Regulator Wants Financial Industry to Self-Report Wrongdoing
A similar philosophy is leading to a wide rollback of federal regulations on businesses under President Trump.
Under the commission’s new approach, companies that come clean about misconduct, cooperate fully with the agency as it investigates and fix their internal problems potentially stand to save millions of dollars.
Penalties imposed by the Commodity Futures Trading Commission range from a few hundred thousand dollars into the hundreds of millions of dollars, depending on the severity of the offense and the size of the offender. Mr. McDonald said in the draft speech and in an interview that the agency expected to reduce penalties by roughly 75 percent for those that fully cooperate. In rare instances, he said, cases would be dropped altogether.
Late Friday, Mr. McDonald told The Times that he and the commission’s chairman, J. Christopher Giancarlo, had changed their minds and decided against setting a 75 percent target. Instead, he said, they will reduce penalties by a “substantial” amount case by case.
The commission already rewards companies for self-reporting misconduct and for cooperating in investigations. But industry executives and lawyers have complained for years that they feel they are being severely penalized even when they assist the government.
Aitan Goelman, who was the commission’s enforcement director until February, said the agency’s small budget meant it had no choice but to rely in part on the institutions it regulated to help flag misconduct and other problems.
“The C.F.T.C. is so chronically and acutely under-resourced that it’s even more necessary to encourage cooperation,” said Mr. Goelman, now a partner at the law firm Zuckerman Spaeder in Washington.
Mr. McDonald joined the commission in April after serving as an assistant United States attorney for the Southern District of New York, where he prosecuted Bronx gangs and former State Assemblyman Sheldon Silver, among others.
He said in the interview that the new enforcement strategy was born out of his experience as a federal prosecutor. Providing clear and strong incentives for self-reporting by wrongdoers — whether they are bank traders or gang members — is a powerful weapon in law enforcement’s arsenal, Mr. McDonald said.
“We need to give the relatively low-level criminals an incentive to cooperate with us,” he said.
He argued that the new focus on self-reporting wasn’t a softening of the commission’s law enforcement strategy. “I don’t want anybody to think we’re going light on companies,” he said.
The emphasis is shifting as the Trump administration rethinks how the government regulates the private sector. Many of the changes are intended to ease the perceived burdens on corporations and other businesses — not a surprise considering that many of Mr. Trump’s cabinet members and senior advisers hail from Wall Street or previously ran large companies.
When it comes to oversight of the financial industry, early indications point to a softening approach.
Monetary penalties imposed by the three main entities that police Wall Street — the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the Financial Industry Regulatory Authority — were down sharply in the first half of 2017 compared with similar stretches in previous years. That trend partly reflects the winding down of cases stemming from the financial crisis, but corporate defense lawyers and banking industry officials say they detect a more business-friendly environment in general.
The Commodity Futures Trading Commission, created by Congress in 1974 to oversee the frenzied trading of futures contracts, was considered a regulatory afterthought for decades. With 706 full-time employees, including 178 in its enforcement division, it is far smaller than other law enforcement agencies.
In the Bill Clinton administration, the Treasury Department blocked the commission’s efforts to more closely regulate complex financial instruments known as derivatives, whose popularity was exploding. A decade later, the ubiquity of derivatives intensified the financial crisis because so many financial institutions were exposed to one another through the instruments.
Out of the ashes of the financial crisis, though, the commission took on a newly prominent role.
The Dodd-Frank financial overhaul law placed sweeping new regulatory powers in the agency’s hands. And a push from the agency’s chairman at the time, Gary Gensler, to go after bigger, splashier cases led the commission to a yearslong investigation into the manipulation of a widely used interest-rate benchmark known as Libor. Some of the world’s largest banks spent years stiff-arming the agency before grudgingly agreeing to cooperate once it became clear that the regulator was making progress.
The Libor investigation eventually turned up evidence of widespread misconduct. More than a dozen international banks admitted wrongdoing and paid billions of dollars in penalties to the commission and other regulators in the United States and overseas.
Bank executives argued that the Libor case, and others that followed, were examples of regulatory overkill, and that the length of the investigations and the severity of the penalties were uncalled-for. Wall Street came to view the Commodity Futures Trading Commission as a major source of frustration.
Mr. Trump named Mr. Giancarlo, who previously spent years as an executive in the brokerage industry, as the commission’s chairman.
Mr. Giancarlo, a free-market devotee who is respected on both sides of the political aisle, vowed to continue to make law enforcement cases a priority. But he also noted that securing headline-grabbing cases should not be a goal unto itself.
Mr. McDonald echoed that sentiment.
“We at the C.F.T.C. are committed to working together with the companies and individuals we regulate — transparently and in partnership — to identify and prosecute wrongdoing that has occurred, and to stop future wrongdoing before it starts,” he initially planned to say in Monday’s speech.
But late Friday, Mr. McDonald said he had decided to delete references in his speech to that “partnership” with the industry, out of concern that such language would come across as overly conciliatory.
Mr. McDonald is also aiming to shorten the duration of investigations so that they will take “months, not years.” The first settlements in the Libor investigation, which got underway in 2008, took place in 2012.
Representatives of the financial industry said the new tone was a welcome shift from an era when industry perceived the commission as being hellbent on extracting severe punishments.
“They’re not settling cases with Al Qaeda,” said Stephen Obie, a former enforcement official with the agency who now represents financial institutions as a partner at the law firm Jones Day. Under Mr. Giancarlo, he added, the commission has adopted a “more deliberate approach.”
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