The CFTC Division of Enforcement has released an advisory regarding how the Division will look at cooperation received in the course of an investigation and the extent to which cooperative behavior may result in mitigation of penalties.
Such mitigation can make a real difference. It was just over one year ago that the CFTC announced settlements with three energy trading firms. Two of the firms settled for $20 million; one settled for $3 million. The difference was "exceptional cooperation."
The advisory indicates that many factors will be considered in judging the extent of cooperation, including whether the firm notified the CFTC of the wrong-doing and willingly waived privilege. The list of factors is long and is enough to make any defense attorney weep, since it effectively requires any firm whic is the subject of an investigation to provide everything now in the hope of mitigation later.
Even so, the CFTC has taken an important step in issuing this advisory. While the CFTC is asking for lots before giving credit for cooperation, at least everyone now knows the rules. Earlier this year, Rosemary Hollinger, who is in charge of the Chicago office of the CFTC's Division of Enforcement, spoke on this topic at a conference. She noted that there was often a wide disparity between what she considered exceptional cooperation and what defense counsel considered exceptional cooperation. While defense counsel probably won't like what is required by the advisory, at least everyone is now on the same page.
An article in this morning's WSJ (subscription required) indicates that Merrill Lynch, Smith Barney and UBS have reached a protocol regarding brokers who resign to go to another firm.
According to the article:
The protocol, expected to be effective in the fourth quarter, lets departing brokers take customer names, addresses (including e-mail) and phone numbers, but not account information, after resigning in writing to a branch manager. When a customer completes a one-page authorization, the old firm must transfer account data within a day, regardless of previous contractual restrictions.
It is surprising that something like this protocol has taken so long to arrive. For years, these firms have engaged in substantial litigation over departing brokers. The firms have rarely been able to stop brokers, or their clients, from leaving. While some firms have won substantial awards where another firm has conducted a full-blown "raid" (i.e., where an entire branch office has been induced to switch firms), the cost-benefit ratio of such litigation could not have been very attractive.
Last year, the NASD proposed a rule that would require that both the CEO and Chief Compliance Officer (CCO) of broker-dealers to annually certify as to the broker-dealer's compliance program.
Compliance officers immediately recognized that one effect of the proposed rule would be, in effect, to paint another target on their backs. In the event of any compliance problems, in addition to all the other disciplinary hammers that could be brought down on the CCO, the NASD would be able to take the certification and assert that (i) the CCO had filed a certification that was knowingly untrue; or (ii) the CCO had been negligent in investigating whether the certfication was true.
Today, an amendment to the proposed rule was published in the Federal Register. As revised, the rule no longer requires the CCO to file these certifications.
I think that the NASD realized that piling more potential liability on CCOs would primarily have the effect of driving good compliance officers out of the business.
The CFTC ordinarily operates with five commissioners. Recently, James Newsome, chairman of the CFTC, resigned to head the Nymex, a futures exchange in New York. This leaves only two commissioners, Sharon Brown-Hruska and Walt Lukken. CFTC commissioners are appointed by the president with the "advice and consent" of the Senate. Considering how the Senate confirmation process has gone for many appointments in recent years (try this Google search, to get a sense of the heat generated by both parties on this topic) it seems improbable that a new commissioner could be appointed and confirmed prior to the November elections. (Of course, there could be "recess appointments," but that seems unlikely). Consequently, the CFTC could be operating short-handed for some time to come.
Perhaps anticipating the difficulties that may arise, Sharon Brown-Hruska, the acting chairman, recently played up the CFTC's enforcement division in an interview.
The problem of a short-handed commission for the foreseeable future isn't that bad guys will be able to get with their schemes while there are only two commissioners -- the enforcement staff is knowledgeable and the commissioners have little to do with the day-to-day work of enforcing the futures laws and regulations. Where the problems will arise is on a policy level. Without a full complement of commissioners, the CFTC's staff will tend to defer decisions on any unusual policy matters. So major rule changes and requests for interpretative guidance will just sit, possibly for months.
This, regardless of your preference regarding the candidates, is another good reason to hope that the election season is over quickly.