CFTC Operating and Enforcement Divisions Issue Advisory on Referrals to Enforcement Division

This latest advisory expands on Enforcement's recent advisory establishing the factors Enforcement will consider when recommending penalties to the Commission and how Enforcement will evaluate those factors (see Jones Day's prior Alert, New CFTC Cooperation, Self-Reporting, and Remediation Enforcement Advisory Introduces Major Changes. That advisory permitted self-reporting to the Division primarily responsible for the relevant regulation(s), which would then decide, using unknown criteria, whether to refer the conduct to Enforcement. Enforcement previously required self-reporting directly to it to receive mitigation credit.

The new advisory: 

• Introduces a materiality standard for determining whether to refer self-reported violations, or supervision or non-compliance issues to Enforcement;
• Explains that the Divisions will address non-material issues directly with supervised entities, rather than referring them; and 
• Notes that failure to supervise charges have "frequently" involved technical or operational issues, hinting that these would rarely be referred.

The advisory also provides examples of "material" violations, including:

• Harm to clients, counterparties, customers, members, or participants; 
• Harm to market integrity; or 
• Significant financial losses. 

The Divisions caution that supervised entities should still determine whether self-reporting a material violation (particularly fraud, manipulation, or abuse) directly to Enforcement is more appropriate. This was a missed opportunity for express guidance on when to go directly to Enforcement, though the advisory hints that fraud, manipulation, and abuse should trigger that, particularly given Enforcement's new focus on fraud.

To determine supervision or non-compliance issues' materiality, the Divisions will apply a "reasonableness" standard—considering a supervised entity's size, activity, and complexity ("Context") (which seemingly could positively or negatively impact the analysis)—to the following:

• Especially egregious or prolonged systematic deficiencies or material weakness of the supervisory system, controls, or program;
• Knowing and willful management misconduct (e.g., evidencing an intent to conceal a potential violation or supervision or non-compliance issue); and 
• Lack of substantial completion of a remediation plan for an unreasonably long time, such as "several years[]" (emphasis added). 

On the first point, the advisory notes that, generally, single failures involving a control, technical, or operational issue would not be material or indicate inadequate supervisory systems absent a widespread potential or actual impact or failure involving numerous persons, multiple errors, or significant dollar amounts, given the Context.