The Commodity Futures Trading Commission (CFTC) recently announced a significant enforcement action against Goldman Sachs & Co., one of the leading players in the financial industry.

The CFTC’s order revealed that Goldman had violated the cease-and-desist provision of a prior order and committed recordkeeping violations pertaining to its failure to properly record and retain certain audio files.

Alongside this announcement, CFTC Commissioner Kristin Johnson issued a comment emphasizing the importance of regulatory compliance and the need for appropriate penalties to deter repeated violations by market participants.

$5.5 million civil monetary penalty on Goldman

The CFTC’s order detailed that Goldman Sachs failed to maintain audio recordings related to its activities as a swap dealer, as mandated by the Commodity Exchange Act and existing CFTC regulations. This failure to comply with established statutory and regulatory requirements led to the violation of a cease-and-desist order issued by the CFTC in 2019 for the same non-compliance. As a result of these violations, the CFTC imposed a $5.5 million civil monetary penalty on Goldman and required the firm to cease further violations of recordkeeping provisions outlined in the Commodity Exchange Act and CFTC regulations.

The order highlighted the fact that this was not the first instance of Goldman’s failure to maintain audio recordings. In 2012, the CFTC had already established swap dealer recordkeeping requirements, which Goldman later failed to fulfill. Moreover, after the 2019 CFTC action, Goldman once again found itself in violation of audio recordkeeping requirements, signaling a concerning trend of repeated non-compliance. Commissioner Kristin Johnson expressed her concerns about central market participants repeatedly violating well-established legal requirements.

Challenges when dealing with 3rd party vendors

The comment by Commissioner Johnson acknowledged the challenges that market participants face, particularly when dealing with third-party vendors for technology and cyber resilience services.

However, she emphasized that this reliance on third-party service providers cannot serve as a defense for regulatory violations. The comment also addressed the issue of penalties and deterrence. While civil monetary penalties play a pivotal role in enforcing regulations, Commissioner Johnson raised questions about the effectiveness of these penalties when repeat offenders repeatedly engage in the same violations. The imposed penalty was noted to be relatively small compared to Goldman’s financial stature, prompting a discussion about the calibration of penalties to ensure that they effectively deter misconduct.

Commissioner Johnson underscored the vital role of recordkeeping requirements for swap dealers. These requirements aim to ensure transparency and provide regulators with the tools necessary to reconstruct trades accurately, assess compliance, and protect customers. Failure to maintain these records undermines the CFTC’s ability to execute its mission effectively and erodes market integrity.

CFTC’s Kristin Johnson wants harsher penalties

The CFTC’s enforcement action against Goldman Sachs serves as a stark reminder of the importance of regulatory compliance in the financial industry.

The case highlights the challenges posed by third-party service providers and raises questions about the adequacy of penalties in deterring repeated violations.

“When we find that—notwithstanding fines or penalties—market participants repeatedly engage in material violations of the same Commission regulations based on the same or substantially similar behavior, we must examine the effectiveness of our resolution methodology.  Civil monetary penalties are one of the most important levers employed by the Commission to enforce the CEA and CFTC regulations in accordance with the Commission’s mission.

“These penalties serve the purpose of general and specific deterrence, in other words they serve to put the market and the specific registrant on notice that the Commission intends to enforce the CEA and CFTC regulations vigorously and punish violators substantially. The Commission’s penalties must be rightly calibrated to deter repeat offenders and to prevent anyone from perceiving penalties as the cost of doing business.

“The resolution announced today—a $5.5 million penalty—represents less than one half of one percent of the net income that The Goldman Sachs Group, Inc., of which Goldman is a material subsidiary, reported solely for the second quarter of 2023.  Put differently, the civil monetary penalty imposed today is quite literally less than the profit Goldman can earn by the end of the day today.”

Commissioner Kristin Johnson’s comment further underscores the need for vigilance in maintaining compliance and the obligation of market participants to uphold established legal requirements. As regulatory bodies continue to evolve, it remains crucial for financial firms to prioritize adherence to regulations to safeguard the integrity of the markets and ensure fair and transparent practices.