On May 8, 2019, the Commodity Futures Trading Commission’s (CFTC) Division of Enforcement (DOE) published its first Enforcement Manual (Manual) to the public. The Manual is non-binding on the CFTC and was released for the purpose of following through with its mission statement of fostering open, transparent, competitive, and financially sound markets as well as to further the convergence of its practice to that of the Securities and Exchange Commission (SEC), which published its first enforcement manual in 2008. This development comes on the heels of a Memorandum of Understanding ratified between the SEC and CFTC last year, as well as the CFTC-SEC Joint Advisory Committee that was established in 2010. While the Manual does not reveal new policies and is broad in scope, the CFTC has stated that it will be continuously updated as changes in enforcement policy are determined. The Manual also contains a few significant provisions of special note regarding self-reporting, whistleblowers, the “Wells Notice”, and enforcement priorities.
In keeping with prior guidance issued by the DOE in 2017, the Manual reinforces the CFTC’s initiative to encourage cooperation and self-reporting, through which the DOE will consider a registrant’s previous efforts to self-report or cooperate with DOE investigators in determining enforcement actions or penalties. Per the Manual, the DOE considers the following three broad policy issues in its assessment of cooperation and self-reporting:
- Value of the registrant’s cooperation to the investigation and related enforcement actions;
- Value of the registrant’s cooperation to the broader law enforcement interests; and
- The balance between the registrant’s level of responsibility and history of prior misconduct.
If the level of cooperation and self-reporting is deemed sufficient, the DOE may recommend reductions in penalties to the CFTC, and the relevant individual or entity may also be eligible for a non-prosecution or deferred prosecution agreement if the circumstances apply. While this information is useful, the Manual is inherently broad in nature and it remains unclear how the guidelines would be administered, which adds further complication should an individual or entity find themselves in this circumstance.
The Manual also contains a provision on whistleblowers that includes broad details on qualifying as a whistleblower, available monetary awards, and anti-retaliation and confidentiality measures. Outlined in Section 11 of the Manual, any person, other than a company or other entity, who provides information about a potential violation of the Commodity Exchange Act (CEA) can qualify as a whistleblower, and may also be eligible for monetary awards between 10% and 30% of the monetary sanctions imposed in the enforcement action that exceed $1,000,000. The Manual also identifies the different measures DOE staff take to maintain the confidentiality of whistleblowers, such as redactions of revealing information in investigation related documents, as well as the anti-retaliation protections internal whistleblowers have against employers, including the right to litigation for those retaliated against by employers.
With a model similar to that of the SEC process, the DOE’s Notice of Proposed Enforcement Action, or “Wells Notice,” provides the DOE with discretion to inform individuals or entities named in a proposed enforcement action of the allegations against them, and before any action is filed. In determining whether a “Wells Notice” is to be issued, the DOE considers relevant facts and circumstances, including the following, which are outlined in the Manual:
- If the investigation into the individual or entity is substantially complete;
- If immediate enforcement action is necessary;
- If the “Wells Notice” may put funds at risk that the enforcement action is intended to protect;
- If there is a parallel criminal investigation that may be adversely affected; and
- If a formal response (i.e., a “Wells Submission”) by the recipient would be useful in evaluating complicated factual, legal or policy issues.
Upon issuance of a “Wells Notice,” the recipient is given the ability to respond to the action and request a formal meeting, at the approval of the DOE investigators, to discuss the substance of the enforcement action, as well as any possible settlements. There is an apparent lack of additional details and specifics on the “Wells Notice,” however, most notably with specific examples or circumstances of what would merit a “Wells Notice” being issued.
The Manual also outlines types of prohibited conduct under the CEA. The following are some examples of prohibited conduct stated in the Manual:
- Use of a manipulative or deceptive device;
- Misappropriation of material, confidential, non-public information;
- Disruptive trading practices, including disregard of orderly execution during the closing period and spoofing;
- Trade-practice violations (trading ahead, prearranged trading, bucketing, trading at other than bonafide prices, wash sales, and position limits);
While many of the listed examples in the Manual are traditional areas of enforcement and currently known by registrants, such as trade practice violations, a close reading of those listed and any future changes to the Manual could provide added indication or clarity regarding the DOE’s future enforcement priorities. In so doing, since the CFTC indicated that the Manual is to be continuously updated, this can provide an added benefit for registrants now that the Manual has been released.
While the Manual now provides a singular location for the DOE’s enforcement policy and procedures, and in a readily available format for those individuals or entities less versed with the DOE, the Manual ultimately provides few specifics on policy and procedures and leaves broad discretion to the DOE in the application of its enforcement. Nonetheless, the Manual’s publishing represents a move in the right direction for increasing transparency and understanding between the CFTC and registrants, as well as offering a public base from which future DOE policy changes can be published.
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