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Enforcement Round-Up
During a keynote address at the FIA BOCA conference on March 11, 2025, Acting Chair Pham highlighted recent regulatory and organizational initiatives undertaken by the CFTC, and foreshadowed additional measures the CFTC plans to take, to further the Commission’s priorities built around its core principles of “Mission, Markets, and Mindset.” With no date announced yet for when the confirmation hearing for President Trump’s pick for CFTC Chair, Brian Quintenz, will be scheduled, Acting Chair Pham’s agenda continues to define the CFTC for the time being.
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“Enforcement Sprint”: Acting Chair Pham announced the parameters of a new “30-Day Compliance and Remediation Initiative” or “enforcement sprint” that is designed to free up the CFTC’s resources to pursue matters consistent the Commission’s priorities. Under this initiative, the CFTC will seek to “expeditiously resolve” pending matters related to compliance violations that do not involve fraud or manipulation, such as recordkeeping, reporting or other compliance violations without customer harm or market abuse. Acting Chair Pham invited any firm currently under investigation, subject to enforcement action, or engaged in an inquiry with the CFTC’s Department of Enforcement (DOE) involving a material violation, to approach the DOE Staff within the next
two weeks with a “reasonable settlement offer” based on (i) the CFTC’s February 25 Enforcement Advisory on Self-Reporting, Cooperation, and Remediation (February 25 Advisory) and (ii) resolutions of comparable matters from the past ten years. Any outreach should also include an update on remediation plans and progress toward completion. With that two-week period now expired, we anxiously await the announcement of any settlements that may come out of the sprint initiative, which will likely be informative on how the February 25 Advisory is being applied in practice. In particular, it remains to be seen whether forthcoming resolutions will expressly state the amount of self-reporting and cooperation credit awarded. The CFTC has also since clarified that its enforcement sprint has no expiration date and firms can continue to ask for “sprint”
treatment, although firms that offered settlements in the first two weeks will be prioritized.
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Clarity on Referrals to DOE: In relation to the DOE’s new policy that self-reporting will be permitted to not only DOE, but any CFTC operating division, such as the Division of Market Oversight (DMO), Acting Chair Pham’s keynote also previewed updated criteria for when another operating division may refer either a “material violation” or a “material non-compliance issue” to DOE. This guidance is expected to be released in a separate, forthcoming advisory. Issues referred to DOE as “material violations” should involve: (1) willful conduct or abuse; (2) harm to clients, counterparties, or customers; or (3) significant financial losses. Regarding “material non-compliance issues,” Acting Chair Pham stated it was her view that in cases involving a risk
management or compliance program, a referral to DOE may occur if the issue involves (1) “especially egregious or prolonged systemic deficiencies”; (2) material weakness; or (3) willful misconduct by management, and there has been no “material progress” toward remediation in four or five years (or more for larger, more complex financial institutions).
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What’s to Come: In her remarks, Acting Chair Pham also previewed additional efforts by the Commission to provide further regulatory clarity and to restructure the agency’s organization, including moving the Market Surveillance Branch from DOE to DMO and moving the oversight of futures commission merchants from the Market Participants Division back to the Division of Clearing and Risk Management. Acting Chair Pham highlighted that as part of the reorganization, the CFTC would procure an off-the-shelf real-time market surveillance system to help identify potential fraud, manipulation, and abuse. Additionally, Acting Chair Pham intends for the CFTC to revisit two prior regulatory initiatives related to efforts from 2017 to identify ways in which the
rules can be simplified and modernized and reopening the comment period on the 2008 Concept Release on the Regulatory Treatment of Event Contracts to assess the framework around prediction markets. The CFTC also is gathering information and holding discussions with industry participants regarding a potential digital assets markets pilots program for tokenized non-cash collateral.
Here is a link to this month’s summary of enforcement matters brought by the CFTC.
Tiffany Payne, Drew Newman | Email
New Enforcement Director Offers Insights on CFTC’s Priorities and Approach
Recently-appointed enforcement director Brian Young echoed much of Acting Chair Pham’s “back to basics” approach during the recent SIFMA conference. Director Young also used his personal remarks at the conference as another opportunity to elaborate on the CFTC’s enforcement priorities and what we can expect under his DOE leadership. Here are the key takeaways from Director Young’s remarks:
- The CFTC plans to focus on fraud and manipulation cases in the agency’s “core” markets, such as precious metals, agriculture, and foreign exchange, with an emphasis on restitution to victims.
