How the New CFTC Whistleblower Rules Will Operate

When the CFTC announced its final whistleblower rules yesterday, it answered many questions about how the new CFTC whistleblower program will work.

David Meister, the CFTC’s Director of the Division of Enforcement, provided this summary according to the unofficial transcript our firm prepared of yesterday’s CFTC public meeting:

The Commission will pay awards to eligible whistleblowers who provide original information to the Commission leading to a successful Commission enforcement action and the imposition of monetary sanctions in excess of $1 million.

Congress provided that the amount of the whistleblower award must be between 10% and 30% of sanctions collected in either the Commission action or related action as defined in the rules. The Commission has discretion in determining the amount of the award within that 10 – 30 percent range.

The rules set forth a number of factors that the Commission will consider in determining the amount of the award. These factors include the significance of the information; the degree of the whistleblower’s assistance; the Commission’s programmatic interest; whether the award enhances the Commission’s ability to enforce the Commodity Exchange Act, protect customers and encourage people to come forward with high quality information; and potential adverse incentives from oversized awards.

To be award eligible, a whistleblower is not required, under our recommendation– a whistleblower is not required to report his information internally to his employer. Staff believes that such a requirement would deter some whistleblowers from coming forward, which would undermine congressional intent.

Sometimes, a whistleblower might reasonably believe that his employer’s internal reporting system is ineffective or that he might risk retaliation if he report internally. By the same token, the rules recognize that internal reporting through effective company compliance systems can help deter and detect violations of the Commodity Exchange Act. And that reporting to effective internal systems should be encouraged.

So the rules strike a balance among these factors. They provide that, in its exercise of discretion, the Commission will consider a whistleblower’s decision to report his information internally as a basis potentially to increase the amount of the award. This is not to say that a whistleblower’s decision to bypass an internal system and report first and directly to the Commission will necessarily reduce the whistleblower’s chance to maximize the award.

Again, sometimes such a decision to bypass the internal system would be entirely reasonable. The rules simply make it explicit; that an internal report is a factor that will be considered and that it might increase the award.

The rules also state that the Commission will consider a whistleblower’s interference with his company’s internal compliance and reporting process as a basis potentially to decrease the amount of an award. Though there are categories of individuals who are ineligible to receive a whistleblower award because of their position, status, or the manner in which they obtained information.

For example, certain government employees are ineligible. Executives who learn information about misconduct in connection with an entity’s process for identifying, reporting, and addressing possible violations of law are, in general, not eligible for an award. Nor are employees who obtain information because their principle duties involve compliance or internal audit responsibilities.

Eligibility is also limited where the information reported to the Commission was obtained in connection with the legal representation of a client. Likewise, information obtained through attorney-client privileged communications cannot, in general, be used by a whistleblower to obtain an award.

A whistleblower may appeal the Commissions’ eligibility and amount decisions to a United States Circuit Court of Appeals. However, neither Dodd-Frank nor these final rules authorize a whistleblower to appeal a decision not to pursue an investigation or a Commission decision to file, not file, or settle an enforcement action.

Whistleblower awards will be paid from the Commodity Futures Trading Commission Customer Protection Fund established by Dodd-Frank. The Commission will deposit into this fund civil monetary penalties, disgorgement and fines and collects and covered actions up to a one hundred million dollar balance.

The Commission is also establishing an Office of Consumer Outreach, which will undertake initiatives to help people protect themselves against fraud or other violations of the Commodity Exchange Act.

Dodd-Frank provides whistleblowers who submit information to the Commission with protections. A whistleblower will have a federal cause of action against his or her employer who retaliates against the whistleblower for making a report to the Commission. Under this anti-retaliation cause of action, a prevailing whistleblower is entitled to reinstatement, back pay, and compensation for other expenses including reasonable attorney’s fees.

Finally, the Commission is taking the procedural step under these recommendations of delegating the implementation of the whistleblower program to a Whistleblower Office and delegating the determination of the award amount to a panel comprised of staff from three of the CFTC’s divisions or offices.

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