What does the future hold?
Before retiring, former CFTC Chairman Gensler commented that the CFTC was “shelving” cases because of its lack of resources. Regardless of the budgetary constraints, it seems highly unlikely the CFTC will “shelve” enforcement of activity that can be characterized as criminal. Instead, it is more likely that the Commission will pursue such cases in tandem with the Department of Justice and a court-appointed receiver to triage its dwindling resources.
In addition, the CFTC’s new enforcement tools make it easier to bring cases by going after reckless but unsuccessful attempts to manipulate markets, for example. These tools increase the likelihood that CFTC enforcement staff is building a pipeline of new cases even if it cannot pursue them at the moment. As resources come available, this anticipated pipeline likely will result in a rash of new enforcement cases.
“Enforcement scorecard,” (below) shows the increase in both the cases filed by the Division of Enforcement over the past several years and, more importantly, the number of investigations opened each year (based on available statistics).
In short, the CFTC has a massive pipeline of cases. It can be expected to continue to file new matters and to open new investigations at an ever increasing pace — this year more than others, as the CFTC’s swap authority is now well-established and ready to be tested.
The CFTC itself has predicted that 2014 will see “continued growth in enforcement cases filed under the new jurisdiction and enforcement powers provided under Dodd-Frank including fraud based manipulation, manipulation authority over OTC trading, and enforcement of new false reporting prohibitions.”
In addition, the pipeline of old cases (hundreds of new investigations opened annually have to go somewhere) suggests that the trendline of new enforcement cases filed will continue to go up—and will include scores of old cases. The CFTC filed numerous dated enforcement actions in 2013 related to technical violations of broker segregation rules. Some industry particpants argued that this was done to help justify the reinterpreation of its residual interest rule. Regardless of your opinion, it shows that the Commission is willing to look back several years even for relative minor violations.
What does this mean for the industry? Certainly greater expenses, as compliance costs and legal fees continue to go up. Will the world be safer for investors? Perhaps, although enforcement based on yesterday’s frauds (and rule violations) only means that yesterday’s frauds are not likely to be repeated. In an ever-changing financial landscape, it could be that the CFTC’s budget would be better spent figuring out where tomorrow’s frauds are coming from—and preventing them before commodity investors are harmed.
Trace Schmeltz is a partner in the Chicago and Washington, D.C., offices of Barnes & Thornburg LLP, where he is the co-chair of the firm’s Financial, Corporate Governance, and M&A Litigation Group and a member of the White Collar Crime Defense Practice Group.