New Administration Outlook: A Possible Roadmap to What's Ahead for the CFTC Under New Leadership

Agency reform and enforcement changes likely on the horizon under Acting Chairman Pham

On January 20, 2025, the Commodity Futures Trading Commission ("CFTC") unanimously elected Commissioner Caroline D. Pham as acting chairman. The Administration has not yet identified who will be nominated for the position of permanent chairman (Acting Chairman Pham is among the names reported to be under consideration). The tenure of Acting Chairman Pham will likely last for more than several months, if not longer, while the Administration considers its nomination and waits for Senate confirmation.[1] As commissioner, Acting Chairman Pham issued a litany of statements critical of the CFTC (and especially its Division of Enforcement) and the CFTC's approach to digital assets and event contracts. Indeed, on her second day as acting chairman, sweeping changes to the CFTC's leadership were made across the board, giving strong indication that many of her proposed reforms will be implemented during her tenure. The following reviews Acting Chairman Pham's prior remarks to provide a roadmap for the possible direction the CFTC will be heading in while under her leadership.

Commission Reform

As noted in her prior public statements, Acting Chairman Pham already has a strategic plan for reform of the CFTC.[2] Citing concerns over straying too far afield from the requirements of the Administrative Procedure Act and the Constitution, she has repeatedly called for a study by the Government Accountability Office ("GAO") to review the CFTC's procedures for rulemaking, examinations and compliance reviews, investigations and enforcement, adjudicatory proceedings, due process protections, and other administrative law requirements. Her laundry list of concerns includes: "the CFTC's lack of procedures, improper expansion of the law, increased delegation of authority, dubious enforcement actions and unfair adjudicatory proceedings, failure to comply with the APA, and general disregard for due process." Citing Dodd Frank's various requirements for the SEC to improve management, Acting Chairman Pham also calls for the same accountability measures to be implemented at the CFTC whereby a GAO study would provide the framework for reforms.

In addition to overarching reform, Acting Chairman Pham has identified specific areas of reform, ranging from leadership to the creation of new divisions and offices. Acting Chairman Pham seems to be wasting no time in implementing her agenda, making sweeping changes to the CFTC's leadership only two days after she took the helm. While transition of division leadership is expected with any administration change, the divisional deputy directors typically tapped to serve in an acting capacity were noticeably absent from the acting roles. This change could be due to the fact that Acting Chairman Pham is in an acting capacity herself or, rather, an indication that she could be looking outside of the career ranks to fill these leadership roles. The latter approach would be consistent with her calls for seeking industry experience and her prior criticisms of staff.[3]

Again looking toward the SEC as a model, Acting Chairman Pham has called for the creation of an examination division and an Office of the Retail Advocate. As discussed below, Acting Chairman Pham has been extremely critical of the CFTC's Division of Enforcement, especially with its examination by enforcement approach to operational and technical issues. She has proposed the creation of an examination division, similar to the SEC's, which would be staffed by trained and well-qualified examiners to handle supervisory matters with the National Futures Association ("NFA").[4] Additionally, she has made an urgent call for establishing a CFTC examination program for systematically important swap dealers. Likewise, she has proposed the formation of an Office of the Retail Advocate, which the Small Business Association ("SBA") and SEC both have. This office would study retail options reform, consider a new registration category for direct clearing retail derivatives clearing organizations, and promote responsible innovation through market pilot programs.[5]

Changes to Enforcement

The overarching reforms proposed by Acting Chairman Pham by their nature would take an extended amount time to implement and will, therefore, require the support of the permanent Chair. More immediate changes, however, will likely be seen within the CFTC's Division of Enforcement ("Division"). Acting Chairman Pham has issued numerous statements to enforcement actions filed by the Division, raising a multitude of concerns over various aspects of its staff's conduct from the source of enforcement investigations to settlements. Those concerns will undoubtedly be addressed in some fashion during her tenure. Indeed, Acting Chairman Pham has already reorganized the Division's existing task forces into two task forces, one focusing on complex fraud and the other on retail fraud.

Division investigations can be commenced in a multitude of ways, ranging from a whistleblower tip to referrals from the exchanges, the NFA, other operating divisions of the CFTC, and other governmental agencies. Acting Chairman Pham has questioned the sources of several enforcement actions brought in the last couple of years, including where the CFTC "piggybacked" off of an SEC investigation and there had been no evidence that any CFTC-registered associated persons had engaged in the recordkeeping violations cited.[6] Similarly, she called out the enforcement division for bringing enforcement actions by "mining" routine examination findings by the NFA and undermining the NFA's processes.[7] Acting Chairman Pham was also critical of the "prescriptive" approach to the Core Principles regulatory framework for futures exchanges and swap execution facilities, which had been rooted in examinations of swap execution facilities.[8] As she has called for a more formal and transparent process of referrals to the enforcement division from the CFTC's primary operating divisions to be published on the CFTC's website, it is probable that absent persistent or materially non-compliant conduct, enforcement actions stemming from deficiencies noted during routine examinations will decline.

In her prior statements, Acting Chairman Pham also noted the lack of accuracy and completeness in the CFTC's administrative files and legal filings presented to the Commission and expressed serious concern over the taking of shortcuts as part of enforcement's "ready, shoot, aim" approach.[9] While deference typically is given to enforcement staff as those conducting and, therefore, closest to the investigations, it is likely that investigations going forward will be conducted at a more deliberative pace. Future memoranda from staff seeking authorization to bring a complaint or to settle a matter will likely be subjected to higher levels of scrutiny and inquiry by the Commission, thereby requiring a more fulsome administrative file supporting the requested action. As a result, we expect that the rush to judgment by enforcement staff may subside and a return to more dialogue between firms and with the staff and division leadership given the anticipated increase in scrutiny.

