Enforcement
Table Of Contents
| Budget | FTEs | |
|---|---|---|
| Total Budget | $46,313,000 | 171 |
| Total Change | $4,265,000 | 11 |
| Program Activity | Percentage |
|---|---|
| Enforcement | 29% |
| All Other Programs | 71% |
| Program Activity | Percentage |
|---|---|
| Enforcement | 28% |
| All Other Programs | 72% |
Justification of the FY 2010 President’s Budget & Performance Plan
The primary responsibility of the Enforcement program is to police for conduct that violates the CEA and Commission regulations. Such conduct undermines the integrity of the market and the confidence of market participants.
In FY 2010, the Enforcement program’s FTE allocation level is 171, an increase of 11 FTEs over the FY 2009 appropriation level. These FTEs are vitally needed by the Enforcement program to address the following developments:
- Trading strategies have become more complex, crossing product lines and markets, which has required the Enforcement program to expand the scope of its investigations concerning fraud, market manipulation, and other abusive trading practices. A striking example is the program’s intensive investigations and litigations involving manipulation, including energy-related market abuses. Due to their complexity, the Enforcement program must devote significantly more resources to these investigations in order to analyze voluminous trading data, hire experts, and examine the activities of multiple markets and market participants.
- The Enforcement program anticipates that it will be required to engage in a number of large, complex investigations and trials during FY 2009 and FY 2010. To adequately address these complex matters will require the Enforcement program to commit expenditures, especially with respect to information processing and experts that exceed its historical usage.
- Matters involving fraud by registered and unregistered pool operators and trading advisors typically require immediate action using the Enforcement program’s “quick strike” capability to freeze assets belonging to customers and preserve books and records.1 The Enforcement program anticipates that it will need to devote additional resources to investigate CPO and CTA activity.
- The dramatic increase in electronic trading poses additional challenges to the Enforcement program in terms of potential novel violations (or adaptations of traditional trade practice violations) and potential audit trail gaps. The recent legislation reauthorizing the Commission, the CRA, also expanded the Commission’s oversight of electronic trading facilities. These challenges and developments will require additional resources not only for investigation and prosecution, but also for Enforcement staff training.
- The Enforcement program continues to battle the pervasive fraud involving retail forex futures, forex options, and/or off-exchange retail forex transactions. The CRA bolstered the Enforcement Program’s efforts in this area by clarifying the Commission’s forex jurisdiction. The Enforcement program anticipates that it will need to devote additional resources to combating retail forex fraud.
- The Enforcement program also focuses resources against other types of off-exchange fraud. The Enforcement program anticipates additional activity in this program area, in part, due to the fact that the CRA clarifies the Commission’s anti-fraud jurisdiction with respect to certain principal-to-principal transactions.
Responding to Violative Conduct. When an enforcement investigation indicates that violative conduct may have occurred, the Commission either files an administrative or civil injunctive enforcement action against the alleged wrongdoers. In administrative actions, wrongdoers found to have violated the CEA or Commission regulations or orders can be prohibited from trading and, if registered, have their registrations suspended or revoked. Violators also can be ordered to: cease and desist from further violations; pay civil monetary penalties of up to $1 million per manipulation violation or $140,000 per other violation, or triple their monetary gain, and pay restitution to those persons harmed by the misconduct. In civil injunctive actions, defendants can be enjoined from further violations, their assets can be frozen, and their books and records can be impounded. Defendants also can be ordered to disgorge all illegally obtained funds, make restitution to customers, and pay civil penalties.
As detailed above, alleged violations prosecuted by the Enforcement program may arise from: commodity futures or option trading on U.S. exchanges; manipulative trading in the OTC markets that affect, or tend to affect, the futures or options markets; fraud involving certain off-exchange principal-to-principal transactions; or off-exchange retail forex transactions. Enforcement program addresses various types of violative conduct including conduct that threatens the economic functions of the markets.
Protecting Market Users. The Enforcement program works to protect market users and the public by promoting compliance with and deterring violations of the CEA and Commission regulations. The bulk of the work in this area involves investigating and prosecuting enforcement actions in matters involving fraud and imposing sanctions against wrongdoers. These actions send a message to industry professionals about the kinds of conduct that will not be tolerated.
The Commission also pursues actions involving false or misleading advertising. Over the past several years, there has been substantial false and deceptive advertising of commodity-related investment products, often by unregistered persons and entities through various forms of mass media, such as cable television, radio, and the Internet. The Enforcement program has worked aggressively to detect and stop such advertising by filing enforcement actions. Similarly, the Enforcement program pursues cases charging misconduct involving off-exchange retail forex transactions and charging illegal futures and options, often in precious metals. Such cases typically involve unregistered “boiler rooms” selling illegal futures contracts and options to the general public. Again, the most likely victims are individual retail investors.
Supervision and Compliance Failures. The Enforcement program investigates and prosecutes cases involving supervision and compliance failures by registrants handling customer business. Such violations can threaten the financial integrity of registered firms holding customer funds and can, in certain circumstances, threaten the financial integrity of clearing organizations. Diligent supervision by registered firms also protects markets from manipulation and abusive trading practices, including wash sales.
Cooperative Enforcement Efforts. The Enforcement program works cooperatively with both domestic and foreign authorities to maximize its ability to detect, deter, and bring sanctions against wrongdoers involving U.S. markets, registrants, and/or customers.
