The CFTC has impressive enforcement staff.  I am very proud of them.  The substantial and hard-hitting cases we have brought this year reflect their dedication to protecting customers, investors and markets.  Too often, however, they face limitations based on past cases—past cases that do not always reflect the growing potential for harm given the growth in our markets and in recent volatility.  Past cases don’t reflect that it has now been more than a decade since the implementation of Dodd-Frank Act rules, which is certainly enough time for registered entities to come into compliance.  Past cases also may not reflect recidivism.

As a federal official in law enforcement for the last two decades and the first enforcement official to become a CFTC Commissioner, I have used my experience to work closely with the CFTC’s Enforcement Division.  We are working to strengthen our enforcement program where appropriate so that we can further advance the goals of all enforcement programs— accountability, justice, and deterrence.

For that reason, I am pleased to support the Advisory released today by the CFTC’s Enforcement Division.  This Advisory strengthens the CFTC’s enforcement program by adopting my proposal of replacing the routine practice of neither-admit-not-deny settlements with a case-by-case decision on requiring settling defendants to admit their wrongdoing.[1]  It also sets out a strong policy that recognizes the need for imposing higher penalties in certain cases, addressing ongoing recidivism, and clarifying the way the Division will recommend the use of monitors.

A strong enforcement program that achieves accountability, justice, and deterrence, results in greater market integrity and investor confidence.  Strong enforcement aimed at these goals ensures that U.S. financial markets maintain their position as the strongest, safest, most liquid markets in the world.

Market integrity and investor confidence is especially critical for financial stability in derivative markets, given their role in contributing to the 2008 financial crisis.  After the 2008 financial crisis, Congress expanded the CFTC’s jurisdiction to oversee previously unregulated derivatives markets that had played a major role in triggering that crisis.  The CFTC’s mission includes preventing unchecked risk that could rise to systemic levels and trigger another financial crisis, a mission that requires the CFTC to enforce the law.

Protecting market integrity and investor confidence is also critical to preventing artificially inflated prices for Americans at the gas pump and the grocery store and when they heat and cool their homes.  Fraud, market manipulation, and excess speculation in energy and agriculture markets could increase costs to American families, farmers and small businesses who are already working hard to get by. 

Since becoming a Commissioner, I have worked closely with staff on specific cases and more generally to strengthen our ability to achieve enforcement goals and protect market integrity and investor confidence.  I am pleased to see this Advisory adopting many of my priorities for how the Enforcement Division fulfills the CFTC’s core mission.

Defendant admissions

I applaud the Enforcement Division’s decision to end the routine use of neither- admit-nor-deny settlements.  Using neither admit-nor-deny settlements relieves defendants of the consequences of breaking the law (which is not the government’s role), and does not serve the enforcement goals of accountability, justice, and deterrence.

In September 2022, I proposed that the CFTC end this routine settlement practice that does not take advantage of an important enforcement tool: requiring the settling defendant to admit their wrongdoing and to accept the collateral consequences of doing so.  Especially for well-resourced institutions, like Wall Street banks, requiring admissions can bring greater public accountability and have more of a deterrent impact than penalties alone.

I proposed that the CFTC instead consider requiring admissions on a case-by-case basis, and provided the analysis of how to implement that determination.  I proposed a Heightened Enforcement Accountability and Transparency (HEAT) test to list factors that the Commission should consider to require admissions.  Since then, I have worked with staff on specific cases to apply the HEAT test to determine whether admissions should be required as part of a resolution.

I am pleased that the Enforcement Division is following my proposed approach by considering factors that promote accountability, justice, and deterrence on a case by case basis, without creating an exclusive list of factors or situations.[2]  The Advisory reflects consideration of many of the factors that I raised in the HEAT test: egregious conduct, the presence of a criminal scheme, and significant harm or risk of harm to investors and markets, which includes threats to market integrity.  I encourage our Enforcement staff to remember that these factors matter to the goals of enforcement even in the absence of a guilty plea or other criminal resolution.  Importantly, based on the HEAT test, I have not voted to support certain settlements that do not contain defendant admissions.  I will continue to vote in this way.

Penalties

Penalties play an important role in promoting accountability and deterrence, particularly when combined with defendant admissions of wrongdoing.  As both I and my colleague Commissioner Kristin Johnson have warned, where penalties are too low, they risk becoming a cost of doing business.  This is especially true for well-resourced defendants.  I have worked with staff on specific cases and more generally to recalibrate penalties to address the specific circumstances of the case, rather than letting past penalties serve as the driving factor.  I encourage an overall resolution that achieves the desired deterrent effect and promotes accountability and justice.  Importantly, I have not voted for, and will not vote for, certain settlements if the penalties were not appropriately sized to achieve deterrence given the circumstances of the case.

The advisory recognizes that increasing deterrence through higher penalties and admissions is particularly important where the Enforcement Division finds violations by multiple defendants of the same law.  Recently, this has included enforcing Dodd-Frank and CEA requirements that are critical to the CFTC’s surveillance and supervision of the market.

Over the last year, I have worked with staff to achieve appropriate deterrence through penalties and defendant admissions in cases brought for violations of swap data reporting laws, violations that impair the Commission’s ability to conduct surveillance and detect risk, especially systemic risk.  I have also worked with the staff to achieve appropriate deterrence in unauthorized offline communications cases.  The offline communication cases have led to over $1 billion in penalties paid by Wall Street banks, major foreign banks, and others, as well as defendant admissions, along with over $1.5 billion levied by our colleagues at the SEC.  Where many are engaging in the same illegal behavior, the threat to market integrity is particularly serious, and the deterrence effect of penalties must reflect that.

Recidivism

Recidivism has gotten worse in regulated financial services.  The CFTC has repeat defendants who have shown that they will continue to break the law, despite a CFTC enforcement action.  Recidivism is often a signal of a broken culture of compliance.  In these situations, it is critical for the CFTC to send a message to senior leadership to fix that culture, through heightened penalties, defendant admissions, undertakings, and in some cases a monitor.

The way the Enforcement Division considers recidivism is consistent with other Federal law enforcement agencies.  Recidivism is more than just the same exact conduct, violating the same exact provision.  Such a narrow view undermines the deterrent effect of an enforcement action and encourages defendants to view each illegal act in a silo.  A more holistic view of repeat defendants is appropriate.  The Advisory provides that the staff will consider various factors for repeat defendants, including whether there is the same or similar kinds or categories of violations, looking at whether the violations resulted from the same root cause or involved the same general subject matter.  These factors along with close in time violations, overlapping management, pervasiveness, and inadequate remediation efforts, should result in heightened penalties and required defendant admissions.

Monitors

In cases of a broken culture of compliance, the Advisory clarifies that appointment of a monitor reflects significant concerns by the Enforcement Division about an entity’s ability to remediate its illegal activity without assistance of a neutral third party and oversight.  Coupled with the deterrent effects of admissions and an appropriately sized penalty, a monitor sends a strong message to senior management about the pervasiveness and seriousness of problems with their entity’s culture and the urgency of fixing those problems.

Conclusion

I am thankful for the hard work by the Enforcement staff in pursuing justice, accountability, and deterrence in order to protect market integrity and maintain investor confidence.  Every day, I consider it an honor to work with them.  This Advisory is an important recognition of the power of using all of the tools at the Enforcement Division’s disposal in achieving those goals.  I look forward to working with staff as they apply the principles in the Advisory to specific cases that come before the Commission.