CFTC Whistleblower Rules Finalized

25 August 2011 Publication

Legal News: Securities Enforcement & Litigation

The CFTC was given expanded powers to financially reward whistleblowers through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Pursuant to new Section 23 of the Commodity Exchange Act (CEA) entitled, “Commodity Whistleblower Incentives and Protection,” the CFTC just adopted its Part 165 Whistleblower Rules (CFTC Whistleblower Rules). These rules will go into effect 60 days after their publication in the Federal Register.

In most respects, the CFTC’s Whistleblower Rules are similar to those adopted by the SEC (discussed here The SEC’s rules went into effect on August 12, 2011, when the new SEC Office of the Whistleblower opened for business.

Like the SEC, the CFTC may award whistleblowers with monetary awards if they voluntarily provide information that leads to the successful enforcement of an action resulting in monetary sanctions exceeding $1,000,000. The CFTC’s Whistleblower Rules are similar to the SEC’s in most respects, with some important exceptions.

Who Is a Whistleblower?

Whistleblowers are defined as individuals who, alone or jointly with others, provide the CFTC with original information in accordance with the CFTC Whistleblower Rules. This information must relate to a possible violation of the federal commodities laws and any rules or regulations thereunder that has occurred, is ongoing, or is about to occur. Only individuals fit within the definition of whistleblower — companies and entities are excluded. Whistleblowers do not need to be employed by an entity in order to report information about the entity.

Individuals Ineligible for Award

Among those ineligible for awards under the CFTC Whistleblower Rules are members, officers, and employees of the CFTC, and various regulatory agencies, self-regulatory organizations, and law enforcement organizations. Also ineligible are members, officers, and employees of foreign governments and governmental agencies and departments.

Whistleblowers who are convicted of a criminal violation that is related to the judicial or administrative action for which they would otherwise receive an award under the CFTC Whistleblower Rules also are ineligible, as are those individuals who submit fraudulent information to the CFTC or another authority in connection with a related action. Further, individuals who acquire information from ineligible individuals also are ineligible.

Requirement for “Original Information”

To be eligible for a monetary award, a whistleblower must submit “original information.” Like the SEC, the CFTC has defined this term to require that the information is derived from the independent knowledge or independent analysis of the whistleblower. Independent knowledge means information that is not generally known or publicly available.

The CFTC Whistleblower Rules provide several circumstances in which an individual would not be considered to have independent knowledge, and is therefore ineligible for whistleblower awards. Attorneys are included in this list. The CFTC will not consider a whistleblower’s information to be derived from independent knowledge if the information was ascertained through communication subject to the attorney-client privilege or in connection with the legal representation of a client on whose behalf the whistleblower, or the whistleblower’s employer or firm, have been providing services. The only exception is if the disclosure is otherwise permitted by the applicable federal or state attorney conduct rules.

The information provided by a whistleblower who is an officer, director, trustee, or partner of an entity and who learned of the violative conduct in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law also is not considered independent knowledge. Similarly, the information provided by whistleblowers who are employees with compliance or internal audit responsibilities is not considered independent knowledge, and neither is information derived by means that are determined by a court to violate applicable criminal laws.

Unlike the CFTC, the SEC also has excluded from the definition of independent knowledge information acquired by individuals employed or otherwise associated with a firm retained to perform compliance or internal audit functions for an entity, and those who are employed by or otherwise associated with a firm retained to conduct an inquiry or investigation into possible violations of the law. Also excluded is information derived by employees of, or other person associated with, a public accounting firm, if the information obtained was through the performance of an engagement required of an independent public accountant under the federal securities laws, and that information related to a violation by the engagement client or the client’s directors, officers, or other employees.

Like the SEC, the CFTC has articulated that the independent knowledge requirement will not apply in the following three circumstances: (1) if a whistleblower has a reasonable basis to believe that disclosure of the information to the CFTC is necessary to prevent the relevant entity from engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors; (2) the whistleblower has a reasonable basis to believe that the relevant entity is engaging in conduct that will impede an investigation of the misconduct; or (3) at least 120 days have elapsed since the whistleblower provided the information to the relevant internal supervisor, executive, or committee. This third exception also includes situations where the whistleblower received information under circumstances indicating that the relevant officials at the entity are already aware of the information.

Requirement That Information Be Provided “Voluntarily”

Like the SEC, the CFTC has required that whistleblowers voluntarily submit original information to be eligible for an award. Voluntary information is information that is submitted prior to any request from the CFTC, Congress, any other federal or state authority, the Department of Justice, a registered entity, a registered futures association, or a self-regulatory organization to the whistleblower or anyone representing the whistleblower (such as an attorney) about a matter to which the information in the whistleblower’s submission is relevant. In addition, if a whistleblower is under a pre-existing legal or contractual duty to report the violations, his/her information is not considered original.

The CFTC’s Whistleblower Rules are more restrictive than the SEC’s because, under certain circumstances, the CFTC will impute requests for information received by the whistleblower’s employer to the whistleblower. In contrast, the SEC’s rules do not impute requests received by the employer to the whistleblower, thus allowing whistleblowers greater opportunities to provide “voluntary” information.

Anti-Retaliation Provisions

Like the SEC, the CFTC has provided statutory anti-retaliation protection to whistleblowers. Whistleblowers who do not satisfy the requirements, procedures and conditions to qualify for an award under the CFTC Whistleblower Rules are protected against retaliation.

