By MICHAEL SMALLBERG
Over the past few months, we've been paying close attention to the reforms that expanded the Securities and Exchange Commission's (SEC) program to incentivize outside whistleblowers whose tips lead to successful enforcement actions. But it's important to keep in mind that the Dodd-Frank financial reform law (Section 748) also created a new whistleblower award program at the Commodity Futures Trading Commission (CFTC), the independent agency whose duties now include overseeing the previously unregulated marketplace for over-the-counter derivatives.
Enacted in July 2010, Dodd-Frank established the following basic requirements for the CFTC’s whistleblower program:
- The CFTC can now pay awards to whistleblowers who provide information leading to a successful enforcement action that results in monetary sanctions exceeding $1 million;
- The award will be between 10 and 30 percent of the sanctions collected;
- Whistleblowers have the right to appeal award decisions;
- Employers cannot retaliate against whistleblowers for providing tips, and whistleblowers who experience retaliation can file in district court for relief such as back-pay and reinstatement at their previous position; and
- Information provided by whistleblowers that could reveal their identity is exempt from disclosure under the Freedom of Information Act (FOIA), but the CFTC Office of Inspector General (OIG) is required to study how the FOIA exemption affects whistleblower disclosures and the public’s ability to access information on the CFTC’s regulatory activities.
Once the law was enacted, industry groups such as the Chamber of Commerce, the Securities Industry and Financial Markets Association, the Futures Industry Association, the Financial Services Roundtable, and the Investment Company Institute aggressively lobbied to weaken the program. The groups warned that the possibility of financial awards would tempt whistleblowers to flood the CFTC with frivolous tips. Many even wanted the CFTC to require whistleblowers to report problems internally in order to qualify for an award.
POGO submitted a comment urging the CFTC to maintain safe and open channels for whistleblower disclosures, and to reject industry’s calls for an internal reporting requirement.
We were pleased to see that, for the most part, the CFTC appears to have heeded the concerns raised by POGO and other whistleblower advocacy groups. Although not perfect, the final rules are largely a victory for whistleblowers, as well as for the shareholders, traders, and consumers who stand to benefit from disclosures of fraudulent market activity.
The CFTC was under intense pressure to make internal reporting a requirement for whistleblowers seeking an award. Thankfully, the agency stood its ground.
In explaining its decision not to require internal reporting, the CFTC referred to POGO’s argument that such a requirement “would have a chilling effect on the whistleblower program and would put whistleblowers in harm’s way.” It appears the CFTC shares our view:
The Commission believes that to require internal reporting could raise the risk of retaliation, and have a chilling effect on whistleblowers who are inclined to come forward and bring information to the attention of the Commission. For these same reasons, the Commission has decided not to deem lack of cooperation with an internal investigation a basis to render a person ineligible for an award....A rule requiring internal reporting could...deprive victims of restitution and could deprive market participants and the public of the benefits associated with detection, prosecution, and deterrence of such violations of the [Commodity Exchange Act].
At the same time, the CFTC has followed the SEC’s lead in establishing internal reporting as a possible factor to consider when determining the amount of the award. Also, whistleblowers who report internally can still qualify for an award as long as they provide the information to the CFTC within 120 days.
We encouraged both the SEC and CFTC to stipulate that a whistleblower’s “independent analysis” could include an evaluation of publicly available sources—such as judicial and administrative hearings, government reports, hearings, audits, and investigations, and reports in the news media—if the analysis reveals information that is not generally known. This would enable the agencies to award tipsters such as Harry Markopolos, who raised red flags about Bernie Madoff’s Ponzi scheme by analyzing publicly available sources.
The CFTC acknowledged our comment, but unlike the SEC, the CFTC decided not to include this provision in its final rules.
Exclusions for certain employees
Like the SEC, the CFTC’s rules exclude attorneys who obtain their information through a communication subject to the attorney-client privilege or in connection with the representation of a client, and individuals who obtain their information through a violation of federal or state criminal law. In addition, the rules would generally exclude officers, directors, trustees, partners, or other individuals at a firm who learn about the misconduct through the firm’s internal channels for identifying and addressing possible violations, and employees whose principal duties involve compliance or internal audit functions. However, these employees can still qualify for an award if they believe that disclosure to the CFTC is necessary to prevent misconduct that is likely to cause substantial financial harm; if they believe the firm is impeding an investigation; or if at least 120 days have passed since the whistleblower reported information to their supervisor or to the firm’s audit committee, chief legal officer, or chief compliance officer.
Unlike the SEC, the CFTC’s rules do not exclude employees of public accounting firms. Although Dodd-Frank specifically required this exclusion for the SEC, and external auditors are obligated under the Securities Exchange Act of 1934 to report violations to the SEC, no such requirements are in place for the CFTC.
POGO supported the CFTC’s original proposal to broadly apply the anti-retaliation measures in Dodd-Frank, including to individuals who do not qualify for a whistleblower award.
Thankfully, the CFTC decided to implement this rule as proposed, clarifying that the anti-retaliation measures “apply whether or not the whistleblower satisfies the requirements, procedures and conditions to qualify for an award,” so long as the whistleblower believes he or she is providing information relating to a possible violation of the Commodity Exchange Act.
Direct access to whistleblowers
POGO also supported the CFTC’s original proposal authorizing staff to communicate directly with whistleblowers without seeking consent from the firm’s counsel, so long as the whistleblower initiates the communication. We were pleased to see that this provision made it into the final rules. The CFTC explained that “giving an entity the right to stifle a whistleblower plainly is not what Congress intended.”
In addition, the final rules stipulate that the rights and remedies afforded to whistleblowers “may not be waived by any agreement, policy, form, or condition of employment, including by a predispute arbitration agreement.”
The sole dissenting vote came from Commissioner Jill Sommers, who remarked in her opening statement that “this rule does not sufficiently address the potential for thousands of new tips or complaints and how this new office will prepare for this outcome.” However, a recent study by the Ethics Resource Center found that the vast majority of whistleblowers seek to report violations internally, and we have no reason to doubt that this trend will continue.
All told, we believe the CFTC’s rules have laid the groundwork for a strong and effective whistleblower program that will enhance the agency’s ability to detect and address fraudulent market activity.
Unfortunately, the CFTC’s new program has come under attack from Rep. Michael Grimm (R-NY), who recently introduced legislation that would gut the whistleblower programs at the SEC and CFTC just as key reforms are being finalized. Please take a moment to contact your representative and urge them to stand with whistleblowers, consumers, investors, and taxpayers by rejecting Rep. Grimm’s legislation.
Michael Smallberg is a POGO Investigator.
Image via CFTC.