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In this month’s newsletter we focus on a lengthy analysis of what may be coming based on Acting Chair Pham’s dissents.
January Enforcement Round-Up
January was a transitional month for the CFTC’s Division of Enforcement. Ian McGinley stepped down as Director, and Brian Young, who has been at the CFTC since 2024 as the Director of the Whistleblower Office, was tapped as the Acting Director of Enforcement. Each of January’s four enforcement actions focused on a form of fraud or misrepresentation resulting in customer harm. It is tough to predict what the future holds under the CFTC’s new leadership, but there is no doubt the CFTC will continue to bring actions that fall squarely within its mission to prevent fraud, manipulation, and abuse in our markets. However, we will have to
wait and see whether there is a noticeable shift away from actions for more technical or operational violations that do not cause injury to customers or the markets.
Here is a link to a round-up of January’s CFTC enforcement actions.
Tiffany Payne | Yiran Jiang - Email
Acting Chair Pham - Learning from Dissents
Caroline Pham is now the Acting Chair and we are getting “Back to Basics”. Immediately we thought, “fantastic – but what does that mean exactly?”
Acting Chair Pham authored a number of dissents during her time as a Commissioner. I know that myself and many other derivatives attorneys always looked forward to a good dissent authored by Pham during her time as Commissioner. Personally, I find her principled and more pragmatic approach refreshing. And while past performance does not guarantee the future, there are some important nuggets of information to glean that give me cautious optimism for the direction that the CFTC may be headed under Acting Chair Pham’s leadership.
1. Evidenced-Based Action. We start in 2022 when Pham dissented to then proposed amendments to Form PF. Pham noted that the amendments are “overly broad”, “unnecessarily burdensome”, and cause little benefit for the amount of operational effort to implement the forms. In February 2024, those amendments were passed and Pham again dissented noting the joint rule continues to “double, and sometimes, triple, reporting, without being based on any demonstrated data or evidence that it will improve systemic risk monitoring.”
What do we learn? For Pham you must show your work. It’s not good enough that an amendment to a rule creates efficiencies on paper, there must be supporting evidence.
2. Transparency with Registrants. In August 2022, Pham has a fantastic dissent regarding political event contracts. In this matter, the CFTC announced the public review period of KalshiEx’s proposed congressional control contracts. The CFTC determined in their announcement that the contracts could implement multiple CFTC regulations and sections of the Commodity Exchange Act. According to Pham’s dissent, the CFTC never raised any implication of these regulations or the CEA during the nearly 36 meetings over the course of a year with KalshiEx.
What do we learn? Pham states in her conclusion “We should say what we mean and mean what we say.” Pham, rightfully, appears to believe that the CFTC should be open and transparent with registrants and not take a “gotcha” approach.
3. Consistent Treatment of Registrants. Then in June 2023, we see Pham’s second dissent concerning political event contracts. In May of 2023, the Fifth Circuit enjoined the CFTC from closing or deterring PredictIt Market contracts, including political event contracts. Then in June 2023, the CFTC announced it was reviewing the permissibility of certain political event contracts through KalshiEX, LLC market. Pham dissented because the CFTC opining on KalshiEx may violate the Fifth Circuit’s order regarding PredictIt Market, if the review of KalshiEx were to result in the suspension or prohibition of the listing or trading of KalshiEx political event contracts.
What do we learn? Pham appears to believe that the CFTC needs to respect the litigation process and adhere to court orders. This dissent also reflects another one of Pham’s key principles, which is the need for consistency in application of the law across registrants. As she states in her dissent, “I believe that it is only fair for either both exchanges to list the political control contracts, or neither of them should.”
4. Enforcement Is No Substitute for Supervisory Oversight. Next we stop in August of 2023 for Pham’s dissent of the administrative proceeding In re Goldman Sachs & Co. LLC. I recommend folks read this one in depth. In her dissent, Pham states that the order and settlement against Goldman Sachs for violating a prior cease-and-desist as a result of recordkeeping violations for the failure to retain certain recorded phone calls – most of which took place in the shift to remote work during the pandemic. Pham uses the phrase “examination by enforcement”, which she explains as “where the Division of Enforcement imposes a disproportionately high civil monetary penalty (Goldman was fined $5.5M) for one-off, non-material operational or technical issues with no misconduct, harm to clients, or financial losses, and that every other major regulatory
authority addresses through an examination program conducted by supervisory staff (i.e., examiners).”
What do we learn? Two very important things: (1) Pham appears to believe the CFTC’s failure to develop an examination program for its most systematically important registrants and reliance instead on enforcement actions is no substitute for ongoing oversight by supervisory staff. (2) The Division of Enforcement should focus its talent and resources on cases that root out misconduct and wrongdoing that adversely impacts customers and the markets.
5. Proper Legal Process Must Be Followed. In September of 2023, Pham dissented to the CFTC’s use of administrative proceedings before a hearing officer in the absence of CFTC Administrative Law Judges and in lieu of federal court against multiple entities fraudulently claiming to be FCMs and RFEDs. Pham argues that the CFTC’s use of “shotgun hearings and quickie defaults” to jam them in the last day before the fiscal year hindered the due process for the defendants.
