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CFTC fines bank $3M for recordkeeping failures and more
On August 14, the CFTC issued an order simultaneously filing and settling charges against a swap dealer (the respondent) for allegedly violating the Commodity Exchange Act and related regulations. The order stated the bank self-reported these violations based during an internal audit. Specifically, from December 2019 to the present, the respondent failed to maintain required records, used unapproved communication methods, and inadequately supervised its swap dealer activities. Furthermore, the respondent’s employees (including senior personnel) used personal text messages and other unapproved methods of communication for business purposes, and such communications were not preserved or monitored (as required by the CFTC). This failure to maintain records and supervise employees specifically led to violations of Sections 4s(f)(1)(C), 4s(g)(1) and (3), and 4s(h)(1)(B) of the Commodity Exchange Act, among others.
The offer of settlement, which the CFTC accepted, included the respondent admitting to the violations, agreeing to pay a civil monetary penalty of $3 million, and committing to cease and desist from further violations. Additionally, the respondent will conduct a review of its supervisory and compliance policies related to electronic communications and will implement changes to ensure future compliance.
CFTC orders bank to pay $5M for swap reporting violations
On August 26, the CFTC issued an order against a bank for allegedly failing to correctly report millions of swap transactions to a registered swap data repository, in violation of a prior CFTC order, and for failing to properly supervise its swap dealer business. According to the consent order, the CFTC found that from at least 2018 through 2023, the respondent violated multiple sections of the Commodity Exchange Act and CFTC regulations related to swap data reporting, engaged in improper supervision of its swap dealer business, and failed to comply with a 2019 CFTC order.
The respondent self-reported the violations and agreed to engage an outside compliance consultant to review and provide advice regarding its compliance program. The consent order imposed a $5 million civil monetary penalty. The CFTC acknowledged the respondent’s cooperation, which, according to the CFTC, resulted in a reduced civil monetary penalty.
CFTC amends regulations to allow direct access for U.S. introducing brokers
On July 29, the CFTC approved its final rule allowing U.S. introducing brokers (IBs) direct access to registered foreign boards of trade (FBOTs) for the submission of customer orders. Specifically, the CFTC will amend its regulations to allow FBOTs registered with the commission to provide direct access to their electronic trading systems to U.S.-based IBs for customer order submissions. The amendments will also establish a procedure for FBOTs to request revocation of their registration and remove outdated references to “existing no-action relief.” These changes will be intended to improve competition, risk management, and liquidity in the market while maintaining protections for U.S. customers trading foreign futures and options. The amendments respond to market developments since the original regulations were established in 2011.
CFTC awards over $1M to whistleblower
On August 8, the CFTC announced a $1+ million award to a whistleblower whose original information and voluntary assistance led to a successful CFTC digital assets-related enforcement action. According to the redacted order, the information from the whistleblower, who was the first, prompted the investigation’s start and led to the charges. The first whistleblower’s information also led to the discovery of the misconduct at issue, although it was “somewhat limited.” Conversely, the commission recommended denying the award applications of two other whistleblowers because the information they provided did not lead to the charges. Additionally, the commission also recommended denying the first whistleblower’s application for a related action award with respect to another agency because the other action was not based on the whistleblower’s original information.
CFTC finalizes rules on foreign boards of trade
On July 29, the CFTC released a final rule to amend Part 48 of its regulations to permit a CFTC-registered, foreign board of trade (FBOT) to provide direct access to its electronic trading and order matching system to an identified member or participant in the U.S. and registered with the commission as an introducing broker for customer orders. The final rule will:
- Permit FBOTs to provide direct access to introducing brokers to enter orders on behalf of U.S. customers
- Impose certain registration conditions for FBOTs
- Allow for FBOTs to request a revocation of registration voluntarily
- Remove the alternate registration procedure for FBOTs under preexisting no-action letters
The rule will go into effect 30 days after publication in the Federal Register.
CFPB circular warns against unlawful NDAs
On July 24, the CFPB issued a circular to law enforcement agencies and regulators clarifying that overly broad confidentiality agreements required by certain employers may violate Section 1057 of the CFPA, which protects whistleblowers. Nondisclosure agreements can violate the CFPA if they discourage employees from reporting suspected financial law violations to governmental authorities or participating in investigations. The Occupational Safety and Health Administration (OSHA) was highlighted as the key entity responsible for addressing retaliation claims under various federal laws, including the CFPA.
The CFPB’s analysis in the circular suggested that confidentiality agreements, when broadly worded and leading individuals to believe that communication with law enforcement regarding potential violations of law would constitute a breach of the agreement, may be seen as a threat of retaliation against whistleblowers, which is prohibited under Section 1057 of the CFPA. Such agreements may imply legal action or job termination for employees who breach confidentiality to report legitimate legal violations.
The circular referenced other regulatory bodies, including the SEC and CFTC, which have acted against companies using confidentiality agreements that obstruct reporting to government agencies. The CFPB advised that the risk of violating whistleblower protections should be reduced. Employers should ensure confidentiality agreements allow free communication with government enforcement agencies and cooperation in government investigations.
