Remarks of Chairman J. Christopher Giancarlo at the North American Securities Administrators Association (NASAA) Conference, Washington, D.C.
May 21, 2018
Thank you, Michael Pieciak. Good morning everyone.
We are here to highlight the importance of cooperative enforcement among the Commodity Futures Trading Commission and individual States securities commissions.
Last year, the day after the White House announced its intention to nominate me as CFTC Chairman I pledged that the agency would look to benefit from cooperation with civil and criminal capabilities of other federal and state regulators and enforcement agencies. Today, I am making good on that pledge.
In just a moment, we will sign an important milestone in the area of US federal and state financial fraud detection and prosecution. This Memorandum of Understanding (MOU) between the CFTC and individual States securities commissions will focus our collective resources to better uphold the law.
I am particularly pleased to sign this agreement today in your presence. I believe that by signing this document, I am making an agreement with each one of you. And, I am proud to do so.
This MOU will establish protocols and procedures, for the access, use, and confidentiality of information and treatment of non-public information in the course of law enforcement. It creates a framework for cooperation that will result in:
- 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 Commission and State Securities Administrators (SSAs).
Together, we will work to better connect the dots and see patterns of illegal activity that we currently miss. As I will discuss shortly, rapidly emerging financial technology generates a greater need for cooperation. And therefore I am pleased that we sign this agreement on NASAA’s 99th anniversary.
For almost ten decades the NASAA has been a trusted organization, a respected voice, and a powerful advocate. You have taken significant action to thwart manipulation, fraud, and misappropriation of financial instruments and investments, including digital assets. You have helped address money laundering, terrorism, and other criminal enterprises. Your work has benefitted every American. The nation owes you a debt of gratitude.
And the CFTC has relied on you. For over 40 years CFTC has worked with your organization. We have collaborated on joint enforcement actions, training and consumer fraud advisories. And we have arranged for several members of your organization to be detailed to our staff.
The CFTC and your member states have historically partnered to combat fraud in forex, commodity pools and precious metals. This partnership has been facilitated by the fact that our statute allows states to bring injunctive actions as co-plaintiffs with the CFTC in federal court for violations of the CEA. Let me give you a few examples that highlight our joint successes.
In a forex fraud case involving the misappropriation of over $40 million from 600 customers, the CFTC and the State of Oregon jointly filed a federal injunctive action as co-plaintiffs to stop a massive fraud scheme. As a result of close cooperation with the US Department of Justice, over $100 million in civil monetary sanctions were imposed and the principal defendant was sentenced to 8 years in prison.
In another case involving an $8.7 million affinity Ponzi scheme targeting 140 members of the Oklahoma City ethnic Chinese community, the CFTC and the State of Oklahoma filed an injunctive action as co-plaintiffs. The federal court ordered the Defendants to pay over $26 million in restitution and civil monetary penalties.
Additionally, the CFTC and South Carolina worked together to stop a precious metals Ponzi scheme where the defendants misappropriated over $90 million from 800 customers in sixteen states. Due to the coordinated efforts of the CFTC, South Carolina, and DOJ, the main defendant was ordered to pay approximately $57 million in civil monetary sanctions and sentenced to almost 20 years in prison.
I want to thank Joe Borg and everyone in this room for their support with such fine work.
Today, technology is leading us into a complex, virtual future. New financial tools are impacting trading, markets and the entire economic landscape with far ranging implications for capital formation and risk transfer. These technologies include machine learning and artificial intelligence, algorithm-based trading, data analytics, “smart” contracts valuing themselves and calculating payments in real-time and distributed ledger technologies, which over time may come to challenge traditional market infrastructure.
One thing is certain: ignoring these changes in the market would be a profound mistake. They will not go away. We must be proactive in making a regulatory and statutory framework that is ahead of the curve, prevents and punishes fraud and criminality, gives clarity and coherence to these emerging technologies, and anticipates the evolution of new instruments such as virtual currencies. The same technology can give us advantages in market regulation. Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence.
We are at the juncture of changing times. The American public expects a coordinated approach to overseeing these vital markets and protecting commercial and retail market participants from fraud.
As we think about the current and evolving state of regulatory oversight of virtual currency markets, we should explore the interplay of state and federal laws to ensure a coherent and rationalized approach – an approach that permits market-enhancing innovation to proceed, but that also keeps market integrity and consumer protection top of mind.
