The first Enforcement Advisory on Self-Reporting, Cooperation, and Remediation of its kind has been released by the Commodities Futures Trading Commission (CFTC).

Unlike previous guidance, the Advisory lays out a rubric the CFTC’s Enforcement division will use to assess self-reporting and cooperation. An individual or entity’s cooperation and self-reporting behavior will be sorted into tiers of merit and compared to produce a final penalty mitigation, ranging from 0% to 55%.

As the Advisory states: “The [Enforcement] Division’s policy on these topics must be consistent with the Commission’s overall regulatory scheme, be transparent, and provide clarity to those who might seek a reduced penalty based on their self-reporting, cooperation, and remediation.”

Assessment

Previously, the CFTC, like other US regulatory agencies, provided little information about how it assessed self-reporting and cooperation, and how it calculated penalty mitigation. Critics frequently stated that the process’s opacity chilled incentives to come forward, and opened the door to criticisms of arbitrary decision-making.

The effectiveness of cohesive reporting incentives has been highlighted in the success of whistleblower programs, which have been credited with netting the CFTC, SEC and DOJ billions in penalties.

Announcing the move, Acting Chairm,an Caroline Pham said: “I have encouraged firms to self-report to proactively take ownership, ensure accountability, and prevent future violations. By making the CFTC’s expectations for self-reporting, cooperation, and remediation more clear – including a first-ever matrix for mitigation credit – this advisory creates meaningful incentives for firms to come forward and get cases resolved faster with reasonable penalties.”

She went on to explain that: “It will enable the CFTC to do more with less and free up enforcement resources to focus relentlessly on catching fraudsters and scammers, helping victims, and promoting market integrity. Today’s advisory gets back to basics by returning to decades of prior CFTC policy on self-reporting and is aligned with best practices for assessing penalties followed by the Department of Justice and other US financial regulators. 

The Advisory categorizes self-reporting and cooperation/remediation efforts into tiers of merit. The Mitigation Credit Matrix describes the presumptive percent that will be knocked off of a total penalty depending on the tier, from 0% to 55%, based on a comparative assessment of both categories.

Self-reporting tiers

• Tier 1: No self-report: The self-report was not timely, contained already-known or available sources, was irrelevant or not designed to notify the CFTC of an underlying violation.
• Tier 2: Satisfactory self-report: The report was sent to an appropriate division and notified the commission about a potential violation, but did not contain all material information known to the reporting party.
• Tier 3: Exemplary self-report: The same as tier 2, except it includes “all material information” related to the violation known at the time of the report, and includes additional information that assists the Enforcement division with conserving resources;

To qualify for self-reporting credit, the self-report must be voluntary, made to the Commission, timely, and complete. As a safe harbor provision, the Enforcement Division will also not recommend charges under sections 6(c)(2), 9(a)(2), and 9(a)(3) of the Commodity Exchange Act, or CFTC Rule 180.1, if an inaccurate disclosure was made in good faith and the inaccurate disclosure is promptly supplemented and corrected after discovery.

Cooperation and remediation tiers

• Tier 1: No cooperation: No assistance beyond legal obligations;
• Tier 2: Satisfactory cooperation: “Substantial assistance” including voluntary production of information, arranging for witness interviews, and basic presentations on legal and factual issues;
• Tier 3: Excellent cooperation: The same as tier 2, but with “consistent substantial assistance” including internal investigations, use of expert resources, and a “thorough analysis” of the violation, its root cause, and remediation plan.
• Tier 4: Exemplary cooperation: The same as tier 3, but with “significant” use of resources and completion of remediation, and the use of accountability measures.

Remediation will be evaluated concurrently with cooperation. As a “general matter,” the Enforcement Division will only recommend mitigation credit if it concludes that the violation and its cause has been remediated, or that there is a plan to do so.

Mitigation Credit Matrix:

Cooperation and self-report satisfaction will be assessed against one another to determine the recommended penalty mitigation, according to the following table:

Commissioner Johnson dissents

CFTC Commissioner Kristin N Johnson stated that she was unable to support the Advisory in its current form. While she expressed support for the CFTC’s stated goals of increasing transparency, clarity and efficiency, she also stated that caution needed to be exercised.

Without going into specifics, Johnson expressed concern that the Advisory was incautious in rescinding long-standing guidance, and indicated that changing parameters without due diligence could lead to “muddying the waters” of compliance expectations.