The CFTC Proposes New Rules Granting the CFTC the Power to Bring Enforcement Actions and Prohibiting the Enforcement of Confidentiality Clauses in Employment Agreements

SUMMARY

On August 30, 2016, the Commodity Futures Trading Commission (the “CFTC”) issued a notice of proposed rulemaking (the “Proposed Rules”) to amend its regulations to enhance the process for reviewing whistleblower claims and to make related changes to clarify staff authority to administer the whistleblower program.1 In addition, the Proposed Rules reinterpret the CFTC’s authority under the Commodity Exchange Act (the “CEA”) with respect to retaliation against whistleblowers and to make certain rule amendments to implement that expanded authority. The Proposed Rules would allow the CFTC to bring enforcement actions against entities that retaliate against a whistleblower and would prohibit the enforcement of confidentiality clauses in employment contracts that would frustrate the whistleblower program. These changes would resolve inconsistent interpretations of their respective authorizing statutes by the Securities and Exchange Commission (the “SEC”) and the CFTC and may signal a period of more aggressive enforcement by the CFTC with respect to whistleblower actions.

BACKGROUND

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) provided the CFTC with authority to establish a whistleblower program and Section 922 of Dodd-Frank gave the SEC similar authority. In 2011, the CFTC adopted regulations to establish a whistleblower program pursuant to this authority. 2 The whistleblower program provides for the payment of awards to whistleblowers who provide original information leading to monetary sanctions greater than $1 million in a successful enforcement action under the CEA. Under the program, a whistleblower must file a claim after the successful resolution of the enforcement action. If a whistleblower files a successful claim, the whistleblower can receive an award from the CFTC equal to between 10 and 30 percent of the amount of the monetary sanctions, depending on the CFTC’s determination of the significance of the information and the degree of assistance.

In 2011, the SEC issued rules pursuant to its Dodd-Frank statutory authority to establish a whistleblower program. Although similar to the CFTC whistleblower program, the SEC rules gave the SEC authority to bring enforcement actions against any entity that retaliates against a whistleblower or “take[s] any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”3

However, the CFTC did not interpret its statutory authority as broadly as the SEC when adopting its regulations in 2011. The CFTC declined to recognize that it had the power to bring actions for retaliation against whistleblowers, stating that the CEA “clearly states only an individual who alleges retaliation in violation of being a whistleblower may bring such a cause of action.”4

This is the second time the CFTC is reinterpreting its authority after clearly holding an exactly opposite position. This proposed rulemaking would amend the regulations to provide a private right of action under the CEA for parties alleging market manipulation by electricity generators.5

As expressed in the Proposed Rules, the CFTC is revisiting this matter in light of the broad authority granted to it under the CEA and the public interest in harmonizing the two whistleblowing programs.

PROPOSED CHANGES

A. THE CFTC PROPOSES TO BRING DIRECT ACTIONS AGAINST ENTITIES THAT RETALIATE AGAINST WHISTLEBLOWERS

In its 2011 rulemaking, the CFTC interpreted the CEA’s private right of action for whistleblowers who have been retaliated against as precluding any similar right by the CFTC itself to bring actions against entities that retaliate against whistleblowers. In the Proposed Rules, the CFTC argues that the CEA both explicitly establishes a prohibition against retaliation6 and provides broad rulemaking authority7 sufficient to provide it with the same right of action that the SEC enjoys under its interpretation of its relevant statute. Therefore, in light of the SEC’s interpretation of similar statutory language and its experiences in the intervening years, the CFTC proposes to reinterpret its authority to give it the same right as the SEC to bring enforcement actions against entities that retaliate against whistleblowers. In doing so, the release accompanying the Proposed Rules notes, “[H]armonization between the SEC’s and the Commission’s Whistleblower programs would be beneficial to the public by making the consequences of illegal retaliation more uniform.”8

B. THE CFTC PROPOSES TO PROHIBIT THE ENFORCEMENT OF CONFIDENTIALITY CLAUSES IN EMPLOYMENT AGREEMENTS AND SEVERANCE CONTRACTS

In addition to the right of action described above, the CFTC proposes to specifically amend its rules to prohibit the enforcement of confidentiality and pre-dispute arbitration clauses in pre-employment, employment or post-employment agreements which would restrict whistleblowers from providing information to the CFTC. The release accompanying the final rules notes that such rules are necessary to implement the provisions in the CEA banning retaliation against whistleblowers.

Under its whistleblower authority, the SEC has recently brought enforcement actions against publicly traded companies for violations of SEC regulations prohibiting retaliation against whistleblowers. In one recent SEC action, the respondent company’s severance agreements contained a provision whereby departing employees waived a right to file a claim to receive an award under the SEC’s whistleblower program. Although nothing in the agreement precluded the employee from providing the SEC with information, the SEC brought and settled an enforcement action on the basis that the severance agreement “removed the financial incentive for its former employees who executed that agreement to communicate with [SEC] staff concerning possible securities law violations” at the company.9 In another action, the respondent settled the SEC’s claim related to severance agreements that prevented former employees from sharing confidential information unless “compelled to do so by law or legal process.”10

If the Proposed Rules are finalized in their current form, it is expected that the CFTC will bring enforcement actions for similar violations of the CFTC rules prohibiting retaliation against whistleblowers.

C. ADDITIONAL PROPOSED CHANGES

In addition to the proposed changes described above, the Proposed Rules include several other changes: ]

  • Prohibition against employers threatening, harassing or retaliating against individuals who participate in the CFTC’s whistleblower program, irrespective of whether those individuals qualify for an award or report internally before providing the CFTC with information;
  • Expansion of eligibility requirements for whistleblower awards to allow a claimant to receive an award based on action that is merely related to the one for which it provided information, subject to an exception to prevent any claimant from getting an award under both the CFTC’s and the SEC’s whistleblower programs;
  • Revision of Form TCR (used by a whistleblower to provide information to the CFTC) and Form WB-APP (used by a whistleblower to initiate a claim for a whistleblower award);
  • Revision of the definition of “original source” to allow whistleblowers to claim an award based on information provided to a regulatory other than the CFTC, provided that the claimant files a Form TCR within 180 days, compared to the previous threshold of 120 days; and
  • Creation of a process whereby a claimant can contest the denial of an award or the size of the award under a successful claim.