|All Other Programs||72%|
|All Other Programs||73%|
The primary responsibility of the Enforcement program is to deter and prevent price manipulation or any other disruptions to market integrity and to protect all market participants from fraudulent or other abusive sales practices and misuses of customer assets. Such conduct undermines the integrity and functioning of the market as well as the confidence of market participants. In the enforcement role, each year the Commission performs investigations and conducts litigations for non-compliance with the laws and regulations under the jurisdiction of the CEA.
In FY 2011, the Enforcement program’s FTE allocation level is 200, an increase of 39 FTEs over the FY 2010 appropriation level. In FY 2009, despite operating significantly below its FTE allocation level of 160 for the entire year, the Enforcement program brought 25 percent more actions to protect customers and market participants than it had in FY 2007 and 2008. Many of these were quick-strike actions to freeze customer funds, resulting from tips regarding Ponzi-type and other fraudulent schemes. For example, in FY 2009, the Enforcement program filed over 24 of these Ponzi-type fraud cases, which represented a 100 percent increase in comparison to FY 2008 filings of this nature. In FY 2009, the Enforcement program also brought a large-scale case involving manipulative activity in milk futures.
The Ponzi-type fraud cases primarily arose from the unprecedented financial crisis which caused these schemes to collapse. Additionally, the use of increased authority provided by the Congress involving retail foreign currency fraud contributed to the increase in these cases. The Enforcement program was forced to shift significant resources from larger-scale market manipulation cases – primarily involving crude oil and other energy markets– to prosecute the Ponzi-type fraud cases, thus delaying the conclusion of these larger manipulation investigations. For example, in FY 2009, the Enforcement program anticipated using only five FTE’s to investigate and ultimately prosecute all retail foreign currency fraud leads, which is just a small subset of the Ponzi-type frauds handled by the Enforcement program. Within a month of the financial crisis, the Enforcement program devoted more than double the number of FTE’s anticipated to investigate and ultimately prosecute retail foreign currency fraud.
The additional 39 FTE’s requested in the FY 2011 budget are vital for the Enforcement program to continue to prosecute large-scale manipulations and other market abuses. The types of investigations being handled by the Enforcement program have become increasingly more complex. For instance, in the last decade, trading volume has increased almost six-fold and the amount of customer funds held at futures commission merchants has more than quadrupled alone. Also, the amount of information that the Enforcement program must analyze in its investigations is staggering. For instance, in the ongoing National Crude Oil Investigation commenced in May of 2008, the Enforcement program is reviewing millions of emails, instant messages, and other documents and analyzing incredibly complex trading strategies. As part of that investigation alone, the Enforcement program is reviewing over 8,000 hours of audio recordings. To handle the vast amount of information that must be analyzed, the Commission has made significant technology investments in its e-law program which has enabled the Enforcement program to keep up, in part, with the demands and complexities of manipulation investigations.
The additional FTEs requested for FY 2011 are vitally needed by the Enforcement program to address the following:
Responding to Violative Conduct. When an enforcement investigation indicates that violative conduct may have occurred, the Commission files either an administrative or civil injunctive enforcement action against the alleged wrongdoers. In administrative actions, wrongdoers found to have violated the CEA or Commission regulations or orders can be prohibited from trading and, if registered, have their registrations suspended or revoked. Violators also can be ordered to: cease and desist from further violations; pay civil monetary penalties of up to $1 million per manipulation violation or $140,000 per other violation, or triple their monetary gain, and pay restitution to those persons harmed by the misconduct. In civil injunctive actions, defendants can be enjoined from further violations, their assets can be frozen, and their books and records can be impounded. Defendants also can be ordered to disgorge all illegally obtained funds, make restitution to customers, and pay civil penalties. In FY 2009, the Commission’s efforts have thus far resulted in the award of approximately $147 million in restitution and disgorgement and $77 million in civil monetary penalties.
As detailed above, alleged violations prosecuted by the Enforcement program may arise from: commodity futures or option trading on U.S. exchanges; manipulative trading in the OTC markets that affect, or tend to affect, the futures or options markets; fraud involving certain off-exchange principal-to-principal transactions; or off-exchange retail forex transactions. The Enforcement program addresses various types of violative conduct including conduct that threatens the economic functions of the markets.
Protecting Market Users. The Enforcement program works to protect market users and the public by promoting compliance with and deterring violations of the CEA and Commission regulations. The bulk of the work in this area involves investigating and prosecuting enforcement actions in matters involving fraud and imposing sanctions against wrongdoers. These actions send a message to industry professionals about the kinds of conduct that will not be tolerated.
The Commission also pursues actions involving false or misleading advertising. Over the past several years, there has been substantial false and deceptive advertising of commodity-related investment products, often by unregistered persons and entities through various forms of mass media, such as cable television, radio, and the Internet. The Enforcement program has worked aggressively to detect and stop such advertising by filing enforcement actions. Similarly, the Enforcement program pursues cases charging misconduct involving off-exchange retail forex transactions and charging illegal futures and options, often in precious metals. Such cases typically involve unregistered “boiler rooms” selling illegal futures contracts and options to the general public. Again, the most likely victims are individual retail investors.