CFTC Chairman outlines regulatory gaps with digital commodities
On July 10, the Chairman of the CFTC, Rostin Behnam, testified before a U.S. Senate Committee and urged Congress to enact legislation to create a federal regulatory framework for digital assets. Courts have affirmed that digital asset commodities included Bitcoin and Ether. The Chairman expressed concerns about a lack of legislative responses that could have protected consumers from digital asset scams. Behnam also highlighted a report by the Financial Stability Oversight Council that identified a gap in regulation for commodity tokens. In sum, the Chairman stressed how Congress should act quickly to empower commodity regulators to provide essential customer protections.
Benham noted the CFTC was actively enforcing digital commodities by bringing over 135 cases. However, the escalating rate of enforcement cases reflected the accelerated adoption of digital assets by U.S. investors. The Chairman emphasized that the CFTC, primarily responsible for overseeing derivatives markets, was allocating significant resources towards a market that it lacked the authority to regulate robustly. The Chairman also noted the progress made by other countries in establishing regulatory frameworks for digital assets. He warned that regulatory gaps left U.S. consumers vulnerable to exploitation by bad actors and hindered coordination efforts. The Chairman concluded with his legislative priorities for a comprehensive regulatory framework, including a principles-based oversight model, adequate funding, disclosure requirements, anti-money laundering measures, and a clear distinction between commodities and securities. A link to the recording of the testimony can be found here.
President Biden taps Goldsmith Romero to become next FDIC Chair
On June 13, President Biden announced Christy Goldsmith Romero as his nominee for FDIC Chair. Goldsmith Romero most recently served as a Commissioner at the CFTC since 2022, where she sponsored the CFTC’s Technology Advisory Committee examining cybersecurity, artificial intelligence, digital assets, and blockchain technologies. Goldsmith Romero spent 12 years at the Treasury where she served as the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), as well as on a Council of Inspectors General overseeing the FSOC. Her oversight of SIGTARP resulted in the recovery of more than $11 billion in civil charges against large financial institutions and criminal charges against hundreds of individuals. Goldsmith Romero has also held positions at the SEC as well as in academia as a law professor.
CFTC reports on success of whistleblower policy by citing recent $4.5 mil. award
On June 3, the CFTC awarded over $4.5 million to an anonymous whistleblower who provided information and industry expertise as part of an enforcement action. The CFTC noted that the award highlighted the pivotal role whistleblowers play in maintaining the integrity of the futures markets. Ian McGinley, the CFTC's Director of Enforcement, commended the whistleblower for their extensive cooperation with the enforcement staff. Additionally, Brian Young, who leads the CFTC's Whistleblower Office, emphasized that the award program is open to individuals from diverse backgrounds.
The CFTC noted this award solidified the CFTC Whistleblower Program's impact since its inception in 2014. With approximately $370 million awarded to date, the program has been instrumental in numerous enforcement actions that have resulted in over $3.2 billion in sanctions. The program was funded entirely by monetary sanctions paid by violators of the Commodity Exchange Act, ensuring no funds are taken from harmed customers.
Securities regulators issue guidance and an RFC on AI trading scams
On January 25, FINRA and the CFTC released advisory guidance on artificial intelligence (AI) fraud, with the latter putting out a formal request for comment. FINRA released an advisory titled “Artificial Intelligence (AI) and Investment Fraud” to make investors aware of the growing popularity of scammers committing investment fraud using AI and other emerging technologies, posting the popular scam tactics, and then offering protective steps. The CFTC released a customer advisory called “AI Won’t Turn Trading Bots into Money Machines,” which focused on trading platforms that claim AI-created algorithms can guarantee huge returns.
Specifically in FINRA’s notice, the regulator stated that registration is a good indicator of sound investment advice, and offers the Investor.gov tool as a means to check; however, even registered firms and professionals can offer claims that sound too good to be true, so “be wary.” FINRA also warned about investing in companies involved in AI, often using catchy buzzwords or making claims to “guarantee huge gains.” Some companies may engage in pump-and-dump schemes where promoters “pump” up a stock price by spreading false information, then “dump” their own shares before the stock’s value drops. FINRA’s guidance additionally discussed the use of celebrity endorsements to promote an investment using social media; FINRA states that social media has become “more saturated with financial content than ever before” leading to the rise of “finfluencers.” Finally, FINRA mentioned how AI-enabled technology allows scammers to create “deepfake” videos and audio recordings to spread false information. Scammers have been using AI to impersonate a victim’s family members, a CEO announcing false news to manipulate a stock’s price, or how it can create realistic marketing materials.
The CFTC’s advisory highlighted how scammers use AI to create algorithmic trading platforms using “bots” that automatically buy and sell. In one case cited by the CFTC, a scammer defrauded customers into selling him nearly 30,000 bitcoins, worth over $1.7 billion at the time. The CFTC posted a Request for Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets. The Request listed eight questions addressing current and potential uses of AI by regulated entities, and several more addressing concerns regarding the use of AI in regulated markets and entities for the public to respond to.