By Michael Smallberg
The Commodity Futures Trading Commission (CFTC) should stand tall against industry lobbying and establish a robust whistleblower program, POGO argued in a public comment submitted last week. Once described as a "sleepy little agency" by former Chairman Mary Schapiro, the CFTC has come under intense scrutiny lately as it ramps up its rulemaking on a number of critical oversight issues under the Dodd-Frank financial reform law. On Friday, POGO submitted a public comment on the CFTC's proposed rule for implementing a new program to provide financial awards to whistleblowers who help to expose fraud, manipulation, and abusive trading practices.
CFTC needs all the help it can get
Many of our readers are probably familiar with the False Claims Act and the existing whistleblower award programs at the Internal Revenue Service (IRS) and Securities and Exchange Commission (SEC). We've also been blogging recently about the significant changes to the SEC's program under the financial reform law. But in addition to making vast improvements to the SEC's program, the Dodd-Frank law gave virtually identical whistleblower award authority to the CFTC, the federal agency tasked with regulating commodity futures and options markets.
The CFTC can now provide an award to whistleblowers who voluntarily provide original information on a violation of the Commodity Exchange Act leading to a successful enforcement action that results in monetary sanctions of $1 million or more. Whistleblowers can receive between 10 and 30 percent of the amount recovered, make anonymous disclosures, and appeal the CFTC's decision to not provide an award. Importantly, whistleblowers also can file for relief if they are retaliated against for making a disclosure.
As the CFTC tries to keep up with its expanded authority under Dodd-Frank—including its enhanced responsibilities for regulating the $300 trillion over-the-counter derivatives market in the U.S.—with severely limited staff and resources, it needs all the help it can get from whistleblowers on the front line. Tipsters have played a central role in numerous prominent enforcement cases at the SEC, and Congress appropriately decided to offer enhanced incentives and protections for whistleblowers to make similar disclosures to the CFTC.
Industry thinks it can police itself
Many industry groups responded with alarm to the Dodd-Frank whistleblower provisions, and in recent weeks these groups have been pulling out all the stops to weaken the new program at the CFTC. In the days leading up to last Friday's deadline for submitting a public comment, the CFTC was inundated with letters from the Chamber of Commerce, the Securities Industry and Financial Markets Association, the Futures Industry Association, the Financial Services Roundtable, the Investment Company Institute, and others seeking to influence the agency's rulemaking on the whistleblower program.
Nearly every industry group raised concerns that the prospect of a financial award will tempt employees to circumvent their firms' internal compliance programs, many of which were established or enhanced following the passage of the Sarbanes-Oxley Act. Some even want the CFTC to require whistleblowers to report problems internally in order to qualify for an award, unless the whistleblower can prove that their firm's compliance program is grossly inadequate.
POGO believes that the proposals for internal whistleblower reporting would require the CFTC to show a deference to corporate compliance programs that was never intended by Congress. But even worse, such a requirement could also unnecessarily put a whistleblower at risk or allow violators of the law to evade scrutiny or enforcement.
Examples of poor internal compliance programs abound
A recent survey conducted by KPMG revealed that many employees lack confidence in their firms' internal reporting systems. Nearly 75 percent of employees said they have personally observed or have firsthand knowledge of wrongdoing within their organizations during the previous 12 months, but only 50 percent believed they would be protected from retaliation if they reported wrongdoing to management, and even fewer believed they would be satisfied with the outcome of an internal investigation. Along these lines, a study by the Ethics Resource Center found that approximately 40 percent of employees who witness fraud or misconduct do not report it to anyone.
If internal compliance systems were so successful, we wonder why they failed to detect and avert the widespread abuses that fueled the financial crisis, especially abuses involving high-level managers. The recently released report by the Financial Crisis Inquiry Commission provides several examples of senior executives weakening their firms' internal compliance programs. For instance, at a summer retreat in 2006, the chairman of Fannie Mae introduced a new chief risk officer, but declared he would not stand in the way of risk-taking: "We have to think differently and creatively about risk, about compliance, and about controls....Today's thinking requires that these areas become active partners with the business units and be viewed as tools that enable us to develop product and address market needs. Enrico Dallavecchia [the new Chief Risk Officer] was not brought on-board to be a business dampener."
In another example, Scott McCleskey, a former chief compliance officer at credit rating agency Moody's, recalled how a former president of Moody's confronted him in front of the Board about the compliance program standing in the way of the company's revenue: "So Brian Clarkson comes up to me, in front of everybody at the table, including board members, and says literally, 'How much revenue did Compliance bring in this quarter? Nothing. Nothing.'...For him to say that in front of the board, that's just so telling of how he felt that he was bulletproof....For him, it was all about revenue."
Given how much compliance programs can vary from firm to firm, whistleblowers should be given the option to report problems directly to the CFTC, and to qualify for an award if the tip leads to a successful enforcement action. In fact, we hope that a strong whistleblower program at the CFTC will force companies to make real improvements to their compliance programs so that employees can feel more confident reporting problems internally.
CFTC: don't get swept up by the lobbying tidal wave
Nonetheless, the CFTC has come under intense pressure to make internal reporting a general requirement. And this is just the lobbying they've received on one particular issue. As soon as Dodd-Frank passed in July 2010, lobbyists stormed the CFTC and other regulatory agencies seeking to "make their mark" on hundreds of financial reform rules. One CFTC commissioner recently stated that the "number of people that have come in requesting to be exempt from the law, or to have the law delayed has literally shocked me."
Source: Center for Responsive Politics
And thanks to the CFTC posting its meetings with outside groups to discuss the implementation of Dodd-Frank, we can see that industry organizations have continued their efforts to shape the agency's rulemaking on a wide range of financial reform issues.
Despite this onslaught of industry lobbying, we urge the CFTC to hold its ground and establish a strong whistleblower program that provides safe and open channels for employees to disclose wrongdoing. A strong whistleblower program will protect the interests of investors and taxpayers, and will help the CFTC crack down on fraud, manipulation, and abusive trading practices, just as Congress intended.
Michael Smallberg is a POGO investigator.
Image by Flickr user stevendepolo, used under Creative Commons License.
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