Last week, Commodity Futures Trading Commission (CFTC) Commissioner Christy Goldsmith Romero proposed that the CFTC increase its transparency in public documents about enforcement decisions in specific cases, “rather than rely on public documents with limited information supplemented by individual Commissioner statements.”

She said she is concerned that transparency is often limited in public documents on how self-reporting, cooperation and remediation was weighed, “which cuts against the government providing incentives.”

And she added: “The government also has an interest in conserving investigative and litigation resources while bringing accountability, and a company’s full cooperation assists in that interest.”

Goldsmith Romero explained how one Commissioner evaluates cases and cooperation credit, which she said should be read as a supplement to the CFTC Division of Enforcement’s Advisory on Self-Reporting, Cooperation and Remediation, issued in February, noting that the advisory is not a binding document, but is a guide.

She said the best way to provide incentives to cooperate is for the CFTC as an agency to increase transparency into how the CFTC evaluated these factors: whether the defendant is a recidivist or repeat defendant, the nature of the charges, who is charged, the nature of each remedy and undertaking, and the language used by the government in public documents. This would, she argued, truly provide registered firms true incentives to self-report, cooperate and remediate their compliance programs.

Factor one: Recidivists

Goldsmith Romero noted the while the notion of recidivism is briefly mentioned in the February Advisory, it does not address whether or how a recidivist defendant would be treated.

She said she would question it if the Enforcement Division recommended giving significant credit off a penalty to a recidivist, even if they promptly self-reported the second or third violation, had the highest level of cooperation, and fully remediated. “That defendant should have fixed the problem after the first time, and I would question their credibility on remediation,” Goldsmith Romero said.

She also pointed out that a second or third violation rarely has the same specific facts and circumstances. And limiting recidivism to the same specific violation leaves out similar activity that may have been raised by the CFTC, the SEC, Justice Department, or other federal agency, or an exchange, she notes.

Factor two: Harm posed

Goldsmith Romero said significant harm or risk of harm to individual victims should result in a strong resolution. “This is especially true for harm to retail customers or vulnerable victims. The rise in retail customers in CFTC-regulated markets may also mean that past precedent before the rise in retail may not be comparable,” she said. A strong resolution is also appropriate for significant harm to end users, and she cites farmers and agricultural producers as examples.

“Failure to put resources into systems and staff to ensure compliance is a choice, even if the level of scienter for a specific violation does not rise to the level of intentional conduct.”

Christy Goldsmith Romero, CFTC Commissioner

Along with the risk to individuals, she observed that the CFTC has a strong public interest in bringing accountability and preventing significant harm or risk of harm to market integrity or financial stability, and, again this is because it could harm retail customers. “Harm posed to markets or financial stability can ultimately impact individuals, as seen in the 2008 financial crisis or in artificially inflated prices due to market manipulation,” she said.

There may be a need to send a pronounced message about particular conduct or practices, she said.

Factor three: Scienter

Scienter will play a substantial role in determining self-reporting and cooperation credit, Goldsmith Romero said. “The higher the scienter, the stronger the need for accountability and deterrence in all the potential outcomes (charging decisions, language used in charging documents, penalties, other remedies and undertakings, etc), which may limit cooperation credit.”

She said she strongly disagreed with the statement in the February Advisory that: “In extraordinary circumstances – for example, where a person is the first to self-report pervasive fraud, manipulation, or abuse involving multiple parties, and also provides Exemplary Cooperation – the Division may recommend a declination.”

She said such a statement is inconsistent with historical federal civil law enforcement where the first one in the door is often charged, albeit sometimes with a lesser charge or other outcome.  

And she would find it hard to assign significant self-reporting and cooperation credit in cases with a high level of scienter (guilty knowledge), particularly where there is significant harm. 

“Otherwise, a defendant could intentionally violate the law, benefit for some time and cause (or pose) significant harm, but then seek to limit culpability and accountability by promptly self-reporting, cooperating, and remediating,” she said. 

She said she would also find it challenging to assign significant self-reporting and cooperation credit in cases where the defendant engaged in obstruction, lying or concealment in an investigation or examination by the CFTC, a self-regulatory organization, exchange or other federal agency, on the same conduct, but later self-reported and cooperated.

Scienter is not limited to intentional or willful conduct, she pointed out, as it can refer to a failure to do something to prevent a harm. “Failure to put resources into systems and staff to ensure compliance is a choice even if the level of scienter for a specific violation does not rise to the level of intentional conduct,” she said.

Factor four: Nature of the charges

An important part of the evaluation of a case is whether the Enforcement Division could have recommended more charges, but pulled back, Goldsmith Romero said.

It’s important for the agency to spell out which charges were taken off the table, thanks to a defendant’s self-reporting, cooperation, and remediation. “Defendants should recognize the government’s decision to forego charges that it could have pursued as one of the most powerful incentives to self-report and cooperate, short of the government not bringing charges,” she said.

Factor five: Acceptance of responsibility

The level of a defendant’s acceptance of responsibility is an important factor to consider, Goldsmith Romero notes, and this includes defendant admissions in appropriate cases.

She said practitioners in the CFTC space are aware of her statement on the public interest in increased accountability, transparency, and deterrence by the CFTC requiring defendants to admit wrongdoing in appropriate cases. And she reminded us that she created the Heightened Enforcement Accountability and Transparency test (HEAT test) in September 2022; a document that has become one that defendants analyze and refer to in their materials submitted to the Enforcement Division. 

“Since I announced the HEAT test, the Commission has required defendants to admit their wrongdoing in 57 cases,” she said.

Factor six: Accountability and deterrence

In determining the penalty necessary to achieve accountability and deterrence, past precedent is helpful, she said, but only if it’s truly applicable. “Too often it is approached as a formulaic driver of the appropriate penalty.”

It should not be a comparison of the number of violations and the number of years in each past case and a comparison of those prior cases with the case before the Commission. “Lost in that approach is the reasoning behind the penalty – accountability and deterrence – based on the facts and circumstances of the case before the Commission,” Goldsmith Romero said.

“I would also prefer to see a discussion about the seriousness of upholding the specific law violated … in some cases the CFTC may wish to send a pronounced deterrent message.”

CFTC Commissioner Goldsmith Romero

She said she would prefer to see a discussion and analysis on accountability in a section on the gravity of the specific violation by this defendant versus the gravity of other cases, because the same law can be violated in different ways that carry different levels of gravity. “I would also prefer to see a discussion and analysis about the seriousness of upholding the specific law violated … in some cases the CFTC may wish to send a pronounced deterrent message.”

She said this could be the case when the CFTC starts seeing a pattern of violations or finds an egregious violation.

In some cases, the first enforcement cases soon after the implementation of a new rule can result in lower penalties, because the CFTC considered recent implementation of the rule as a mitigating factor, even if not publicly stated. But that proves that early cases are less comparable. 

The agency didn’t ratchet up the penalty over time; rather, in the beginning, the CFTC ratcheted down the penalty, because the mitigating factor was later removed as time passed.   

Factor seven: Other remedies

The Enforcement Division may recognize self-reporting and cooperation by foregoing certain remedies or undertakings, she noted. These non-monetary penalties include statutory disqualifications, bans on future trading or other activity, a company holding individuals accountable, and other outcomes. 

The Enforcement Division has not recommended undertakings when the defendant has either substantially remediated or offered a remediation plan – nor required a monitor – when the Division trusts the defendant to follow through with that plan. “These are examples of nonmonetary cooperation credit that the CFTC should publicly recognize to increase transparency and incentives,” Goldsmith Romero said.