Financial regulators have considerably slowed the pace of enforcement actions over the course of the year. Where the Commodity and Futures Commission (CFTC) and Securities and Exchange Commission (SEC) had once been in high gear, issuing consistent fines for compliance violations – particularly related to recordkeeping – the past several months have seen a clear reduction in appetite for enforcement action.
However, this is not the only shift regulators have made, with a recent run of reduced fines issued as part of the CFTC’s latest “enforcement sprint” initiative pointing to a regulatory environment that increasingly prioritizes – and rewards – proactive collaboration and cooperation.
(Enforcement) sprint finish
As part of its recent “enforcement sprint” initiative, the CFTC issued fines against 10 firms, with a combined total of $8.3 million in civil monetary penalties. Spearheaded by Acting Chair Caroline Pham, the enforcement initiative encourages firms to work with the regulator to quickly settle violations, incentivizing this with potential reductions in penalties.
The initiative, launched in March, specifically applies to enforcement matters “regarding compliance violations…that did not involve fraud, customer harm, or market abuse,” instead focusing on recordkeeping, reporting, communications supervision, and other compliance related breaches.
Firms were able to provide the CFTC’s Division of Enforcement their “remediation plans and reasonable settlement offers based on comparable cases over the last decade,” and could then work collaboratively with the regulator to settle these instances of noncompliance.
The penalties levied as part of the enforcement sprint included a $5 million fine for trade surveillance system supervision failures, a $1.5 million penalty for logging inaccurate trade reports, a $235,000 fine for data reporting violations, and several $500,000 penalties related to recordkeeping and off-channel communications violations. In some cases, failures went unnoticed by firms for a period of at least a decade.
The firms were all said to have completed or nearly completed remediation plans, and agreed that they would cease and desist from future violations. Most firms received a reduction to financial penalties because of what the regulator deemed “exemplary cooperation.”
Pham expressed her concern that previous approaches to “technical non-compliance issues” diverted resources from the CFTC’s mission to fight against fraud and other financial crime, and that her goal in proposing this initiative was to encourage firms to proactively reach out to the CFTC Division of Enforcement (DOE):
“The goal of this initiative was to provide firms an opportunity to work with DOE to fairly and efficiently resolve compliance-related investigations.”
Sprint, don’t walk, to collaborate with the regulator
This isn’t the first we’ve seen from the CFTC on the benefits of self-reporting and cooperation – earlier in the year, the regulator released an enforcement advisory on “self-reporting, cooperation, and remediation,” which outlined substantial incentives for firms that voluntarily self-report potential misconduct.
Also proposed by Acting Chairman Pham, this approach presented “meaningful incentives for firms to come forward and get cases resolved faster with reasonable penalties.” If firms meet the regulator’s benchmarks for self-reporting and cooperation measures, they can receive up to 55% mitigation credit toward penalties – a tantalizing sum.
We’ve seen other regulators urge firms to step up self-reporting efforts to reap maximum benefits in the form of cooperation credit and reduced fines. The Department of Justice (DOJ) has previously announced amends to its Corporate Enforcement and Voluntary Self-Disclosure Policy (CEP) to incentivize firms to self-report.
The DOJ’s objective was to offer firms a course to declination, meaning that the regulator will not prosecute for misconduct.
These changes come during a time when regulators across jurisdictions are refocusing on both adopting more business-friendly approaches and concentrating resources on fighting financial crime. In May, newly appointed Securities and Exchange Commission (SEC) Chair Paul Atkins stated that the regulator would return to its “core mission,” with one of its main objectives being to strip back prescriptive rulemaking and free up enforcement resources to focus on financial crime.
Self-report, settle, succeed
With a marked reduction in fines for collaboration with the CFTC, these enforcement outcomes are a clear sign that the regulator is sincere in demonstrating its support for voluntary self-reporting and cooperation with investigations.
While the CFTC’s shift of focus towards financial crime and fraud may mean we see the pace of compliance-based enforcements continue to drop, the regulator had made one thing abundantly clear – firms that proactively self-refer on compliance issues will benefit from having done so. And firms that ensure they are leveraging the right solutions to identify potential issues, then have access to the data and evidence they need to proactively self-report, will be best placed to reap the words. While enforcement might be a sprint, compliance is a marathon.
Whether or not regulators are shifting gears in handling compliance-related enforcements, firms that capture and monitor communications to identify misconduct before the regulator will come out ahead.