Supervision and Compliance Failures. The Enforcement program investigates and prosecutes cases involving supervision and compliance failures by registrants handling customer business. Such violations can threaten the financial integrity of registered firms holding customer funds and can, in certain circumstances, threaten the financial integrity of clearing organizations. Diligent supervision by registered firms also protects markets from manipulation and abusive trading practices, including wash sales.
Cooperative Enforcement Efforts. The Enforcement program works cooperatively with both domestic and foreign authorities to maximize its ability to detect, deter, and bring sanctions against wrongdoers involving U.S. markets, registrants, and/or customers.
On the domestic level, this includes sharing information with, and on occasion providing testimony or other assistance to, state regulators and other Federal agencies, such as the DOJ, the Federal Bureau of Investigation (FBI), the SEC, the FERC, and Federal banking regulators. The Commission may also file injunctive actions jointly with state authorities with concurrent jurisdiction. These cooperative efforts bolster the effectiveness of the Enforcement program by allowing it to investigate and litigate more efficiently.
Similarly, in the international realm, the Commission has entered into more than 25 formal information-sharing arrangements and numerous other informal arrangements with foreign authorities. These arrangements permit information sharing and cooperative assistance among regulators. Such arrangements benefit all nations involved and greatly enhance the ability of the Enforcement program to investigate matters that involve foreign entities and/or individuals, or transfers of tainted funds to foreign jurisdictions.
The markets continue to grow in volume and complexity as increasingly sophisticated instruments are employed across markets. An ever-larger segment of the population has money at risk in the futures markets, either directly or indirectly through pension funds or ownership of shares in publicly held companies that participate in the markets.
The Enforcement program will utilize the FTEs allocated for FY 2011 in targeting certain program areas, for example: 1) allegations of manipulation, attempted manipulation, trade practice violations, and false reporting; 2) misconduct by commodity pools, hedge funds, CPOs, and CTAs; and 3) financial, supervision, recordkeeping and other violations committed by registered entities. Also, in response to recent legislation reauthorizing the CFTC which provided the agency with clarified authority with respect to off-exchange retail foreign currency fraud and trading on ECMs, the Enforcement program will target off-exchange fraud involving illegal futures and options contracts, including those involving foreign currency; and trade practice violations. The allocated FTEs also will enable the Enforcement program to continue its commitment to cooperative enforcement activities.
Without these FTE resources, the Enforcement program will not meet established responsibilities. Without adequate staffing, the Enforcement program must be more selective in the matters it investigates, potentially leaving serious wrongdoing unaddressed. Furthermore, investigations will take longer to complete, particularly when increasing complex litigation draws resources away from investigations, resulting in less efficient and potentially less successful actions. Likewise, domestic and international cooperative enforcement activities will be undermined, adversely affecting not only the mission of the Commission, but also that of its domestic and international counterparts.
Enforcement staff are operating at full capacity and are forced to shift resources from important investigations to ongoing and future litigation demands, which limits our ability to pursue new investigations. If the Enforcement program is unable to bring actions because of insufficient resources, other authorities will not be available to step in and fill the void. Self Regulatory Organizations can take action only against their own members, and their sanctions cannot affect conduct outside their jurisdiction or markets. In addition, other Federal regulators and state regulators have limited jurisdiction and expertise in handling futures-related misconduct. Finally, while criminal prosecutions by the DOJ and State authority are an important adjunct to effective enforcement of the CEA, cooperative enforcement still requires the active use of Commission FTEs to assist criminal authorities in their prosecutions.
|FY 2010||FY 2011||Change|
|Outcomes||FY 2010||FY 2011||Change|
|GOAL ONE: Protect the economic functions of the commodity futures and option markets.|
|1.1 Futures and option markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity.||$18,097||67.38||$25,006||83.88||$6,909||16.50|
|1.2 Markets are effectively and efficiently monitored to ensure early warning of potential problems or issues that could adversely affect their economic vitality.||620||2.31||864||2.90||244||0.59|
|Subtotal Goal One||$18,717||69.69||$25,870||86.78||$7,153||17.09|
|GOAL TWO: Protect market users and the public.|
|2.1 Violations of Federal commodities laws are detected and prevented.||$19,238||71.61||$26,372||88.47||7,134||16.86|
|2.2 Commodities professionals meet high standards.||207||0.77||289||0.97||82||0.20|
|Subtotal Goal Two||$19,445||72.38||$26,661||89.44||$7,216||17.06|
|GOAL THREE: Foster open, competitive, and financially sound markets.|
|3.1 Clearing organizations and firms holding customer funds have sound financial practices.||$3,726||13.87||$5,178||17.37||$1,452||3.50|
|3.3 Markets are free of trade practice abuses.||554||2.06||718||2.41||164||0.35|
|3.4 Regulatory environment responsive to evolving market conditions.||806||3.00||1,193||4.00||387||1.00|
|Subtotal Goal Three||$5,086||18.93||$7,089||23.78||$2,003||4.85|
1 “Quick-strike” enforcement actions are those that the Commission files within four months of opening an investigation. (back to text)