On the domestic level, this includes sharing information with, and on occasion providing testimony or other assistance to, state regulators and other Federal agencies, such as the DOJ, the Federal Bureau of Investigation, the SEC, the FERC, and Federal banking regulators. The Commission may also file injunctive actions jointly with state authorities with concurrent jurisdiction. These cooperative efforts bolster the effectiveness of the Enforcement program by allowing it to investigate and litigate more efficiently.
Similarly, in the international realm, the Commission has entered into more than 25 formal information-sharing arrangements and numerous other informal arrangements with foreign authorities. These arrangements permit information sharing and cooperative assistance among regulators. Such arrangements benefit all nations involved and greatly enhance the ability of the Enforcement program to investigate matters that involve foreign entities and/or individuals, or transfers of tainted funds to foreign jurisdictions.
Consequences of Not Receiving Requested Level of Resources
The markets continue to grow in volume and complexity as increasingly sophisticated instruments are employed across markets. An ever-larger segment of the population has money at risk in the futures markets, either directly or indirectly through pension funds or ownership of shares in publicly held companies that participate in the markets.
The Enforcement program will utilize the FTEs allocated for FY 2010 in targeting certain program areas, for example: 1) allegations of manipulation, attempted manipulation, trade practice violations, and false reporting; 2) misconduct by commodity pools, hedge funds, CPOs, and CTAs; and 3) financial, supervision, recordkeeping and other violations committed by registered entities. Also, in response to recent legislation reauthorizing the CFTC, which provided the agency with clarified authority with respect to off-exchange retail foreign currency fraud and trading on exempt commercial markets, the Enforcement program will target: 1) off-exchange fraud involving illegal futures and options contracts, including those involving foreign currency; and 2) trade practice violations. The allocated FTEs also will enable the Enforcement program to continue its commitment to cooperative enforcement activities.
Without these FTE resources, the Enforcement program will not meet established responsibilities. Without adequate staffing, the Enforcement program must be more selective in the matters it investigates, potentially leaving serious wrongdoing unaddressed. Furthermore, investigations will take longer to complete, particularly when increasing complex litigation draws resources away from investigations. Likewise, domestic and international cooperative enforcement activities will be undermined, adversely affecting not only the mission of the Commission, but also that of its domestic and international counterparts.
Enforcement staff are operating at full capacity and shifting resources from important investigations to ongoing and future litigation demands, which limit the ability to pursue new investigations. If the Enforcement program is unable to bring actions because of insufficient resources, other authorities will not be available to step in and fill the void. SROs can take action only against their own members, and their sanctions cannot affect conduct outside their jurisdiction or markets. In addition, other Federal regulators and state regulators have limited jurisdiction and expertise in handling futures-related misconduct. Finally, while criminal prosecutions by the DOJ and State authority are an important adjunct to effective enforcement of the CEA, cooperative enforcement still requires the active use of Commission FTEs to assist criminal authorities in their prosecutions.
| FY 2009 | FY 2010 | Change | ||||
|---|---|---|---|---|---|---|
| Budget Request |
FTE | Budget Request |
FTE | Budget Request |
FTE | |
| Enforcement | $42,048 | 160.00 | $46,313 | 171.00 | $4,265 | 11.00 |
| Total | $42,048 | 160.00 | $46,313 | 171.00 | $4,265 | 11.00 |
| Outcomes | FY 2009 | FY 2010 | Change | |||
|---|---|---|---|---|---|---|
| Budget Request |
FTE | Budget Request |
FTE | Budget Request |
FTE | |
| GOAL ONE: Protect the economic functions of the commodity futures and option markets. | ||||||
| 1.1 Futures and option markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity. | $12,766 | 48.58 | $14,103 | 52.07 | $1,337 | 3.49 |
| 1.2 Markets that can be monitored to ensure early warning of potential problems or issues that could adversely affect their economic vitality. | 604 | 2.30 | 666 | 2.46 | 62 | 0.16 |
| Subtotal Goal One | $13,370 | 50.88 | $14,769 | 54.53 | $1,399 | 3.65 |
| GOAL TWO: Protect market users and the public. | ||||||
| 2.1 Violations of Federal commodities laws are detected and prevented. | $21,918 | 83.40 | $24,117 | 89.05 | 2,199 | 5.65 |
| 2.2 Commodities professionals meet high standards. | 202 | 0.77 | 222 | 0.82 | 20 | 0.05 |
| Subtotal Goal Two | $22,120 | 84.17 | $24,339 | 89.87 | $2,219 | 5.70 |
| GOAL THREE: Foster open, competitive, and financially sound markets. | ||||||
| 3.1 Clearing organizations and firms holding customer funds have sound financial practices. | $3,620 | 13.77 | $3,997 | 14.76 | $377 | 0.99 |
| 3.3 Markets are free of trade practice abuses. | 2,412 | 9.18 | 2,666 | 9.84 | 254 | 0.66 |
| 3.4 Regulatory environment responsive to evolving market conditions. | 526 | 2.00 | 542 | 2.00 | 16 | 0.00 |
| Subtotal Goal Three | $6,558 | 24.95 | $7,205 | 26.60 | $647 | 1.65 |
| Total | $42,048 | 160.00 | $46,313 | 171.00 | $4,265 | 11.00 |
| Goal | Percentage |
|---|---|
| Goal One | 32% |
| Goal Two | 53% |
| Goal Three | 15% |
1 "Quick-strike" enforcement actions are those that the Commission files within four months of opening an investigation. (back to text)