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CFTC Announces 2019 Examination Priorities

The Compliance Branch of the Division of Market Oversight (DMO) of the Commodity Futures Trading Commission (CFTC) for the first time announced its annual examination priorities for contract markets and swap execution facilities.  The DMO will prioritize the following areas in 2019: cryptocurrency, disruptive trading, trading practices, block trades, markets, market makers and trading incentive programs, and relationships with service providers.  The DMO expects that most of its regulated entities will undergo at least one examination in 2019.  The CFTC expects that the DMO will announce examination priorities every year in order to enhance industry communication, prioritize risk-based areas of concern, pursue continuous improvement, and create efficiencies.

Expect the NFA to follow the DMO’s lead with respect to the announced priorities as well as the areas required in the Self-Examination Questionnaire.

CFTC Penalties Nearly Triple in Fiscal 2018

 The Commodity Futures Trading Commission, the primary commodities and derivatives regulator, imposed nearly $1 Billion in civil monetary penalties, restitution and disgorgement during the fiscal year that ended on September 30.  The CFTC Division of Enforcement imposed $947 Million in penalties, disgorgement and restitution, including $897 Million in civil penalties, a nearly threefold increase over last year’s total.  The CFTC filed 83 enforcement actions, the most since 2012, and imposed $10 Million judgments in 10 cases, a CFTC high water mark.  More than 2/3 of cases charged an individual executive, reflecting the CFTC’s priority to hold individuals accountable in part because it deters others who become “fearful of facing individual punishment.”  The CFTC has also prioritized parallel criminal proceedings, setting enforcement records for the number of cases filed in parallel with criminal prosecutors.

The CFTC’s regulatory sphere has greatly expanded with the emergence of swaps, derivatives, cryptocurrencies, and alternative hedge funds.  The CFTC, like the SEC, has ramped up its enforcement activities to historic levels.

CFTC and States Sign Information Sharing Agreement for Enforcement

The Commodity Futures Trading Commission (CFTC) and the North American Securities Administrators Association (NASAA), the organization of state securities regulators, have signed an information sharing agreement intended to facilitate state regulators to investigate and enforce the Commodity Exchange Act.  The Agreement also allows the CFTC to share information about state securities laws violations.  The NASAA President described the unique role of state securities regulators because “they can bring enforcement actions for both securities law and commodities law violations” which is “particularly relevant given the recent epidemic of schemes involving cryptocurrencies and other modern types of commodities.

OUR TAKE:  The MOU deputizes the state regulators to enforce the commodities laws, which helps the budget-strapped CFTC.  It also continues the trend of more active state securities authorities.


CFTC Imposes $800,000 Fine for CEO’s Outside Fraud


The CFTC fined an RIA/CPO $800,000 for failing to stop its CEO from defrauding investors as part of an outside business activity.  The CFTC asserts that the CEO used the firm’s resources, including its email system, trading facilities, and personnel to assist an outside offering fraud involving alleged performance misrepresentations.  The CFTC argues that the respondent became responsible for the CEO’s conduct because the use of firm resources brought his conduct within the scope of his employment.   The firm’s compliance department uncovered the outside activity and questioned the CEO, who took his own life soon thereafter.

OUR TAKE: The CFTC breaks new regulatory ground by connecting use of company facilities as constituting conduct within the scope of employment.  Compli-pros must re-think supervision of outside business activities if the regulators will fine an RIA or CPO for every action taken by a senior executive, many of whom have outside business activities.  Is it better for an executive to use company facilities so that Compliance can monitor OBAs, or should Compliance force all such activities off the company grid?