25 April 2016 - Post by:
The US Commodity Futures Trading Commission (CFTC) recently announced an award of more than $10 million to a whistleblower who provided the agency with information about violations of the Commodity Exchange Act. The CFTC has suggested that more whistleblower awards are in the pipeline—will this award prove to be a bellwether?
Like the US Securities and Exchange Commission (SEC), the CFTC was required under the Dodd–Frank Wall Street Reform and Consumer Protection Act to establish a whistleblower program that offers monetary awards to whistleblowers who voluntarily provide original information to the CFTC that leads to a successful enforcement action in which sanctions of more than $1 million are ordered. An eligible CFTC whistleblower may collect 10-30% of the total monetary sanctions actually collected in a CFTC or a related action.
But few awards have been made under the program
Unlike the SEC, however, the CFTC’s Whistleblower Office has been distinctly quiet since the agency’s whistleblower rules went into effect in October 2011. Indeed, including the recent $10 million award, the CFTC has made only three whistleblower awards in that time. The number of awards is so low, in fact, that the CFTC’s Inspector General is currently investigating “the reason, if any, for the limited number of CFTC whistleblower awards compared to the SEC.”
Nevertheless, Chris Ehrman, the Director of the CFTC’s Whistleblower Office, has long insisted that “we’re going to start getting more awards out, and I think they’re going to be bigger.”
A $10 million award would certainly qualify as “bigger.” Indeed, it is one of the largest-ever whistleblower payments (see table). A wave of publicity in the wake of the award announcement has gone a long way to bringing some much-needed attention to the CFTC’s whistleblower program, and Ehrman “hope[s] that this multimillion dollar award will encourage others to come forward.”
The CFTC regulates the US derivatives markets—including futures, options, and swaps—and it oversees designated contract markets, swap execution facilities, derivatives clearing organizations, swap data repositories, swap dealers, futures commission merchants, commodity pool operators, and other intermediaries.
The CFTC’s Division of Enforcement has spearheaded a number of headline-grabbing enforcement actions, including actions relating to the alleged manipulation of benchmark rates (such as LIBOR and ISDAFIX), forex trading scams, and fraudulent off-exchange precious metals transactions.
Still, as Ehrman puts it, the CFTC has “a much smaller footprint than the SEC does, and also it’s a footprint that’s not of as much concern to retail investors as the SEC.” For those reasons, it is difficult to predict whether the CFTC’s announcement of a $10 million whistleblower award will spur a deluge of tips from market participants.
It is relatively certain, however, that the CFTC’s whistleblower program will not expand to the size or scope of the SEC’s program. Setting aside distinctions in the agencies’ regulatory mandates, the CFTC’s whistleblower program simply isn’t as popular with would-be whistleblowers (or their counsel) as the SEC’s program. By way of example, in 2015, the SEC received 3,923 tips from would-be whistleblowers; the CFTC received only 232.
That doesn’t mean the CFTC’s whistleblower program should be overlooked. The announcement of a $10 million award is almost certain to result in an uptick in the number of tips to the CFTC. And the CFTC Whistleblower Office is actively seeking to capitalize on that momentum through public outreach programs and panel presentations—as well as by passing out whistles emblazoned with the CFTC emblem.
Many regulated entities have already taken steps to address the implications (and risks) of the SEC whistleblower program. (For our thoughts on steps organizations might take, please read our previous blog post).
Firms that are regulated by both the SEC and the CFTC should ensure their policies and systems—including systems for internal reporting—apply equally to business lines in both sectors. Meanwhile, firms that are regulated by the CFTC would be well advised to develop or revisit policies and procedures designed to encourage internal reports, triage credible tips, and promptly address legitimate complaints.
In the whistleblowing world, it’s always better to be the first to know.
If you have any questions about this blog post please contact Investigations.Insight@AllenOvery.com