Background. On October 5, 2012, the
Commodity Futures Trading Commission (Commission or CFTC) announced
fiscal year 2012 enforcement statistics and case highlights, and
identified for practitioners and market participants the Division
of Enforcement's (Division) likely 2013 priorities.1
In addition to fraud-based actions, the announcement brought
attention to cases involving allegations of manipulation, false
reporting, wash trades, exceeding position limits, and deficient
customer fund safeguards and supervision obligations.2
In fiscal year 2012, the Division opened a record 350 new
investigations, initiated 102 enforcement actions, and obtained
orders imposing $1.17 billion in sanctions, restitution and
disgorgement. The Division has had a very busy year, demonstrating
an aggressive approach to investigating and charging what it
believes is unlawful conduct.
Reporting to Price-Index Publishers. The
announcement highlighted the Division's activity relating to
LIBOR and Euribor reporting by focusing on possible disconnects
between actual transactions and the information submitted to
rate-setting bodies. The Division's focus may have wider
implications for commodities market participants when submitting
transaction data to cash market price-index publishers. These
market participants may wish to reexamine their policies and
controls relating to providing quotes to price-aggregators,
particularly in light of new CFTC Rule 180.1, which prohibits false
reporting using fraud-based standards patterned after Rule 10b-5.
Market participants actively reporting pricing data to index
publishers should consider implementing measures—such as
information barriers and trade submission, auditing and monitoring
procedures—to ensure that submissions remain
transaction-focused.
Position Limits Enforcement. The
Division, by bringing a total of six actions in 2012, was very
active in enforcing position limits. This increased enforcement
presence is likely to continue and perhaps intensify in light of
the importance the Commission has recently attached to position
limits. A critical part of the Commission's current position
limits framework and recently vacated3Position Limit
Rules4 involves interpreting position and account
aggregation standards. With respect to aggregation, the
Division's approach in at least one matter may be a harbinger
of the possible intent to aggregate positions held by separate and
independent subsidiaries with that of a parent when enforcing
speculative limits.
Customer Funds Safeguards. The Division
also actively enforced the Commission's segregated fund
requirements and assessed a $20 million civil monetary penalty
which, according to the Commission, is the largest sanction for a
segregated fund violation. Financial firms and futures commission
merchants (FCMs) holding segregated FCM customer funds are
prohibited from using such funds as though they belong to any
person other than the customer. In light of the financial collapses
of Peregrine Financial Group, Inc. and MF Global, it is likely that
the Division will continue and intensify enforcing the segregation
requirements by not only investigating the improper use of customer
funds, but also enforcing compliance with customer account opening,
titling and maintenance rules, including rules requiring written
acknowledgements from depository institutions demonstrating their
awareness that funds in an account are FCM customer funds.
Supervisory Obligations. The
Division's activity covered actions relating to supervising the
handling of accounts through which clients may be violating the
Commodity Exchange Act (CEA) and CFTC rules. These cases indicate
that the Division expects FCMs to diligently investigate
questionable client activity and not rely solely on customer
representations when responding to potential red flags. As the
Commission's resources are stretched even thinner across
regulated futures and swaps markets, it may increasingly seek to
shift investigative efforts and costs to registrants. One way to do
so is through bringing failure to supervise actions for not
diligently investigating red flags caused by customer activity,
thereby reinforcing the expectation that registrants
self-investigate and remedy any improper activity.
Cooperative Enforcement. The fiscal
year-end announcement highlighted the Division's cooperative
enforcement initiatives, emphasizing that the Division worked
actively with federal and state criminal and civil law enforcement
authorities in more than 200 investigations and prosecutions. On
the international front, the Division received responses from 70
different regulators under the IOSCO Multilateral Memorandum of
Understanding Concerning Consultation and Cooperation and the
Exchange of Information or other information-sharing
arrangements.
Conclusion. The Division of Enforcement
has had its busiest year, as the number of investigations and
enforcement actions, as well as the amount of fines, increase.
Together with the Commission's increased presence, new CFTC
Rule 180.1 (which is patterned after Rule 10b-5) and newly granted
authority in CEA Section 4c(a)(5) to prohibit disruptive trading
practices, including disorderly trading during a contract's
closing period, we can expect to see this trend continue in fiscal
year 2013. Market participants can expect the Division to focus on
actions involving manipulative and disruptive trading, false
reporting to price-index publishers, strict position limit
aggregation standards, customer fund safeguards and the failure to
diligently supervise customer account activity raising red
flags.
Footnotes
1 CFTC Releases Enforcement Division's
Annual Results, No. 6378-12 available at cftc.gov/PressRoom/PressReleases/pr6378-12
.
2 The cases discussed in this article are
available at
cftc.gov/LawRegulation/Enforcement/EnforcementActions/index.htm
.
3 ISDA, et al. v. CFTC, Civil Action No.
11-CV-2146 (RLW) (September 28, 2012).
4 Position Limits for Futures and Swaps;
Final Rule and Interim Final Rule, 76 Fed. Reg. 71626 (November 18,
2011).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.