Acting Chairman Pham has also called for more clarity in enforcement speaking orders, especially for matters of first impression. She advocates that the CFTC must ensure that speaking orders adhere to best practices for administrative agency policy making and: (1) provide regulatory clarity and clear expectations for compliance; (2) deter future violations to the greatest extent possible; and (3) avoid disruption to the markets and market participants.

Prior statements of Acting Chairman Pham indicate that the standards for self-reporting and cooperation credit will be relaxed. She previously raised concerns about what she viewed as the Division's contradictory approach to self-reporting by market participants and enforcement approach to non-material or technical issues.[10] Contrary to enforcement's current approach of only giving self-reporting credit when a firm immediately self-reports an issue to the Division, she has commented that it is more appropriate to consider whether the self-report was made after a firm has conducted an internal review and determined in good faith that a material non-compliance issue has occurred. While enforcement has historically taken the approach that the self-report must be made to the Division, Acting Chairman Pham noted that it is "nonsensical" that self-reporting to the primary division does not constitute self-reporting for cooperation purposes given that the CFTC is one agency. Acting Chairman Pham has also recommended creating a safe harbor from charges of making false statements if the self-reported information is later supplemented or corrected. She also suggested that credit should be given if issues are raised in the firm's annual compliance reports.

Similarly, the "examination by enforcement" approach, at least with regard to technical and operational deficiencies that are not the subject of misconduct or did not cause harm, will likely subside under Acting Chairman Pham.[11] In her dissent to an enforcement action involving two unrelated failures by vendors, Acting Chairman Pham returned to a strict reading of CFTC regulations at issue and called out that the language of the regulations required reporting of material non-compliance issues and for swap dealers to have a system that is reasonably designed to achieve compliance with the Commodity Exchange Act and CFTC Regulations. She also noted that there had been no findings of material weaknesses or deficiencies in the firm's operational risk management or failure to implement a reasonably designed compliance program. We anticipate that penalties and enforcement actions relating to technical or operational deficiencies that are not the subject of misconduct or caused harm will decrease and will likely remain with the primary operating division (and potentially a new examinations division). This is likely to be especially true in the off-channel communications and recordkeeping space, which had garnered record-breaking penalties over the last several years.

However, Acting Chairman Pham has called for a "holistic" approach to holding management accountable where there are especially egregious or prolonged deficiencies or material weakness in their risk management or compliance programs, and she has also supported the imposition of a compliance monitor in those instances. Acting Chairman Pham also noted a "missed opportunity" and expressed concern that a senior officer of a swap dealer, in addition to the chief compliance officer, had not been required to sign the written consent order on remediation status pursuant to a settlement, specifically noting that "[i]t is the business and management, not the Compliance department, who are the first line of defense."[12] Accordingly, we anticipate that individual accountability will likely be an enforcement focus for Acting Chairman Pham.

Finally, despite Acting Chairman Pham's criticisms of the CFTC's enforcement division, she has repeatedly supported the staff's efforts in bringing fraud and manipulation cases. We can expect that enforcement staff will continue to be aggressive on those fronts.

Potential Expansion of CFTC Jurisdiction

Acting Chairman Pham's tenure may also see an expansion of the CFTC's jurisdictional mandate into digital assets and event contracts as she has already announced the launch of public roundtables on both subjects.[13] As previously discussed in our note regarding interagency cooperation and the approach that Acting Chairman Pham will likely take in conjunction with the recently announced SEC Crypto Task Force, we expect that she will recommend public roundtables and regulatory sandboxes. It also is clear from her prior dissents that she is highly critical of the "regulation by enforcement" approach for digital assets. Therefore, novel interpretations of CFTC authority, without providing parties sufficient notice beforehand, will likely not be an enforcement priority going forward.[14] That said, Acting Chairman Pham previously expressed her view that the "SEC regulates the securities markets, and the CFTC has regulatory touchpoints with virtually everything else," and has already identified ten fundamentals for responsible digital asset markets that will likely form the framework for her approach toward prospectively regulating digital assets.[15] The ten fundamentals, listed in footnote 15, begin with identifying the particular product or service, protecting customers and the retail public, and addressing conflicts of interest.

Event contracts are also on the horizon. Although the CFTC issued a rulemaking proposal on event contracts last May,[16] the CFTC has also been named as a defendant in two separate pending lawsuits relating to event contracts alleging that the CFTC violated the Administrative Procedure Act, due process, and other constitutional rights, including the lawsuit brought by KalshiEx which we previously discussed in our blogpost [insert link].[17] Acting Chairman Pham dissented from the CFTC's proposed rulemaking on events contracts, instead advocating for a cautionary approach and being mindful of the potential federalism issues that may arise where regulation of gaming is reserved to the states.[18] Her dissent to the review and stay of the listing of political event contracts also advocated for reviewing the contracts on a case-by-case basis pursuant to CFTC Regulation 40.3.[19] As such, we anticipate that Acting Chairman Pham will take a deliberate approach to event contracts that stays within her interpretation of the bounds of the APA and the Constitution, seek public input, and evaluate these types of products on a case-by-case basis.

Conclusion

Changes are already afoot at the CFTC, and more are on the way. As Acting Chairman Pham implements her plan to go "back to basics," [20] we can expect significant changes at the agency in approach to both proposed rulemakings and enforcement. While some of Acting Chairman Pham's proposals will likely take longer to implement, especially in light of limited funding and resources and the impending appointment of a permanent chair, movement is already happening in the digital asset and event contract arenas, and Acting Chairman Pham shows no signs of slowing down. Whether the permanent appointment is given to Acting Chairman Pham or to someone else, it is clear that the new administration is breaking with the policies of the past administration in many material ways. For the next four years, it appears that regulation by enforcement is out, and industry friendly policies are in.

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