U.S. CFTC Enforcement: Key Compliance Takeaways From 2016 - Commodities/Derivatives/Stock Exchanges

In 2016, the U.S. Commodity Futures Trading Commission brought several significant enforcement actions involving computerized robo-advisors, recordkeeping and reporting requirements, insider trading, spoofing, market manipulation, and employee liability. Many of these cases included novel theories and new interpretations of existing laws and regulations. This client briefing looks back on the Commission's 2016 enforcement agenda and highlights key compliance takeaways for market participants going into the new year. In light of these trends, it is important that market participants review their compliance programs and understand the facts and circumstances that the Commission may consider in assessing penalties.

Introduction

In fiscal year 2016, the U.S. Commodity Futures Trading Commission ("CFTC") issued more than $1.2 billion in fines for violations of the Commodity Exchange Act, as amended ("CEA"), and CFTC regulations.¹ Although this is slightly less than the total fines issued over the last fiscal year, the CFTC's Division of Enforcement brought several unique cases this year, opening the door to a vast terrain of diverse enforcement territory in 2017. Even though these cases stem from traditional CFTC enforcement authority, many include novel theories or new interpretations of the law, involving computerized robo-advisors, suitability, employee liability, insider trading, and violations of new reporting requirements. Additionally, the National Futures Association ("NFA") collected roughly $700,000 in fines in fiscal year 2016 for violations of its regulatory requirements. This client briefing looks back on the enforcement agenda of the CFTC and highlights key compliance takeaways from 2016. A Reed Smith analysis of enforcement actions brought by the UK Financial Conduct Authority in 2016 is available here.

Summary of significant topics and trends highlighted in the CFTC's 2016 enforcement agenda

The CFTC's enforcement agenda in 2016 highlights a number of significant topics and trends that market participants should note, as follows:

First, the CFTC has demonstrated a new concern about insider trading and the misappropriation of material nonpublic information, issuing significant penalties in its second such enforcement action this year.

Second, the CFTC brought its first enforcement action involving risk management for FCMs and their CCOs. Market participants must be cognizant that the CFTC is actively enforcing failure to investigate and failure to follow written procedures, even where such procedures are in compliance with the CFTC's rules. It is essential that FCMS have clear written risk management policies and procedures in place, and that CCOs ensure all personnel follow these policies.

Third, reporting remains low-hanging fruit for enforcement. In addition to Series '04 and Large Trading Reporting violations, the CFTC has begun to bring actions pursuant to new Dodd-Frank reporting requirements. As such, reporting parties should determine their reporting obligations prior to engaging in futures or swaps transactions, and ensure that all reports are timely, complete, and accurate. As highlighted in a significant enforcement matter last year, reporting parties should take care to ensure the accuracy of LEIs in their reports to SDRs, including in the cross-border context where privacy laws and other considerations may come into play. Care should be taken to ensure that each LEI is not lapsed, retired, or cancelled. LEI renewals may be enforced in the future.

Fourth, with respect to the CFTC's treatment of new technology, vendors that develop and market commodity trading software should be aware that commodity trading software platforms may be treated by the CFTC as commodity trading advisors.

Fifth, the CFTC continues to investigate market participants for engaging in spoofing. Automated trading systems should not be designed to enter orders without the intent to execute them, and must be carefully monitored.

Finally, the Southern District of New York made it much more difficult for the CFTC to prosecute market manipulation, mandating that the agency show a defendant's intent to create an artificial price. The question remains whether other jurisdictions will follow suit.

Given the CFTC's aggressive pursuit of a wide variety of enforcement violations in 2016, clients should be sure to contact Reed Smith as soon as possible if they discover a compliance shortcoming within their company, receive a subpoena or inquiry from the CFTC, or learn of allegations that may lead to an investigation.

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