Statement of Commissioner Caroline D. Pham on Administrative Proceedings
March 15, 2024
The appropriate use of agency administrative proceedings has generated much debate. I have previously shared my views on the Commission’s use of administrative proceedings before a hearing officer in the absence of an Administrative Law Judge (ALJ) and in lieu of filing an action in federal court.[1] I now turn to other uses of the Commission’s agency adjudication authority. The federal courts serve as an essential part of the checks-and-balances inherent in the separation of powers embodied in the United States Constitution, and therefore the use of administrative proceedings that bypasses the courts merits scrutiny.[2]
I.
As I have previously noted, the federal courts impose discipline on the tendency for administrative agencies to exercise power for self-aggrandizement.[3] Among other things, federal courts identify violations or deficiencies by administrative agencies in the application or interpretation of the law, sufficiency of factual evidence to support the alleged charges, lack of fair notice, and abuse of discretion or process.[4]
However, administrative proceedings, where the agency is the prosecutor, judge, and jury, lack the checks-and-balances imposed by separation of powers between the executive and judicial branches of government to ensure a fair hearing and due process. I have noted the simple fact that the Commission has nearly boundless discretion in exercising its prosecutorial authority in bringing enforcement actions, and is rarely challenged in imposing administrative sanctions and penalties.[5] It thus falls upon the Commission to uphold the highest standards of integrity, diligence, and excellence in our administrative actions to maintain the public’s trust in the CFTC’s ability to oversee our markets with fairness and in service to justice.[6] It is paramount that the Commission is an objective finder of fact and neutral arbiter of law that respects the Constitution and Constitutional rights.[7] I say again that there must be no bias in the administration of justice and due process.[8]
II.
Recent Supreme Court jurisprudence has stated that “whether any form of administrative adjudication is constitutionally permissible likely turns on the nature of the right in question. If private rights are at stake, the Constitution likely requires plenary Article III adjudication,”[9] and, “[t]o the extent that administrative agencies could, consistent with the Constitution, function as courts, they might only be able to do so with respect to claims involving public or quasi-private rights” (also referred to as governmental privileges or government benefits and entitlements).[10] Critically, “[p]rivate rights encompass the three ‘absolute’ rights, life, liberty, and property,”[11] and serious issues have been raised regarding the authority of administrative agencies to routinely deprive persons of property through adjudication in administrative proceedings.[12]
III.
With respect to public rights bestowed by the government, some examples include registration and licensing to conduct certain activities pursuant to regulatory frameworks. The Commodity Exchange Act establishes various categories of market participants that must be registered in order to engage in activity in the derivatives markets. These CFTC registrants must comply with extensive requirements, including character and fitness standards. Accordingly, one of the important functions that is foundational to the mission of the CFTC to promote market integrity and protect against fraud, abuse, and manipulation in our markets, is the Commission’s authority to oversee such a registration framework, and to revoke the registration of persons convicted of certain felony charges, including for financial crimes involving fraud, through an administrative proceeding.[13]
Because CFTC registration to conduct business in our markets is a governmental privilege, I believe administrative proceedings to revoke registration are appropriate. I commend CFTC staff and the Division of Enforcement for their vigilance in protecting our markets from misconduct.
[1] Dissenting Statement of Commissioner Caroline D. Pham Regarding the Filing of Administrative Complaints for Enforcement Actions, “Shotgun Hearings and Quickie Defaults,” U.S. Commodity Futures Trading Commission (Sept. 29, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement092923.
[2] Id. Cf. Statement of Commissioner Caroline D. Pham on Effective Self-Regulation and Notice of Proposed Rulemaking to Amend Part 40 Regulations, U.S. Commodity Futures Trading Commission (Jul. 26, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072623b.
[3] E.g., Pham, supra note 1.
