Earlier this week, CFTC Chairman J. Christopher Giancarlo announced the signing of a Memorandum of Understanding (MOU) intended to enable greater enforcement coordination and information sharing between the CFTC and state securities agencies. The MOU formalizes a process for exchange of information and coordination between the CFTC, which has jurisdiction over the commodities and swaps markets, and state securities regulators and enforcers. It continues the trend of increasing prominence of the CFTC’s enforcement division, and further reinforces connections with state authorities to promote cross-jurisdictional cooperation and coordinated enforcement action. While the impact of the MOU remains to be seen, it is hoped that it will facilitate more coordinated and efficient enforcement proceedings in cases involving the CFTC. At the same time, the provisions for information sharing reinforce the prudence of assuming that enforcement authorities speak to each other. Therefore, companies facing possible investigations should ensure information provided to all relevant authorities is accurate and complete, and in appropriate cases may consider actively involving state securities agencies early on in order to potentially facilitate a later joint resolution.
New Policies for Sharing Information with States
As described, the MOU will “establish protocols and procedures” for sharing confidential information between the CFTC and state securities agencies. A related CFTC press release specified that this will include, at minimum, the CFTC sharing “investigative leads from the CFTC’s Office of the Whistleblower or other tips, complaints and referrals” with state securities agencies. It is expected that this may lead to an increase in commodities-related investigations by state enforcement authorities on the basis of information provided to the CFTC, including in cases where the CFTC is also investigating.
The announcement lists five expected results from these protocols and procedures:
- Leveraging of resources to support enforcement actions;
- Enhancing the impact of enforcement efforts and their deterrent effect;
- Encouraging the development of consistent and clear governmental responses to violations of the Commodity Exchange Act;
- Preventing the duplication of efforts by multiple authorities; and
- Facilitating vital exchanges of information and communications between the CFTC and state securities agencies.
Chairman Giancarlo paired this announcement with praise for the state securities agencies for taking action in the areas of fraud and manipulation for digital assets and simultaneously previewed expected guidance related to virtual currencies.
Takeaways and Looking Ahead
The CFTC has long cooperated with state authorities, so in some ways this is a formalized extension of existing policy, rather than a new paradigm shift. The announcement specifically highlighted three prior examples where the CFTC worked with the states of Oregon, Oklahoma, and South Carolina to bring cases recovering millions of dollars. This announcement will better enable such working relationships, although it will be interesting to see if the contemplated information sharing becomes the two-way street as envisioned, or if states attempt to retain high-profile enforcement actions. Still, regulated entities currently facing simultaneous investigations by the CFTC and state securities agencies should, as always, ensure that all communications with the entities are aligned and coordinated in light of this policy. This may also provide an opportunity for regulated entities to proactively involve state securities agencies when engaging in discussions with the CFTC. By doing so, in an appropriate case, one might avoid duplicative investigatory costs and increase the possibility of a global resolution in the event one is necessary. At a minimum, the results of this policy may allow a regulated entity to open a dialogue with regulators acknowledging and addressing simultaneous investigations.
Such entities should also be prepared for a possible uptick in state enforcement actions relating to Commodity Exchange Act or similar state-law violations. This will likely not, however, be in lieu of robust CFTC enforcement. As previously noted, the CFTC has been an increasingly active regulator under Chairman Giancarlo’s leadership. Thus, while touching on similar themes of cooperation among enforcement agencies, this announcement stands in contrast to the Justice Department’s recent stated intention to avoid “piling” companies with multiple penalties for the same conduct. Instead, as hinted in the announcement, expect the CFTC to take a leadership role for certain types of misconduct while the state securities agencies help police it. The focus and specific highlight of actions and regulations for digital currency likely portend the industries where the CFTC thinks that this relationship may have the most meaningful impact to start, and will be the area to watch closely to see how this new policy develops. That said, it remains to be seen whether state securities enforcers are content to fall into lockstep with an ongoing CFTC investigation or whether they prefer to take a more active and visible role. How further cooperation between the CFTC and state securities enforcers plays out going forward is likely, therefore, to remain a function of the nature of the case and the personalities involved.