CFTC Divisions Issue Staff Advisory on Referrals to Division of Enforcement

On April 17, 2025, the Market Participants Division, the Division of Clearing and Risk, and the Division of Market Oversight (collectively, the "Operating Divisions") of the CFTC, along with the Division of Enforcement ("DOE"), issued Letter No. 2513, "Staff Advisory on Materiality or Other Criteria That Operating Divisions Will Use to Determine Referrals to the Division of Enforcement" ("Advisory"). This Advisory comes on the heels of DOE's earlier advisory addressing self-reporting, cooperation, and remediation that was issued in February 2025. While referrals to DOE from the Operating Divisions are a mainstay of the CFTC's operating procedures, the Advisory is the first time that the referral process of matters from the various Operating Divisions to DOE has been formalized and made available to the public.

The Advisory: Which Matters Will Be Referred to the Division of Enforcement

This latest Advisory provides that only material supervision or material noncompliance issues will be referred to DOE by the Operating Divisions. The Operating Divisions will address supervision or noncompliance issues that are not material directly with the registrant or registered entity without referral to DOE. In determining materiality, the Advisory provides that the Operating Divisions will apply a reasonableness standard that will consider a registrant's size, activity and complexity, and the following factors:

(1) especially egregious or prolonged systematic deficiencies or material weakness of the supervisory system or controls or program;

(2) knowing and willful misconduct by management such as conduct evidencing an intent to conceal a potential violation or supervision or noncompliance issue; or

(3) 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 Operating Division regarding the lack of substantial progress.

In earlier remarks given by CFTC Acting Chairman Pham foreshadowing this Advisory, she noted that referrals to DOE would be appropriate for material noncompliance issues that involve especially egregious or prolonged system deficiencies, material weakness, or willful misconduct by management, if there is no material progress towards completion of a remediation plan for more than four years.

The Advisory also notes that a single instance of an issue or failure involving a technical or operational issue would not be considered a material supervision or noncompliance issue unless, looking at the totality of circumstances, the issue involved widespread impact to the registrants or its clients, counterparties or customers, or a failure of the registrant's systems, policies or practices that involves numerous persons, multiple errors, or significant monetary amounts given the size, activity, or complexity of the registrant. Notably, the Advisory noted that failing to meet a deadline (or an extension) for corrective action or remediation by itself is not sufficient for a referral to enforcement.

Takeaway

Taken together with the earlier advisory on self-reporting and cooperation, this latest Advisory continues the shift from the "examination by enforcement" approach of the prior Administration in handling technical and operational compliance deficiencies back to the Operating Divisions to address and oversee remediation efforts with registrants. Registrants should endeavor to identify and timely remediate nonmaterial deficiencies with the appropriate Operating Division in order to avoid potential referrals to DOE.