Source: https://wp.nyu.edu/compliance_enforcement/2016/09/11/evolution-of-the-cftcs-whistleblower-program/
Timestamp: 2019-06-18 17:47:01
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Evolution of the CFTC’s Whistleblower Program | Compliance and Enforcement
Financial services firms and market participants face an ever-evolving landscape of regulatory programs designed to encourage and enable whistleblowers to report potential misconduct. On August 30, 2016, the US Commodity Futures Trading Commission (CFTC) published proposed amendments to its whistleblower program.[1] Drawing from the agency’s experience in administering its program over the past five years, as well as strides the US Securities and Exchange Commission (SEC) has made in administering its analogous program, the CFTC’s proposal aims to enhance the whistleblower review process and adopt new enforcement authority for whistleblower retaliation. This post provides a brief overview of the CFTC’s program in its current form, summarizes key points of the proposal and discusses the impact of the proposed amendments on registered firms and market participants. For a more comprehensive discussion, please refer to our recent Client Alert (PDF: 329 KB) on this topic.
The CFTC’s program, created by Section 748 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010[2] and Part 165 of the CFTC’s regulations,[3] provides for payment of monetary awards to eligible individuals (i.e., whistleblowers) who voluntarily provide the CFTC with original information about violations of the Commodity Exchange Act (CEA) that leads to a successful enforcement action resulting in monetary sanctions exceeding US$1 million. If eligible, the whistleblower may receive an award equal to 10-30% of the total monetary sanctions collected in the CFTC action or related actions by other authorities.[4] Awards are paid from a special fund set aside for this purpose.
To qualify for an award, the whistleblower must be a natural person (i.e., not an entity).[5] Certain personnel of government agencies and self-regulatory organizations are ineligible to receive an award, as are persons who willfully provide false information and persons who have been convicted of a criminal violation related to the matter at issue.[6]
A whistleblower must provide original information that is based on the whistleblower’s independent knowledge or independent analysis, rather than information from corporate filings or other sources generally available to the public. Importantly, with limited exceptions, the whistleblower’s tip cannot be based on information learned from privileged attorney-client communications, a company’s processes for identifying possible violations of law or the whistleblower’s own compliance or internal audit duties.[7] The CFTC has stated that a whistleblower can otherwise be “anyone from a corporate officer or insider, to a trader or market observer, to an investor or fraud victim.”[8]
While a CFTC whistleblower is not required to report the information internally to an employer in order to be eligible for an award, the CFTC’s program nonetheless incorporates certain incentives intended to encourage internal reporting by potential whistleblowers.
The CFTC protects whistleblowers’ identities by anonymizing its disclosures about awards.[9] Importantly, the Dodd-Frank Act also protects whistleblowers from retaliation by their employers, whether or not they receive an award from the CFTC.[10] When originally promulgating Part 165 in 2011, the CFTC determined that it lacked statutory authority to subject an entity that retaliates against a whistleblower to an enforcement action, instead interpreting the anti-retaliation provisions as a private right of action.[11]
To date, the CFTC has made four whistleblower awards. On April 4, 2016, the CFTC announced its largest-ever award of more than US$10 million, an amount roughly 17 times greater than the three other awards combined.[12] The SEC’s program, by comparison, has issued more than US$107 million in awards as of August 30, 2016.[13]
Proposed Amendments to the CFTC’s Program
I. Anti-Retaliation Enforcement Authority
The proposed amendment with the most immediate potential impact is the CFTC’s adoption of authority to enforce the anti-retaliation provisions in the CEA and Part 165. As noted above, the CFTC previously took the view that it lacked statutory authority to bring an enforcement action for retaliation against a whistleblower.[14] Now, citing inconsistency with other statutes, the CFTC’s broad rulemaking authority and the SEC’s adoption of enforcement authority for its program, the CFTC proposes to set aside its previous interpretation and amend Part 165 to provide for CFTC enforcement of the anti-retaliation provisions.
Specifically, the CFTC has proposed (i) adding a new rule to implement its enforcement authority under Section 23 of the CEA and Part 165, (ii) prohibiting enforcement of confidentiality and pre-dispute arbitration clauses with respect to actions by potential whistleblowers in any pre-employment, employment or post-employment agreements and (iii) prohibiting employers from threatening, harassing or retaliating against participants in the CFTC’s program, irrespective of whether such whistleblowers ultimately qualify for an award or whether they first report internally.[15]
The discrepancy between the CFTC and SEC programs on anti-retaliation measures has become more salient in the past year and a half, as the SEC has used its authority in recent enforcement actions.[16] If the CFTC adopts the proposed authority, it may move quickly to investigate or take action against perceived retaliatory conduct or potentially obstructive agreements affecting CFTC whistleblowers.
II. Broad Scope, Broad Incentives
In addition to adopting anti-retaliation enforcement authority, the proposed amendments would clarify two aspects of the scope and reach of the CFTC’s program.
