance regarding some of the most complicated issues that arise in CFTC enforcement proceedings, including how to evaluate particular types of claims; how to handle particularly sensitive information, such as source code; and how to calculate settlement demands. Market participants and enforcement counsel will appreciate the additional transparency and clarity provided in the Manual but will still face tough decisions in determining how to navigate the enforcement process.
