Thank you for that kind introduction.  It is an honor to deliver today’s keynote address, particularly to so many sophisticated members of the derivatives bar.  I always appreciate this audience—I can drop “contango” and “backwardation” into speeches without any explanation or anyone looking at me funny.  But I promise not to focus on those concepts today. 

Instead, I want to address a question that members of this bar frequently tell me is a perennial problem.  The question is when a client in any industry subject to our jurisdiction discovers misconduct:  should the client self-report?  What are the benefits of doing so?  Do they outweigh the risks?  Is there any principled way to measure that?  And relatively recently, how does it dovetail with the Division of Enforcement’s Advisory last fall[1] and our Whistleblower Program?

These are hard questions without easy answers.  But I will tell you, there is far more guidance out there on self-reporting and its benefits than the defense bar appreciates, and I’ll walk through that guidance today. 

Before I get into that guidance, I should note that my remarks today are my own and not necessarily those of the Commission or the Chairman or any Commissioners.

I should also note that as our Chairman emphasized when he was a Commissioner, self-reporting is no replacement for the CFTC’s broader efforts to police our markets.[2]  The vast majority of our leads are generated from sources other than self-reports, including Whistleblowers, our extensive proactive market surveillance, and other methods.  Self-reporting will never replace our responsibility to enforce the law.  But it can supercharge and enable it.  

For that reason, I’ll start by explaining why the Commission wants and rewards self-reporting.  The first and most obvious reason is it furthers our mission by providing us information about misconduct that we may have not discovered and may never discover absent a self-report.  Not only does self-reporting pull back the curtain on the specific misconduct at issue, but the incentives to self-report (such as the risk of disclosure by whistleblowers, which I’ll touch on below) can disincentivize misconduct in the first place.  Self-reporting can also generate significant efficiencies for the Commission, uncovering and helping to resolve misconduct that may have otherwise required a more significant devotion of resources to uncover and resolve.  These are significant benefits for the government.

Thus, the CFTC and really all enforcement authorities want to encourage self-reporting.  The question is how.  There is no one formula at the CFTC for awarding self-reporting credit.  Neither the Commission nor the Division has a policy along the lines of “if you voluntarily self-report, you’ll get a 50% discount on the applicable Civil Monetary Penalty (“CMP”).” 

So, what’s the calculus?  Is there a basis for informed decisions here?

I believe that there is, and counsel who have negotiated recent self-reporting resolutions have discovered this.

1.    Division of Enforcement Guidance

Let’s start with the guidance that the Division of Enforcement published in September 2017, the “Updated Advisory on Self-Reporting and Cooperation,” which provides important substantive direction and is incorporated into later memoranda and our Enforcement Manual.[3]  To qualify for self-reporting credit:

Voluntary disclosure must be made prior to an imminent threat of exposure of the misconduct.  In other words, don’t wait until you get a subpoena from another agency or a request for information from an exchange.  Don’t wait until you learn that a whistleblower disclosure may be imminent.  Don’t wait until the eve of a required disclosure in a CCO report.  Remember, what we’re trying to reward here is the decision to come forward with misconduct that we wouldn’t likely otherwise learn of. 

In addition, to qualify for self-reporting credit, the disclosure must be made to the Division within a reasonably prompt time after the company or individual becomes aware of the misconduct.

And, in addition, the disclosure must include all relevant facts known to the company or individual at the time of the disclosure, including all relevant facts about the individuals involved in the misconduct.

On these last two points, one question we sometimes receive is whether a report to one of our operating divisions—such as MPD, DMO, or DCR—qualifies as a self-report.  Our public Division of Enforcement policies require a report to the Division of Enforcement.  So, even if the potential violation falls within the remit of another operating division, I recommend concurrently reporting to the Division of Enforcement in addition to reporting to the relevant operating divisions. 

In addition, as noted in our published advisories, we recognize that, at the time of the first voluntary disclosure, the company or individual may not yet know all of the relevant facts, or the full extent of the misconduct.[4]  That’s ok.  To encourage voluntary disclosure at the earliest possible time, our policy is to still recommend full self-reporting credit where the company or individual made best efforts to ascertain relevant facts at the time of disclosure, fully disclosed the facts known at the time, continued to investigate, and disclosed additional relevant facts as they came to light.  We appreciate when attorneys come to us early, preview the issue, and then circle back after they have gathered more facts.

I should caveat that earning self-reporting credit—while achievable, as I’ll detail in a moment—isn’t easy.  Not only must an entity self-report, but in addition, to obtain full credit, the company or individual will also need to fully cooperate and remediate as well.  My focus today is on self-reporting, but those are independently important components, and we’ve published extensive guidance addressing those as well.  Self-reporting, cooperation, and remediation implicate the importance of trust in these negotiations, which is a two-way street—the regulator’s reliance on the entity to be truthful and fully cooperative, and the entity’s reliance on the regulator to account for the self-report in good faith.[5] 

Ultimately, under our guidance, we will reward self-reporting, substantial cooperation, and remediation with a substantially reduced penalty.  And as I’ll discuss now, that is what we’ve done in many cases.

2.    CFTC Orders

The guidance alone doesn’t answer the question of what the specific benefits and risks might be to self-reporting in a particular case.  For that, the CFTC has published materials that can provide practitioners additional helpful guidance:  the CFTC’s own orders.

Specifically, the CFTC has a body of orders, some of which award self-reporting credit, and some of which address analogous facts but which did not award such credit.  Since 2018, the CFTC has issued at least 15 orders recognizing a Respondent’s self-reporting, cooperation, and remediation, and imposing a substantially reduced penalty as a result.  Those resolutions addressed a variety of misconduct, including spoofing and swap dealer reporting and compliance.  In all of these areas, the CFTC has issued numerous additional resolutions that did not award self-reporting credit—offering practitioners a basis to compare outcomes. 