- Director Young invited firms advocating for a lower (or no) civil monetary penalty (CMP) to refer to and rely upon older resolutions in comparing and contrasting facts and circumstances during the advocacy process. Director Young stressed that the CFTC would apply the new cooperation and self-reporting matrix without being necessarily bound to the higher penalties imposed more recently. He also elaborated that firms should not expect that the DOE Staff will manipulate the cooperation and self-reporting guidance to reverse engineer a desired CMP; rather, DOE Staff discussions will start with the potential CMP absent self-reporting and cooperation credit in an effort to not defeat the purpose of the new guidance in providing greater
transparency and consistency. While the DOE has committed to transparency around quantifying self-reporting and cooperation credit, it remains to be seen whether there will be increased transparency with respect to the Staff’s initial calculation of a proposed penalty absent any mitigating credits. Moreover, prior CFTC settlements do not reflect the amount of any self-reporting and cooperation credits, so reliance on prior settlements will continue to be a facts and circumstances assessment.
- DOE is more willing to accept a self-report early in an internal investigation and allow firms to continue their investigation without immediate CFTC intervention, provided the firm agrees to provide updates on the investigation. But waiving privilege is not necessary to receive the highest levels of cooperation credit. Having a plan for remediation and executing on it will be important for seeking the highest levels of self-reporting and cooperation credit under the February 25 Advisory.
- DOE’s 2 new task forces—Complex Fraud and Retail Fraud/General Enforcement—down from the previous 9 task forces, are intended to create more consistency and predictability for specialized cases, such as spoofing, and to help the CFTC identify connections across these types of cases. These task forces will be staffed nationally across CFTC offices.
- Under the new DOE policy, in choosing which CFTC operating division to self-report to, Director Young stated that firms should use their best judgment and act in good faith.
- Finally, as the former director of the CFTC’s Whistleblower Program, Director Young stressed the importance of the program to the CFTC’s enforcement efforts, with about 40% of its enforcement matters originating from a whistleblower complaint. Director Young noted that in his experience, whistleblowers generally raise their complaints internally within their firm first, so firms have an opportunity to address the underlying issues before getting a document request from the CFTC.
Tiffany Payne, Drew Newman | Email
Crypto, Crypto, Crypto
On March 26, Sen. Ted Cruz introduced legislation to prevent the Federal Reserve from issuing a central bank digital currency. Similar legislation was also introduced in the House. Meanwhile the SEC’s Crypto Task Force announced they’re holding four more roundtables on crypto asset regulation. You can stream each roundtable live through the SEC’s website if you’re interested.
The CFTC issued two interesting releases during the month of March, which withdrew prior advisories on (1) the review of risks related to clearing digital assets and (2) virtual currency derivative product listings. The theme of the CFTC’s effort to withdraw both advisories is to clarify for the market that digital asset derivatives will receive the same level of scrutiny as other products (no longer any “emphasis” by the CFTC) and the CFTC’s staff are now more experienced with virtual currency derivatives.
On March 7, the OCC issued Interpretive Letter 1183, which (1) reaffirmed the permissibility of national banks to conduct crypto-asset custody, distributed ledger, and stablecoin activities and (2) withdrew OCC Interpretive Letter 1179 that outlined a supervisory nonobjection process to engage in the activities above.
The FDIC also issued guidance titled “Notification of Engaging in Crypto-Related Activities”, whereby FDIC-supervised institutions “may engage in permissible activities, including activities involving new and emerging technologies such as crypto-assets and digital assets, provided that they adequately manage the associated risks.” The new guidance removes a prior notice requirement for crypto-related activities that was put in place by the previous administration.
Each agency’s actions this month also underscore the importance of risk management, effective (not excessive) regulation, and maintaining practices designed to ensure a strong and healthy financial/banking system when embarking on digital asset-related activities and stress that now digital assets are subject to the same process as all new bank products/initiatives…generally.
And finally, Fidelity is reported to be considering whether to launch a stablecoin.
Barrett Morris | Email
Richmond, California Sues Over Swap Payments
On March 17, California’s city of Richmond filed suit against JPMorgan Chase, Royal Bank of Canada, and the city’s former financial advisors to recover at least $60 million in payments made on interest rate swaps that the city’s new administration now says violated California’s state laws. Specifically, the suit alleges that seven interest rate swaps, two basis rate swaps, and one swaption entered into between 2006 and 2014 violated California law. The complaint states that a city staff member said, “These derivative contracts were not the City’s idea, the City would prefer…less complexity and risk than contained in the swaps.” There are a number of issues alleged in this suit – suitability, special entity protections, and enforceability to name a few.
MVA (and probably other municipalities) will be watching this matter closely to see how it plays out. We always recommend and are happy to assist with a careful review and analysis of the capacity, authority, and enforceability of swaps entered into with municipalities.
Barrett Morris | Email
Interesting Links
First trader jailed for interest rate manipulation takes case to the UK’s top court
CFTC Interpretation Regarding Financial Reporting Requirements for Japanese Nonbank Swap Dealers
CFTC Advisory on Fraud Using Generative AI
CFTC Staff Withdraws Advisory on Swap Execution Facility Registration Requirement
Warren Buffett pays $1M to NCAA bracket contest winner
Places We’ll Be
FIA Law & Compliance Division Conference – April 23-25
(Don’t hesitate to reach out if you would like to connect!)
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