The staff of the US Commodity Futures Trading Commission (CFTC or Commission) on April 17, 2025 issued an advisory outlining the criteria the agency’s Market Participants Division, Division of Clearing and Risk, and Division of Market Oversight (the Operating Divisions) will use to determine whether to refer a potential violation of law to the Division of Enforcement (the Referral Advisory), further increasing the transparency of its enforcement program.
This follows on the heels of the Division of Enforcement’s February 25, 2025 advisory (the Enforcement Advisory), in which Enforcement staff announced for the first time that a party may receive “self-reporting” credit in seeking a reduced penalty when that party reports a potential violation to the appropriate Operating Division rather than directly to the Enforcement Division. That announcement abrogated an earlier policy under which self-reporting credit was not available, even where a firm reported a potential violation to its primary regulatory division.[1]
It has long been the case that when an Operating Division learns of a potential violation of the Commodity Exchange Act (CEA) or CFTC regulations, the Operating Division may refer the matter to the Division of Enforcement. However, the Commission has never previously informed the public of what circumstances may give rise to a referral. The Referral Advisory provides guidance on what criteria the Operating Divisions may apply in determining whether to refer a matter.
GUIDANCE ON REFERRALS TO THE ENFORCEMENT DIVISION
The Referral Advisory states that the Operating Divisions may refer potential violations that are “material” to the Division of Enforcement. To determine whether a matter is material, the relevant Operating Division will (1) apply a “reasonableness” standard and (2) may refer a matter involving one or more of the following:
- Egregious violations: Egregious or prolonged systematic deficiencies or material weakness of the supervisory system, controls, or program
- Intent: Knowing and willful misconduct by management, such as conduct evidencing an intent to conceal a potential violation, or supervision or noncompliance issue
- Lack of remediation efforts: Lack of substantial progress toward the completion of a remediation plan for an unreasonably lengthy period of time, such as several years, particularly after a sustained and continuous process with the appropriate Operating Division
For a potential violation that is not deemed material, the appropriate Operating Division will address the matter directly with the self-reporting party without referral to the Division of Enforcement. The Referral Advisory indicates that this will generally apply to matters involving supervision or noncompliance issues (as opposed to conduct involving, for example, fraud, manipulation, or abuse), unless the potential violations are nevertheless material under the criteria provided. It advises firms to use their own judgment to determine whether it is appropriate to self-report a material violation directly to the Division of Enforcement in the first instance.
SIGNIFICANCE OF THE REFERRAL ADVISORY
Together with the Enforcement Advisory, the Referral Advisory marks an important change in how CFTC staff, under the Commission’s new leadership, are thinking about the Commission’s separate but related functions as a regulator and enforcement agency. As a practical matter, this change should mean that staff with the most direct expertise and day-to-day involvement in technical compliance issues under the CEA and CFTC regulations generally would be the ones ensuring that the requirements are applied properly and consistently.
Acting CFTC Chairman Caroline Pham observed in a recent speech that this approach may help the Commission better identify emerging issues, risks, or trends earlier than it would otherwise.[2] Firms will also have more clarity to determine whether to self-report a noncompliance issue to the appropriate Operating Division without what Acting Chairman Pham called “undue concern” regarding referral for an enforcement action. Conversely, it leaves to the Division of Enforcement the task of addressing serious misconduct such as fraud and manipulation, where technical compliance issues may not be front and center.
WHAT IS NEXT FOR ENFORCEMENT?
Market participants should be aware that the policies reflected in the Referral Advisory cannot by themselves eliminate the prospect of enforcement actions for technical violations. The Division of Enforcement may learn of such violations directly, such as through tips from whistleblowers, and nothing in the Referral Advisory guarantees that Enforcement staff will not pursue them. The Commission itself, under new leadership, will be the final arbiter of how these matters are handled.
[1] CFTC, Updated Advisory on Self Reporting and Full Cooperation (Jan. 19, 2017).
[2] CFTC, Keynote Address by Acting Chairman Caroline D. Pham, FIA BOCA50 (Mar. 11, 2025).
[View source.]
