As we noted in a prior update,1 Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) provides the Commodity Futures Trading Commission (“CFTC”) with substantial new enforcement powers in the futures, physicals, and swaps markets, in addition to imposing a host of new regulatory requirements on industry participants. But in the current environment of shrinking federal agency budgets, the resources available to the CFTC to conduct audits, market surveillance, and enforcement investigations to ensure compliance with these requirements will likely be very limited. It is therefore critical to the near-term success of the Dodd-Frank regulatory scheme that market participants maintain strong internal structures that foster a culture of compliance and encourage the prompt reporting and correction of possible noncompliance.
Ostensibly to that end, on August 25, 2011, the CFTC formally released regulations implementing the whistleblower provisions added to the Commodity Exchange Act (“CEA”) by the Dodd-Frank Act. The regulations, which will become effective on October 24, 2011, largely mirror the Dodd-Frank whistleblower rule issued by the Securities and Exchange Commission (“SEC”) on May 25, 2011, which was the subject of a previous update.2 Like the SEC’s rule, the CFTC regulations establish a program under which individuals may provide “original information” to the CFTC regarding possible violations of the CEA. If the information provided (and the individual providing it) meets the qualifications spelled out in the regulations and leads to the imposition of a penalty in excess of $1 million, the whistleblower may be eligible to receive an award of between 10 and 30 percent of the penalty imposed. The regulations do not require (but purport to encourage) the whistleblower to “exhaust” internal compliance mechanisms before reporting to the CFTC information concerning possible violations. Moreover, the statute and regulations forbid employers from taking any adverse employment action against an employee “because of” the employee’s whistleblowing activity and provide a private cause of action for employees who claim to have suffered such adverse employment action. The regulations thus create substantial incentives for employees to report information concerning possible violations directly to the CFTC (sidestepping internal compliance procedures). Additionally, the regulations potentially constrain an employer’s ability to take disciplinary or other actions against employees for reasons having nothing whatsoever to do with their whistleblowing activity due to the difficulty in proving that such actions are unrelated to an employee’s reporting of potential violations. The regulations therefore warrant careful attention from entities whose activities are governed by the CEA and CFTC rules.
Eligibility Requirements for CFTC Whistleblower Awards
Only individuals (not corporations or partnerships, for example) are eligible to receive whistleblower awards under the CFTC’s regulations. To be eligible for an award, a whistleblower must have submitted “original information” based upon the whistleblower’s independent knowledge or analysis. Information will not be considered “original” if it is publicly available. The whistleblower may not provide information subject to attorney-client privilege unless there is a waiver of the privilege or some exception to the privilege applies to the information (such as the “crime-fraud” exception). If the whistleblower obtained the information because he or she has governance responsibilities within the entity or learned of the information through the entity’s internal compliance process, the individual will not be eligible for a whistleblower award for submitting the information to the CFTC unless (1) the entity has not disclosed the information to the CFTC within a reasonable period of time (usually 120 days from the date the entity’s compliance personnel learned of the information), (2) the putative whistleblower has a reasonable basis to believe that reporting the information to the CFTC is necessary to prevent substantial injury to the entity or investors, or (3) the putative whistleblower has a reasonable basis to believe that the entity will impede an investigation. In this way, the CFTC intends to allow entities’ internal compliance processes to perform their intended functions without fear that compliance personnel will use the information for personal enrichment. Of course, any information that was obtained by the putative whistleblower in a manner that violates federal or state law will disqualify that individual for an award.
Next, the original information provided by a putative whistleblower must lead to the successful resolution of a “covered” CFTC judicial or administrative action (i.e., any judicial or administrative action brought by the CFTC under the CEA, the successful resolution of which results in monetary sanctions exceeding $1 million) or the successful enforcement of a “related action” brought by federal or state agencies, registered entities (such as futures exchanges), self-regulatory organizations, or foreign futures organizations. Private party litigation will not qualify as a “covered” or “related” action under the CFTC regulations and therefore cannot form the basis for a whistleblower award.
Finally, the original information must be submitted to the CFTC on a voluntary basis – i.e., the whistleblower’s submission of the information may not have arisen from a formal or informal request made to the putative whistleblower’s employer, to the putative whistleblower himself or herself, or to anyone representing the putative whistleblower by the CFTC, Congress, any other federal or state authority, a registered entity, a registered futures association, or a self-regulatory organization. In addition, to be considered voluntary, at the time the information was submitted, the putative whistleblower must not have been under a legal or contractual obligation to provide the information, e.g., where the whistleblower is a corporate compliance officer whose responsibilities include investigating and reporting violations to the CFTC.
Persons seeking whistleblower awards may submit information and claim awards on an anonymous basis. Anonymous whistleblowers seeking awards must be represented by counsel, however, and upon the request of the CFTC staff, such counsel must verify the whistleblower’s identity.
