CFTC Advisory Outlines Materiality Criteria for Enforcement Referrals

On April 17, 2025, three operating divisions (the “Operating Divisions”) of the U.S. Commodity Futures Trading Commission (“CFTC”) and the Division of Enforcement (“DOE”) provided guidance in CFTC Letter 25-13 (the “Supplemental DOE Advisory”) on the criteria that the Operating Divisions will apply when deciding whether to make a referral to DOE. The Supplemental DOE Advisory supplements a February 25, 2025 enforcement advisory (the “First DOE Advisory”) providing guidance on, among other things, how DOE will evaluate self-reporting, cooperation, or remediation by a registrant or registered entity when recommending an investigation or enforcement action to the CFTC.

Key Takeaways

• The First DOE Advisory reversed prior DOE policy that had limited self-disclosure credit to reports made directly to DOE, and the Supplemental DOE Advisory now expands the divisions of the CFTC to which self-reports can be made for potential reductions in civil penalties and other credit. However, the Supplemental DOE Advisory indicates that parties should “use their own judgment” in deciding whether to self-report the matter directly to DOE, “particularly [for those violations] involving fraud, manipulation, or abuse.”
• According to the Supplemental DOE Advisory, the Operating Divisions may refer violations that they deem material to DOE, but the Operating Divisions will address supervision or non-compliance issues that are not material with the registrant or registered entity directly. 
• According to the CFTC, the Supplemental DOE Advisory aims to build on the First DOE Advisory to provide registrants and registered entities with greater transparency and guidance on the materiality or other criteria that the Operating Divisions will use to determine whether to make a referral to DOE.
• The Supplemental DOE Advisory is the CFTC’s latest effort to incentivize self-reporting. The decision whether to voluntarily self-report potential misconduct to the CFTC and cooperate with any ensuing investigation, however, will continue to be sensitive and require a careful assessment of potential risks and benefits. 

The Supplemental DOE Advisory’s Framework

The Supplemental DOE Advisory provides that the Operating Divisions may refer material violations to DOE. To determine materiality, the Operating Divisions will apply what the CFTC characterizes as a “reasonableness standard” to the following criteria (accounting for the registrant’s or registered entity’s size, activity, and complexity):

• Especially egregious or prolonged systematic deficiencies or material weaknesses of the supervisory system, controls, or program;
• Knowing and willful misconduct by management, such as conduct evidencing an intent to conceal a potential violation, or supervision or non-compliance issue; or
• Lack of substantial progress towards completion of a remediation plan for an unreasonably lengthy period of time, such as several years, particularly after a sustained and continuous process with the applicable Operating Division regarding the lack of substantial progress.

The CFTC has sole discretion to determine whether a matter is material. The Operating Divisions will address supervision or non-compliance issues that are not material with the registrant or registered entity directly. “Supervision or non-compliance” issues could include issues involving a registrant or registered entity’s supervisory system or controls, risk management program, compliance program, or other system or program that is used to achieve compliance with the Commodity Exchange Act or CFTC regulations. 

According to the CFTC, the mere failure to meet, or extension of, a deadline for corrective action or a remediation plan, on its own, will not be sufficient for a referral to DOE.

The Supplemental DOE Advisory also provides criteria for chief compliance officers to consider when determining whether an issue qualifies as a material noncompliance issue for mandatory disclosure in an annual compliance report. 

Conclusion

The Supplemental DOE Advisory suggests a more transparent and standardized approach for referrals from the Operating Divisions to DOE. Companies and individuals nevertheless should conduct a careful risk and benefit analysis to determine whether to self-report to the CFTC and cooperate in any ensuing CFTC investigation.