The CFTC’s Director of Enforcement unveiled a new program this week to promote self-reporting of violations of the Commodity Exchange Act or CFTC Rules in the financial industry. According to James McDonald, it will provide a significantly reduced penalty for companies and individuals that self-report and fully cooperate with the CFTC.
McDonald unveiled a few aspects of the CFTC cooperation and self-reporting program in a speech this week, including:
1. Voluntary Reporting – The disclosure can’t be made imminently before the threat of a Government investigation.
2. Clear Disclosure – It can’t be a vague reference deep in a compliance report.
3. Without Delay – Companies will only receive full credit for self-reporting if they disclose all known facts in a reasonable time after becoming aware of them.
4. Full Cooperation – The company must disclose all relevant facts it discovers and be proactive. Notification at the outset is not sufficient.
5. Remediation – The company must work to fix the problem in a timely fashion, correcting compliance flaws or internal controls that allowed the misconduct to happen.
McDonald said that companies which self-report, cooperate and remediate would receive a recommendation for a substantial reduction in the penalty from the Division of Enforcement or, in extraordinary circumstances, declination. In an interview about the program, the early expectation for the size of the reduced penalty was roughly 75%. However, this figure was removed from the final draft and “substantial” put in its place.
The CFTC will continue to give credit for cooperation to entities that have not self-reported, according to McDonald. These companies will simply receive less of a benefit than the businesses that self-report, fully cooperate, and remediate.
At least one commentator in a media report has speculated that the new program to encourage self-reporting is a function of the regulator’s limited enforcement budget.
Although the new cooperation program will not have a direct effect on the CFTC whistleblower program, it could have a tangential impact if it speeds up reporting of misconduct by financial institutions. If it works as intended, it could decrease the need for whistleblowers to report wrongdoing in the first place and thus result in fewer awards.
Practically, the combination of incentives for both self-reporting and whistleblower tips could be a boon to provide additional information to the CFTC. In reality, the government has pushed cooperation efforts in exchange for reduced penalties for some time and it is unclear whether another program will result in either earlier reporting or more cooperation by those that broke the law.