What do we learn? Pham supports the zealous pursuit of wrongdoers, but not at the expense of due process.
6. Clear and Common Sense Based Rules. Flash forward to April of 2024 for Pham’s dissent on the Large Trader Reporting Rule. This is an interesting one. First, Pham dissented to the piece of the Large Trader Reporting Rule that delegates authority to the Director of the Office of Data and Technology to determine the form, manner, coding structure, and electronic data transmission procedures for reporting the data elements in Part 17 appendix C and to determine whether to permit or require one or more particular data standards. Well, in 2020 the CFTC announced that “the Office of Data and Technology—whose personnel have been merged with the new Data and Administration divisions as well as the Office of Public Affairs—will cease to be an operating unit of the CFTC.” Pham was spot on when she found this delegation of authority to an office that no longer exists at the CFTC “deeply troubling and against all common sense”. Second, Pham noted that many commenters to the proposed rule asked for a notice period if the ODT Director made changes to the related requirements. The CFTC did not, however, include a period for notice.
What do we learn? Rules should provide market participants with clarity and certainty – not hide the ball or give them the runaround. And, we already learned this, but due process is important.
7. Violation of CFTC Rules/Regulations Is Required. In August 2024, Pham dissented to two orders against TD Bank settling allegations of recordkeeping and supervision failures for firm-wide use of unapproved communication methods. In this matter, the CFTC’s order was based on a sample of information provided by TD Bank to the SEC concerning only FINRA-registered representatives. According to Pham, there was no evidence of CFTC APs and the types of records that introducing brokers are required to maintain until CFTC rules; therefore, she was “unable to support an enforcement action that does not have any evidence that the alleged violations actually occurred.”
What do we learn? While the CFTC and SEC may partner on certain matters, the CFTC should always conduct its own investigation and not “piggyback” off the SEC. Pham also appears to be concerned with a potential chilling effect of an overly aggressive enforcement action. To quote Pham: “I am concerned that when faced with the choice whether to engage in business activity subject to CFTC oversight, firms would rather not participate in our markets than deal with the CFTC. The CFTC should be promoting greater access to markets—not limiting access.”
See also, Pham’s September 2024 dissent to an off-channel communications enforcement action against Piper Sandler Hedging Services, LLC.
8. CFTC’s Jurisdictional Overreach Is a Real Concern. In September 2024, Pham dissented on an enforcement action against a decentralized financed (DeFi) platform, involving the Uniswap Protocol on the Ethereum blockchain, because the evidence in the record made it impossible to perform the appropriate legal analysis of the product at issue to determine if it was in fact a CFTC-jurisdictional product that could be subject to an enforcement action.
What do we learn? Echoes of due process here, but also that the CFTC must be authorized to bring an enforcement action. Moreover, as she states, Pham has concerns that the “Commission’s ever-expanding jurisdictional overreach continues to perpetuate a lack of regulatory clarity.”
9. Distinctions Between the SEC and CFTC Matter. Also in September 2024, Pham dissented from the consent order in CFTC v. Xie, because the order failed to adhere to the legal precedent of CFTC v. EOX. EOX establishes the test to prove liability under section 6(c)(1) of the Commodity Exchange Act and Rule 180.1 for misappropriation of confidential information and corrects the CFTC’s misuse of the term “material nonpublic [sic] information” in its 2011 rulemaking by replacing it with “confidential information in breach of a pre-existing duty of trust and confidence to the source of the information.” Pham argues that the CFTC staff “no longer take care to be precise in alleging the misappropriation theory, as they once did, and are continuing to take the shortcut of importing non-CFTC terms of art that are
inapposite”, which potentially “muddies the waters” for companies that are dually registered with the CFTC and SEC.
What do we learn? Pham does not support the import of similar SEC principles or concepts when adjudicating or analyzing matters under the CFTC’s jurisdiction. This matter is also indicative of her view that the CFTC should not remain stagnant but should continue to learn from past experiences and make improvements.
10. Clearer Guidance for Self-Reporting and Cooperation Credit. Let’s wrap this up with Acting Chair Pham, as then Commissioner Pham, giving the CFTC a proverbial pat on the back or an “at-a-boy”. This one is not a dissent, but instead a statement supporting the CFTC’s approach to award Barclays substantial credit for its self-reporting, cooperation, and remediation efforts regarding swap reporting violations.
What do we learn? Pham puts it out in the open in this one – “I continue to believe that the CFTC must adopt a clear standard for self-reporting and cooperation credit that is applied consistently.” It will be interesting to see if and how Acting Chair Pham makes good on her belief.
In sum, if Acting Chair Pham intends to pull themes from her dissents and other public statements as part of her path forward for the CFTC, we can expect a CFTC that believes in due process; holds wrongdoers accountable; relies on its own investigations, rules, and regulations as the basis for enforcement action; conducts a thorough analysis and critical review of the impact of any new initiatives; gives credit for self-reporting and cooperation; and believes enforcement actions against systemically important registrants is no substitution for adequate oversight. Time will tell whether under Acting Chair Pham’s leadership, the CFTC
will “say what they mean and mean what they say”.
Barrett Morris | Tiffany Payne - Email
Interesting Links
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