Employers cannot discharge, demote, suspend, harass, or in any way discriminate against whistleblowers. The CFTC Whistleblower Rules provide whistleblowers with a federal private right of action against employers that retaliate, and potential relief for prevailing whistleblowers includes reinstatement, back pay, and attorney’s fees.

The CFTC and SEC rules have different statutes of limitations for retaliation claims. Under the CFTC’s Whistleblower Rules, whistleblowers have two years from the date of the violation to bring a claim, whereas the SEC has allowed six years from the date of the violation or three years from when the material facts of the claim were known or should have been known.

The CFTC and SEC rules also differ in that the CFTC will not bring claims based on retaliation, leaving the whistleblowers to pursue such claims in private actions, whereas the SEC will bring claims for violations of the SEC’s anti-retaliation rules.

Payment of Awards

The CFTC Whistleblower Rules require that whistleblowers can only receive monetary rewards if the CFTC brings a judicial or administrative action resulting in monetary sanctions of $1,000,000 or more. The CFTC will aggregate two or more smaller actions that arise from the same nucleus of operative facts.

The CFTC has discretion in determining the amount of an award. However, the amount will be at least 10 percent and no more than 30 percent of the monetary sanctions that the CFTC, SEC, and the other authorities are able to collect. The percentage awarded in connection with a CFTC action may differ from the percentage awarded in connection with a related action.

If there is more than one whistleblower involved in the case, the total aggregated amount of his/her award will be more than 10 percent and less than 30 percent of the sanctions collected.

Criteria for Determining Award

The CFTC Whistleblower Rules articulate a number of factors the CFTC will consider in deciding the amount of the award to a whistleblower, and these are mostly identical to the factors articulated by the SEC.

The CFTC will consider the following factors that may increase the amount of a whistleblower’s award:

  1. Significance of the information provided by the whistleblower
  2. Assistance provided by the whistleblower
  3. The CFTC’s programmatic interest in making a whistleblower award
  4. Whether the award otherwise enhances the CFTC’s ability to enforce the CEA, protect customers, and encourage high-quality information from whistleblowers
  5. Potential adverse incentives from oversize awards

This fifth criteria — the potential adverse incentives from oversize awards — is not considered by the SEC in making its award.

The factors that may reduce the amount of the award are:

  1. Culpability or involvement of the whistleblower in matters associated with the CFTC’s action or related actions
  2. Whether the whistleblower unreasonably delayed reporting the CEA violations
  3. Whether the whistleblower interfered with and undermined his/her entity’s internal compliance and reporting systems

Related Actions

Like the SEC, the CFTC also will pay an award based on amounts collected in related actions, which are defined as judicial or administrative actions brought by certain entities, and are based on the same original information that the whistleblower voluntarily provided to the CFTC that led it to obtain sanctions of more than $1,000,000.

The list of entities whose actions can qualify as “related actions” differs under the CFTC and SEC Rules. The CFTC will consider actions brought by the following entities to be related actions: the Department of Justice, an appropriate department or agency of the federal government, a registered entity, registered futures association, or self-regulatory organization, a state criminal or appropriate civil agency, or a foreign futures authority. The SEC has listed the following entities: the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization, or a state attorney general in a criminal case.

In order for the CFTC to make an award in connection with the related action, the CFTC has to determine that the same original information that the whistleblower gave to the CFTC also led to the successful enforcement of the related action under the same criteria contained in the CFTC Whistleblower Rules.

The SEC will not make an award for a related action if the CFTC has already granted the whistleblower an award for that information under the CFTC’s whistleblower program. In contrast, the CFTC has declined to adopt a similarly restrictive definition of related action, and it will award whistleblowers for a related action even if the SEC has already made an award based on that information — essentially, under the CFTC Whistleblower Rules, the whistleblower can be awarded twice for the same information if he/she receives an award from the SEC first.

Requirements Regarding Use of Internal Compliance Procedures

Like the SEC, the CFTC rejected calls to require whistleblowers to first report problems through internal compliance channels. However, like the SEC, the CFTC provided certain incentives for whistleblowers to first utilize internal procedures.

Whistleblowers may be eligible for an award for reporting original information to an entity’s internal compliance and reporting systems if the entity later reports to the CFTC the information or the results of an audit or investigation initiated in whole or in part in response to the information the whistleblower reported, and this leads to the CFTC bringing a successful action or related action. All the information provided by the entity to the CFTC will be attributed to the whistleblower, such that the whistleblower is eligible for a whistleblower award. In order to be eligible for the award, the whistleblower also must submit the information to the CFTC within 120 days of providing it to the entity.

The CFTC also will reward whistleblowers who first utilize internal compliance systems by providing such whistleblowers with higher awards. Like the SEC, the CFTC will consider internal reporting as one of the factors that may lead to a higher award and, conversely, any evidence that whistleblowers interfered with and undermined the entity’s internal compliance and reporting systems will lower the award.

Whistleblowers Can Report Anonymously

Whistleblowers can provide relevant information to the CFTC anonymously, and still be eligible for an award. However, anonymous whistleblowers seeking an award must be represented by an attorney.

Information Regarding Pre-Dodd-Frank Violations

Whistleblowers may be eligible to receive an award based on the submission of information related to violations that occurred prior to the enactment of the Dodd-Frank Act. Whistleblowers submitting information after the enactment of Dodd-Frank, but before the final rules become effective, also will eligible for an award.   

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