I’d like to talk through a few examples now.

The first example is our spoofing resolutions.  To take just a few of them, in our 2019 spoofing resolution with Mitsubishi involving hundreds of spoofing events by a Mitsubishi trader, “once aware of [the trader’s] misconduct, Mitsubishi promptly suspended [the trader] and reported the conduct to the Division.  Mitsubishi provided this self-report prior to the completion of its internal review and data analysis.”  As a result of this and other factors, the Commission imposed a significantly reduced CMP of $400,000.[6]  Similarly, in Tanius Technology, a 2022 spoofing resolution, a proprietary trading firm was held liable for over 1,000 instances of spoofing by a trader it employed.  The Commission imposed a $600,000 CMP on Tanius, which reflected a substantial reduction for self-reporting, substantial cooperation, and appropriate remediation.[7] 

Contrast these with Victory Asset, where spoofing occurred “on an almost daily basis” during the 14-month relevant period, and where the Commission imposed a $1.8 million CMP with no discounts for self-reporting, cooperation, or remediation.[8]  And similarly contrast Mitsubishi and Tanius with Heraeus Metals, where spoofing occurred hundreds of times, and where the Commission imposed a higher $900,000 CMP with no discounts for self-reporting, cooperation, or remediation.[9]  Of particular note, compared to Heraeus Metals, the trader in Tanius spoofed far more, but Tanius paid far less, thanks to self-reporting.

A second example derives from our swap dealer reporting and recordkeeping cases.  In September 2021, we entered into resolutions with provisionally registered swap dealers Mizuho Capital and Société Générale for similar unlawful conduct.[10]  Mizuho Capital failed to comply with rules regarding reconciling swap portfolios with its counterparties, providing disclosures to counterparties concerning daily mid-market marks, and swap data reporting, and generally failed to perform its supervisory obligations.  Similarly, Soc Gen failed to comply with mid-market mark disclosure and swap data reporting requirements and generally failed to supervise these processes diligently.  Both self-reported, fully cooperated, and remediated.  As a result, the Commission imposed a $1.5 million CMP on each.  Several months later, in March 2022, the Commission imposed a $3.25 million CMP on ED&F Man Capital Markets for similar swap data reporting, conflict of interest disclosure, mid-market marks disclosure, and related supervision failures.  ED&F Man did not receive a discount for self-reporting.[11]

While it may not be possible to formulaically say with precision exactly how much of a discount the Commission will award for self-reporting, these examples make clear that the CMP reductions can be significant.  In addition, as our advisory notes, if a company or individual self-reports, fully cooperates, and remediates, the Division may recommend a declination.[12]  Now, declinations are also hard to obtain – as they should be – and are reserved for extraordinary circumstances.  But we have granted them.  More typically, we receive self-reports and do not issue a formal declination, but for the reasons noted in our advisory, we decide not to pursue an investigation based on the facts we currently know.

3.    CFTC’s Whistleblower Program

Self-reporting credit, of course, is the carrot.  But there is an additional factor that counsels in favor of self-reporting – our burgeoning and successful Whistleblower Program.  Whistleblower programs are growing across the federal government – for good reason.  They lead to credible and actionable tips from corporate insiders, speeding up our investigations and resolutions. 

The CFTC pays monetary awards to eligible whistleblowers who voluntarily provide the CFTC with original information about violations of the Commodity Exchange Act (CEA) that leads the CFTC to bring a successful enforcement action resulting in monetary sanctions exceeding $1,000,000.  Since issuing its first award in 2014, the CFTC has awarded approximately $365 million to whistleblowers. Enforcement actions associated with those awards have resulted in monetary relief totaling more than $3 billion.  About 30 to 40% of our actions involve Whistleblowers, and in 2023, we paid approximately $16 million to whistleblowers.  So the proof is in the pudding with respect to our Whistleblower program – we actively seek out whistleblowers to report your misconduct, and we heavily incentivize them to do so promising potentially massive payouts.  So, there is a significant incentive to get out ahead of it. 

A recent, groundbreaking Whistleblower award proves the point.  Just last month, we awarded approximately $1.25 million to a whistleblower who served in an entity’s compliance or internal audit function.[13]  There are stricter rules regarding whistleblower awards to such persons—compliance and internal audit personnel need to report the misconduct internally first, and then wait at least 120 days.  That occurred here, and it should really put firms on notice that whistleblowers from up and down the chain, and in key functions, are coming forward.

I should note, when a whistleblower comes to us, it’s not just self-reporting credit at stake.  It’s also at least a part of—maybe a significant component of—cooperation credit.   Our advisories make clear that one significant factor that can affect the degree of cooperation credit is whether the company’s cooperation resulted in material assistance to the Commission’s investigation and enforcement action and the success thereof.[14]  If the whistleblower has already provided us with some, most, or all of the relevant information we’d need to bring an enforcement action, the opportunity for the company to be a real value add may be limited, depending on the case.

All of this is to say, there are ample reasons to self-report.

I’d conclude by noting that this is true—self-reporting can really make a difference—even after the enforcement advisory I announced last fall, where I noted that in certain matters and particularly where we have identified recidivism, our penalties should be higher to achieve sufficient deterrence.  Even in these cases, there is still an opportunity for significant self-reporting credit. 

I’ve been on the other side of this issue and counseled clients regarding whether to self-report.  It’s one of the most significant and consequential decisions a company needs to make.  There is no mathematical formula; but our guidance and resolutions, in my view, make clear that self-reporting credit is real and the benefits to you are significant.

Thank you.