At the federal level, the CFTC will continue to enforce our statute and regulations to ensure the integrity of U.S. swaps and futures markets. We work closely with the U.S. Treasury and the Financial Stability Oversight Council. At the same time, our colleagues at FinCEN continue to apply anti-money laundering and terrorist finance rules, bank regulators assess and mitigate risks and exposures of our banking system, and our sister agency, the Securities and Exchange Commission, looks to impose necessary investor protections, especially around illegal unregistered securities offerings.
In fact, during the past year, the CFTC and the SEC have recommitted ourselves to close cooperation with respect to policy and jurisdictional considerations and in connection with enforcement matters. This close coordination between the Federal government’s primary financial market regulators reflects the personal commitment of me and SEC Chairman Jay Clayton. It also reflects our realization that the American taxpayer expects nothing less from agencies of their Federal government. They should expect careful agency cooperation to continue under our leadership. I expect that bad actors in the markets may come to dread it.
Meanwhile, all of you at the state level continue to act to protect and educate your citizens as age-old schemes are perpetrated under the cloak of novel technology. Indeed, we accept regulatory overlap between state and Federal authority for fraud and misconduct that preys on the significant public attention that surrounds virtual currency. It is critical to have as many cops on the beat when it comes to pursuing bad actors that harm our consumers in what is otherwise a promising area of innovation.
For this reason, we are so very pleased to partner with NASAA and all of you in order to pursue our collective goal of upholding the integrity of our markets. We applaud NASAA on a new program being announced today. It complements the CFTC’s on-going virtual currency investigations with NASAA members.
Indeed, in the past several weeks the CFTC has filed a series of civil enforcement actions against perpetrators of fraud and market abuse involving virtual currency. These actions and others to follow confirm that the CFTC, working closely with other financial enforcement agencies, will aggressively prosecute those who engage in fraud and manipulation.
The bottom line is that we don’t know where the future will take us. But, as we move into that future, the nation, and the world, can count on your efforts.
Today, with this MOU, we turn speech into action. As we discuss digital assets and the future, we must prepare for the present and future needs of oversight, law enforcement and consumer education. This MOU provides a much needed resource for the CFTC and state securities authorities. It gives us scaffolding that builds upon a firm foundation for the future.
And, the audience is global. The world is looking to the United States for leadership and guidance. Our best practices help countries formulate a response to the problems we confront that is ahead of the curve, sensible and effective.
As you know, CFTC has also been at the regulatory horizon on virtual assets, especially with our criteria for heightened review of new virtual currency products.
In the next few days, the CFTC website will publish a CFTC staff advisory providing guidance to exchanges and clearinghouses on certain enhancements when listing a derivative contract based on virtual currency. The advisory will clarify staff priorities and expectations in reviewing new virtual currency derivatives to be listed on a designated contract market or swap execution facility, or to be cleared by a derivative clearing organization. This advisory will reflect CFTC staff’s current thinking based on our growing experience with virtual currency derivatives. As new products are brought forth, staff will reevaluate and revisit the advisory, as necessary, to address any new and emerging issues.
As you may know, US futures exchanges and clearinghouses are self-regulatory organizations for the markets they operate. As front-line regulators, they should be proactive, flexible and engage in heightened review of new virtual currency contracts and their oversight to ensure proper surveillance of the trading and clearing of these contracts given the risks.
I believe that this advisory should help exchanges and clearinghouses effectively and efficiently discharge their statutory responsibilities as SROs, while keeping pace with the unique challenges of emerging virtual currency derivatives.
In drawing to a close, I note that a great American author, Tom Wolfe, passed away last week. He was one of my favorite writers. He had marvelous insight, striking panache and a potent pen. He coined such terms as, “The Right Stuff,” “Good Ol’ Boy” and “Radical Chic”.
Tom Wolfe’s last book was on language. He talked about the “inexplicable power of the word.” He said that language is our way of coming to grips with a changing world.
I thought about that with the signing of the MOU and the panels today. The world is indeed changing, moving into a virtual universe. Language and ideas are being transformed. Distributed ledgers, virtual currencies and other exponential digital technologies are taking us into a new era.
And this conference today is a step into that new world. Our ideas will be tested, molded, and transformed. The inexplicable power of the word will be tested. Through discussions like this one, that power will lead us into the future.
Which brings me back to the importance of today MOU on cooperative enforcement. This agreement increases the ability of the CFTC and state securities administrators to share information, discover misconduct and deter it. It eliminates burdensome red tape. It enhances long-standing relationships among our agencies. It supports our vital missions for now and for the future.
I am honored and proud to sign it.