First, the CFTC proposal would amend Part 165 to clarify that a whistleblower may receive an award with respect to both a successful CFTC action and a related action by another authority.[17] This amendment would clarify that an award may be based on the total penalties collected in both types of actions,[18] further enhancing the potential awards — and thus the incentives — for CFTC whistleblowers.[19]
Second, the proposed amendments would clarify that the universe of potential whistleblowers includes those who provide the CFTC with original information without actually being the original source of the information,[20] a clarification that may support the CFTC’s payment of an award to a whistleblower who has never been employed by the subject entity (i.e., an external whistleblower).[21]
In addition to adopting anti-retaliation enforcement authority and clarifying the scope of Part 165, the proposal would make several changes to the administration of the CFTC’s program, including the process for reviewing whistleblower claims,[22] the allocation of authority for administering the program[23] and the handling of whistleblower information.[24] The CFTC has stated that the impetus behind these amendments is the agency’s desire to provide greater transparency in the whistleblower process, while “enhanc[ing] the expeditious and fair administration” of the program.[25]
The increasing visibility of the CFTC’s whistleblower program ensures that financial institutions and other participants in the commodities markets will face a growing likelihood that whistleblowers may report perceived or actual violations. Firms may also face a new and greater risk of CFTC anti-retaliation enforcement, resulting in increased scrutiny of both their substantive conduct and their treatment of whistleblowers.
Accordingly, it is important for firms to take steps to ensure their compliance programs are designed to (i) encourage internal reporting, (ii) handle internal reports effectively and (iii) prevent retaliation against whistleblowers. In designing and implementing their compliance programs, firms may be guided by certain principles that the CFTC’s evolving program highlights:
With limited exceptions, a whistleblower can be any individual within or outside of a firm
Although there are incentives in the CFTC’s program to encourage whistleblowers to report internally, they are not required to do so
An employer can encourage internal reporting by fostering open lines of communication among employees, managers and legal and compliance personnel
Tips regarding potential violations should be reviewed and investigated promptly using an established protocol
A firm’s handling of an investigation or a regulatory inquiry regarding any potential violation should be informed by the possibility that a whistleblower may have submitted a tip
Personnel should be trained in handling tips and avoiding retaliation against whistleblowers
Contractual provisions that could be perceived as limiting or obstructing whistleblowing may be the CFTC’s first target for the proposed anti-retaliation authority, modeled after the SEC’s recent enforcement actions sanctioning companies for using such provisions
For all of these reasons, the CFTC’s proposed amendments to its whistleblower program are the latest example of the increasingly complex enforcement landscape that registered firms and market participants face. The CFTC’s effort to retool its program serves as a reminder for financial institutions and other firms to review and update their own policies and procedures as well.
[1] Whistleblower Awards Process, 81 Fed. Reg. 59551 (PDF: 906 KB) (proposed Aug. 30, 2016) (proposing amendment of 17 C.F.R. pt. 165) (Proposal).
[2] 7 U.S.C. § 26.
[3] See Whistleblower Incentives and Protection, 76 Fed. Reg. 53172 (Aug. 25, 2011) (codified at 17 C.F.R. pt. 165) (PDF: 1,812 KB) (Whistleblower Rules).
[4] CFTC Rule 165.2(m) defines “Related Action” to mean any judicial or administrative action brought by certain specified authorities that is based upon the original information which a whistleblower voluntarily submitted to the CFTC and which led to the successful CFTC enforcement action. The specified authorities for a Related Action are any of the following: (i) the US Department of Justice; (ii) an appropriate department or agency of the US federal government, acting within the scope of its jurisdiction; (iii) a registered entity, registered futures association or self-regulatory organization; (iv) a state criminal or appropriate civil agency, acting within the scope of its jurisdiction; or (v) a foreign futures authority. 17 C.F.R. §§ 165.2(m), 165.11.
[5] See 17 C.F.R. § 165.2(p)(1).
[6] 17 C.F.R. § 165.6; see 7 U.S.C. § 26(h)(1).
[7] See 17 C.F.R. § 165.2(k).
[8] CFTC Whistleblower Program, Frequently Asked Questions (Nov. 6, 2015), available at https://www.whistleblower.gov/files/Whistleblower_FAQs_11-6-2015.pdf.
[9] See 17 C.F.R. § 165.4(a); 7 U.S.C. § 26(h).
[10] See 17 C.F.R. § 165.2(p)(2); 7 U.S.C. § 26(h)(2).
[11] See Whistleblower Rules, 76 Fed. Reg. at 53182.
