While some U.S. regulatory agencies are pulling back on enforcement actions, the Commodity Futures Trading Commission (CFTC) is going the other direction, planning “more than 10” fraud and market-manipulations cases in the coming weeks aimed at the derivatives industry.
According to a story in The Wall Street Journal, the number of CFTC cases is on the rise as well, up from just eight cases through January of 2017. In the first month of this year, regulators filed 17 cases (and in the last full fiscal year of the Obama administration 14 cases were filed through January).
“The stepped-up enforcement comes after the CFTC recorded a big drop in fines and enforcement actions during the fiscal year that spanned the transition from the Obama administration to the Trump administration.
Enforcement has picked up since then. The agency has already filed 11 manipulation-related cases in the current fiscal year, which ends in September, just one shy of its annual record. The person declined to specify how many of the coming cases concern market manipulation as opposed to more conventional retail fraud.
A CFTC spokeswoman declined to comment on pending enforcement actions, but said the agency was “charging a high number of complex manipulation cases.”
What does the derivatives industry need to know about these CFTC actions?
A New Boss: First of all, it is worth knowing what is driving the CFTC’s thinking in these cases, and why the caseload is rising. Trump-appointed Chairman J. Christopher Giancarlo has committed the agency to a new focus on manipulation and retail fraud, telling industry representatives last year that his aim is to “‘reset’ the agency’s focus on its core missions of market oversight and enforcement, after years of “overly prescriptive regulation.”
A New Structure: The CFTC has also recently changed the way it deals with self-reporting, granting what the Journal calls “substantial benefits” to firms that step forward and reveal their own wrongdoing, offering significant reductions on fines. This is changing the relationship that many companies have with their regulators, assuming a pseudo SRO stature (Self-Regulatory Organization) in that their interests are directly aligned with the interests of regulators. Historically, the interests of the company and its employees most strongly impacted company decisions, and as long as those interests were aligned the company would often assume the legal costs associated with the defense of its employees. That is changing.
A New Market: Changes in the ways that markets function, and investors interact with them, are also driving an increase in CFTC activity. Cryptocurrencies in particular, especially given the recent run-up in Bitcoin prices, are attracting new attention from regulators, leading to more new cases.
A New Commission: And all of this is happening with only three commissioners currently on the CFTC, instead of the usual five! Any companies that thought nothing would happen without a full slate of commissioners, and with a bare-bones staff -- taking a ‘wait and see’ attitude -- have been proved wrong. Enforcement is happening!
SROs Doing More: As Self-Regulatory Organizations (SROs), the exchanges are being empowered by the CFTC to enforce their markets as well. For example, the CME family of exchanges have had over 50 enforcement actions since September 2017!
Shifting Relationships: Companies are now often more aligned with the regulators in terms of shared interests (e.g. ensuring a clean and functional market) than with their employees (who are now more likely to be the parties assuming guilt). In this environment, companies -- which answer to shareholders and their bottom line -- harboring or defending a bad actor is bad for business. Giancarlo gets this. His deputies get this. The exchanges get this, and they are using the oldest tool in the shed in a new way to reward, or at least condition, the market to not just assist in an investigation but to self-report. Self-reporting is one thing; assisting in an investigation is another, in that it is both time consuming and very expensive for the company.
And this is about more than just the CFTC.
Other federal regulators, such as the Federal Energy Regulatory Commission (FERC), are changing the way they deal with their industries. In fiscal year 2017, for example, FERC had 27 new investigations, and closed 16 others either with no action -- resulting in over $51 million in civil penalties and the disgorgement of over $42 million. But some of these settlements also included provisions requiring the companies to enhance their compliance programs and periodically report back to FERC regarding the results of those enhancements. They separately audited 11 companies (including the pipeline companies, utilities and gas companies that they regulate), forcing them to return over $13 million to customers and offering over 300 recommendations for corrective action.
One thing is for sure, regulatory enforcement isn’t slowing down anytime soon, and there are clear benefits for those companies that remain on top of their own issues and self-report when possible. Closely monitoring communications is a key part of any self-reporting program, and it’s something that Whistler can automate for users, adding a new layer of protection to firm leadership in today’s compliance environment.