Our Investment Funds Group reviews the implications of a Commodity Futures Trading Commission (CFTC) policy targeting chief compliance officers (CCOs) as individuals if their companies’ compliance programs fail.

• The policy would bring the CFTC into agreement with current Securities Exchange Commission policy
• The CFTC has already started to use “examination by enforcement” to impose personal liability on CCOs for compliance failures
• CCOs should diligently document the compliance-driven actions they take

The Commodity Futures Trading Commission (CFTC) has indicated that chief compliance officers (CCOs) of firms registered with the CFTC – which includes many investment fund managers – may face personal liability for a firm’s noncompliance with CFTC rules and regulations. This position would harmonize the CFTC with the Securities Exchange Commission (SEC), which has a long history of imposing personal liability on CCOs for failures of a firm’s compliance program.

This position will impact investment managers that are registered with the CFTC as commodity pool operators (CPOs) and commodity trading advisors (CTAs), including those managers who rely on the CFTC’s 4.7 exemption from certain disclosure, reporting, and recordkeeping requirements that otherwise apply to CFTC-registered firms.

These advisers were put on alert this week when CFTC Commissioner Caroline Pham indicated in an interview with Law360 that the CFTC’s Enforcement Division may seek to hold CCOs liable for a firm’s misconduct and compliance program failures, such as the actions of a rogue trader.

Examination by Enforcement

Registered CPOs and CTAs are subject to routine audits by the National Futures Association (NFA), the self-regulatory organization for the futures industry, and can expect the NFA to notify the CFTC of compliance shortcomings.

The CFTC has already started to use “examination by enforcement” to impose personal liability on CCOs for compliance failures at their firms. In the CFTC’s recent case against cryptocurrency exchange Binance, the agency fined CCO Samuel Lim $1.5 million after he actively instructed Binance employees and customers on how to evade anti-money laundering controls. While Pham supported the CFTC’s action against Lim, she remarked that there should be a distinction between CCOs facing personal liability for “egregious personal misconduct,” such as actually engaging in fraud, and noncompliance issues generally. But Pham noted that the CFTC’s decision to hold CCOs personally liable for “run-of-the-mill” control deficiencies may be due, in part, to the agency’s expanded pool of registrants following the Dodd–Frank Act and the fact that the agency regards the business and compliance functions of a firm as one rather than two distinct lines of defense.

What’s Next?

Although the CFTC has not released any official statement on personal liability of CCOs, Pham’s remarks – together with the industry’s recent enforcement stance in Binance – indicate that the CFTC is inclined to impose personal liability on a CCO for failures of their company’s compliance program. For CCOs of firms that are dually registered with the CFTC as CPOs/CTAs and with the SEC as registered investment advisers, this type of personal liability framework simply harmonizes the approach of the CFTC with that traditionally taken by the SEC. In all instances, CCOs seeking to bolster their position in the event of a compliance program failure should diligently document the compliance-driven actions they take, including recommendations made internally and escalations to a firm’s management.

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