[12] Consistent with its statutory obligation to protect the identity of whistleblowers, the CFTC did not identify the recipients of the awards or the successful enforcement actions as to which they provided information. See CFTC Whistleblower Award Determination No. 16-WB-06 (issued March 28, 2016) (PDF: 190 KB); see CFTC Release PR7351-16, CFTC Announces Whistleblower Award of More than $10 Million (April 4, 2016); CFTC Release PR6933-14, CFTC Issues First Whistleblower Award (May 20, 2014); CFTC Release PR7254-15, CFTC to Issue Whistleblower Award of Approximately $290,000 (Sept. 29, 2015); see also CFTC Whistleblower Award Determination No. 16-WB-08 (issued July 19, 2016) (PDF: 203 KB); CFTC Release PR7411-16, CFTC Announces Fourth Whistleblower Award (July 26, 2016); US Commodity Futures Trading Commission, Annual Report on the Whistleblower Program and Customer Education Initiatives (Oct. 30, 2015).
[13] SEC Press Release 2016-173, SEC Whistleblower Program Surpasses $100 Million in Awards (Aug. 30, 2016).
[14] Whistleblower Rules, 76 Fed. Reg. at 53182.
[15] Proposed Rules 165.19(b), 165.20(a)-(c); see Proposal, 81 Fed. Reg. at 59555; see also 7 U.S.C. §§ 26(h)(1)(A), 26(i), 4(c)-(d), 4b, 4c.
[16] SEC Whistleblower Award Proceeding No. 2015-4 (April 28, 2015) (PDF: 158 KB); see SEC Press Release 2015-75, SEC Announces Award to Whistleblower in First Retaliation Case (April 28, 2015); see also In re Health Net, Inc., Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order, SEC File No. 3-17396 (Aug. 16, 2016) (PDF: 160 KB); SEC Press Release 2016-164, Company Punished for Severance Agreements that Removed Financial Incentives for Whistleblowing (Aug. 16, 2016); In re Blue Linx Holdings Inc., Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order, SEC File No. 3-17371 (Aug. 10, 2016) (PDF: 224 KB); SEC Press Release 2016-157, Company Paying Penalty for Violating Key Whistleblower Protection Rule (Aug. 10, 2016).
[17] Proposed Rule 165.5(a)(3); see Proposal, 81 Fed. Reg. at 59552.
[18] Proposed Rule 165.11; see Proposal, 81 Fed. Reg. at 59554.
[19] Notably, the CFTC has proposed to limit one area of potential incentives, prohibiting a whistleblower from “double-dipping” from the CFTC’s Program and the SEC’s Program by collecting awards from both for the same matter. The proposed amendments would also prevent a whistleblower from relitigating before the CFTC any issues that the SEC resolved against the whistleblower in connection with the SEC’s denial of an award. The SEC’s whistleblower rules already contain a prohibition on double-dipping, so this aspect of the CFTC Proposal would close another gap between the two programs. See 17 C.F.R. § 240.21F-3(b)(3).
[20] Proposed Rule 165.5(b)(1); see Proposal, 81 Fed. Reg. at 59552.
[21] The SEC announced an award of more than US$700,000 to an external whistleblower on January 15, 2016. See SEC Whistleblower Award Proceeding No. 2016-2, Release No. 76921 (issued Jan. 15, 2016) (PDF 238 KB); SEC Press Release 2016-10, SEC Awards Whistleblower More Than $700,000 for Detailed Analysis (Jan. 15, 2016).
[22] See Proposed Rules 165.7(b), (e)-(j), 165.10(a)(8)-(9), (b), 165.13(b), 165.15(a)(2) (describing the designation and composition of the Claims Review Staff); Proposal, 81 Fed. Reg. at 59553, nn. 3-4, 6-7, 59554.
[23] See Proposed Rules 165.5(c), 165.7, 165.15(a)(2), (b); Proposal, 81 Fed. Reg. at 59552, 59554.
[24] See Proposed Rule 165.15(a)(3); Proposal, 81 Fed. Reg. at 59554-59555; see also 7 U.S.C. § 26(h)(2)(C); 17 C.F.R. §§ 165.4(a)(2)-(3).
[25] Proposal, 81 Fed. Reg. at 59554.
Douglas K. Yatter is a partner in the New York office of Latham & Watkins LLP and a member of the firm’s White Collar Defense & Investigations Practice and its Financial Institutions and Energy – Oil & Gas Industry Groups. Mr. Yatter joined the firm after nearly five years in the CFTC Division of Enforcement, where he served first as Trial Attorney and then as Chief Trial Attorney.
Yvette D. Valdez is counsel in the New York office of Latham & Watkins LLP and a member of the firm’s Financial Institutions Group and Derivatives Practice.
Ashley Weeks is an associate in the New York office of Latham & Watkins LLP and a member of the firm’s Financial Institutions Group and Derivatives Practice.
This entry was posted in Commodity Futures Trading Commission (CFTC), Compliance, Enforcement, Enforcement Policy, Financial Institutions, Securities and Exchange Commission (SEC), Whistleblowers and tagged Douglas K. Yatter on September 11, 2016 by Serina M. Vash.
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