[4] E.g., CFTC v. Archegos Cap. Mgmt. LP, No. 22-CV-3401 (JPO), 2023 WL 6123102 at 3, 4, 6 (S.D.N.Y. Sept. 19, 2023) (dismissing CFTC’s complaint with prejudice and finding that the ETF Swaps and Custom Basket Swaps are security-based swaps not under the CFTC’s jurisdiction because the CFTC’s theory regarding the ETF Swaps “does not comport with the statutory definition,” CFTC failed to allege that the ETF Swaps are mixed swaps in its Amended Complaint, and “CFTC conflates discretionary authority and unilateral authority” regarding the Custom Basket Swaps) and Concurring Statement of Commissioner Caroline D. Pham Regarding Amended Complaint, U.S. Commodity Futures Trading Commission (Oct. 21, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement102122 (explaining that ETF swaps are security-based swaps under the law); Clarke v. CFTC, 74 F.4th 627, 641-43 (5th Cir. 2023) (finding that the CFTC’s withdrawal of a no-action letter was the “epitome of arbitrary and capricious action,” the CFTC engaged in “obvious post hoc rationalization,” and the CFTC violated the Fifth Circuit’s previous injunction); CFTC v. EOX Holdings, Inc., 90 F.4th 439, 441, 446, 448 (5th Cir. 2024) (holding that “Defendants lacked fair notice of the CFTC’s unprecedented interpretation of this thirty-nine-year-old rule” promulgated in 1984, and finding the “CFTC’s construction of the Rule to be thoroughly unpersuasive” and the “CFTC’s own online glossary” “undermines the CFTC’s position”); Jessica Corso, Forex Firm Wants CFTC Sanctioned for ‘Bad Faith’ Behavior, Law360 (Mar. 11, 2024) (reporting on motion for sanctions against the CFTC for a “‘pattern of misconduct’ that includes knowingly submitting false statements to the court and attempting to intrude on attorney-client privilege”), citing CFTC v. Traders Glob. Grp. Inc., No. 3:23-cv-11808 (D.N.J. Mar. 7, 2024). See, e.g., Grayscale Inv., LLC v. SEC, 82 F.4th 1239 (D.C. Cir. 2023) (reversing the SEC’s order rejecting Grayscale’s spot Bitcoin ETF proposal as acting “arbitrarily and capriciously”); Cboe Futures Exch., LLC v. SEC, 77 F. 4th 971 (D.C. Cir. 2023) (overturning the SEC’s order treating SPIKES index securities as futures rather than security futures as “arbitrary and capricious”); SEC v. Dig. Licensing Inc. dba DEBT Box, No. 2:23-cv-00482, SEC’s Response to the Court’s Nov. 30, 2023 Order to Show Cause, ECF 233 at 1 (D. Utah Dec. 21, 2023) (acknowledging that the SEC fell short of expectations by making and failing to correct inaccurate representations, and assigning a new trial attorney to lead the litigation team, designating senior attorneys from another regional office to supervise the matter, and committing to mandatory agency-wide training for staff about the duty of accuracy and candor and the duty to correct any inaccuracies as soon as they come to light).
[5] Dissenting Statement of Commissioner Caroline D. Pham on Examination by Enforcement, U.S. Commodity Futures Trading Commission (Aug. 29, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement082923b.
[6] Pham, supra note 1.
[7] Statement of Commissioner Caroline D. Pham on the Deliberative Process Privilege, U.S. Commodity Futures Trading Commission (Oct. 23, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement102323.
[8] Id.
[9] Axon Enter., Inc. v. FTC, 598 U.S. 175, 203 (2023) (Thomas, J., concurring).
[10] Id. at 202 (quoting B&B Hardware, Inc. v. Harris Indus., Inc., 575 U.S. 138, 171 (2015) (Thomas, J., dissenting)).
[11] Axon at 198 (internal quotations and citations omitted).
[12] Id. at 204 (“Naturally, merely labeling the deprivation of a core private right a ‘civil penalty’ cannot allow Congress and agencies to circumvent constitutional requirements,” and “[b]y permitting administrative agencies to adjudicate what may be core private rights, the administrative review schemes here raise serious constitutional issues”). E.g.,
Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022), rehr’g en banc denied, 51 F.4th 644 (5th Cir. 2022), cert. granted, 143 S. Ct. 2688 (2023) (mem. op.).
[13] The Commission’s authority to revoke registration pursuant to certain enumerated bases is set forth in section 8a(2)(D) of the Commodity Exchange Act, 7 U.S.C. § 12a(2)(D) (commonly referred to as “statutory disqualification”). The process for statutory disqualification administrative proceedings is set forth in 17 C.F.R. Parts 3 and 10.
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