Putative whistleblowers must be willing to provide additional information to permit the CFTC staff to interpret and analyze the original information provided by the whistleblower. Upon request of the CFTC staff, whistleblowers must also be willing to enter into a confidentiality agreement to prevent the individual from disclosing to others the substance of communications with CFTC staff. Persons who knowingly and willfully make false statements or submit false information to the CFTC in connection with the whistleblower process are ineligible for awards. However, while a person convicted of a criminal offense related to the conduct at issue in the judicial or administrative action will be ineligible to receive an award, persons who are criminally charged (but not convicted) or who are otherwise implicated in the conduct may be eligible for awards, although the amount awarded may be reduced.
Interaction Between Whistleblower Regulations and Internal Compliance
To encourage prompt reporting of violations of the CEA, the CFTC generally declined to require whistleblowers to abide by internal compliance procedures established by their employers or other market participants in order to be eligible for an award. However, the CFTC recognized the important role that such compliance programs play in ensuring compliance with the CEA. Accordingly, the CFTC will consider as a positive factor in determining the size of an award a putative whistleblower’s use of such internal procedures and other attempts by him or her to avoid or mitigate violations of the CEA and CFTC rules.
In addition, in order to encourage internal reporting, if a whistleblower reports potential wrongdoing internally, and this leads the entity itself to report the information to the CFTC, the whistleblower may still be eligible for an award. In fact, in such circumstances the whistleblower will be credited with providing all information provided by the entity, not just the information known to the whistleblower, leading to a potentially greater award than had the whistleblower ignored the entity’s internal compliance mechanism and gone directly to the CFTC.
The CEA prohibits employment retaliation against a whistleblower who provides information to the CFTC related to potential violations of the CEA and CFTC rules. In particular, Section 23(h)(1)(A) of the CEA provides that “[n]o employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower (i) in providing information to the Commission in accordance with subsection (b); or (ii) in assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information.” The protection against employer retaliation applies regardless of whether the whistleblower is entitled to an award or otherwise complies with the CFTC’s procedural requirements. The protection under Section 23(h)(1) of the CEA does not apply, however, to an employee’s reporting of possible violations through an entity’s internal compliance procedure.3
Although whistleblowers are protected from retaliation for the whistleblower’s action in making a report to the CFTC, the fact that the whistleblower has disclosed such information will not protect the whistleblower from prosecution by the CFTC or any other agency for the whistleblower’s conduct in connection with the disclosed activity. However, the CFTC will take the whistleblower’s cooperation into consideration when exercising its prosecutorial discretion.
Importantly, the rights and remedies of whistleblowers under the CEA and the CFTC’s implementing regulations may not be waived by any agreement, including a predispute arbitration agreement. Predispute arbitration agreements that require arbitrations of disputes under the whistleblower regulations will not be enforceable.
Determination of the Amount of the Award
By statute, the amount of an award payable to a whistleblower for original information provided to the CFTC must be between 10 and 30 percent of the total monetary sanctions collected in covered or related actions. In other words, if the information provided and the person providing it meet the listed qualifications, the whistleblower must be provided an award of at least 10 percent of the recovered sanctions. In determining the amount of the award, the CFTC will consider several factors, including, among other things, the significance of the information provided to the success of the action, the level of cooperation provided by the whistleblower (including whether the whistleblower encouraged others to come forward with information), the degree to which the whistleblower attempted to remediate the harm caused by the violation, and the importance of addressing the violations in relation to the CFTC’s enforcement of the CEA. A whistleblower’s award may be decreased (though not below 10 percent of the recovered sanctions) if it is determined that he or she was culpable in the CEA violation, failed to report the violation in a timely manner, interfered with or did not comply with internal compliance procedures, or benefited financially from the violation.
If a whistleblower is required to pay monetary sanctions or if an entity is sanctioned for conduct in which the whistleblower was principally involved, the amount of such sanctions will not be used in determining the award to which the whistleblower is entitled or whether the $1 million award threshold has been met.
The regulations set forth various procedural requirements and forms to be used in providing information and claiming a whistleblower award. Once a covered action has been successfully prosecuted by the CFTC, the agency will post a notice of the covered action on its website. Persons seeking an award for information provided in connection with the covered action will have 90 days to submit a claim for an award.
Particularly in light of these new regulations, every entity whose activities are governed by the CEA and CFTC rules should implement and maintain a strong internal compliance program designed to prevent violations, encourage prompt internal reporting of any potential violations that may have occurred, and correct and remedy those violations as soon as possible, which may include taking appropriate action against the employee(s) involved in the misconduct. Strong internal compliance programs demonstrate to the workforce the entity’s commitment to honoring the letter and spirit of the law and thus encourage internal reporting of possible misconduct through an entity’s compliance procedures. Moreover, in the event the information is reported to the government, the existence of such programs helps demonstrate to the government the entity’s strong culture of compliance and zero tolerance for intentional misconduct, which should, in turn, help to minimize the amount of any penalty stemming from the violation.4 Last but not least, employers must be mindful of the whistleblower anti-retaliation provisions when considering taking personnel actions or imposing employee discipline, and must carefully document the reasons for taking such actions against any employee who is known to have submitted a whistleblower claim.