CFTC Proposes Rules to Align with SEC Whistleblower Program

The U.S. Commodity Futures Trading Commission (CFTC) proposed amendments last month to the regulations governing its whistleblower bounty program.  A number of the changes are aimed at more closely aligning the CFTC’s whistleblower program and the parallel program administered by the U.S. Securities and Exchange Commission (SEC), causing speculation that the CFTC plans to up its enforcement game with respect to whistleblower actions.

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established important incentives and protections for whistleblowers who provide information to the CFTC regarding violations of commodities laws, as well as to those who provide tips to the SEC regarding violations of securities laws.  At their core, the CFTC and SEC whistleblower programs established by the Dodd-Frank Act are quite similar.  However, over the years the two agencies have diverted in their interpretations of the statutory authority provided to them by the Dodd-Frank Act and the manner in which they administer their whistleblower programs.  The CFTC’s August 30, 2016 notice of proposed rulemaking (the Notice) highlights several areas where the CFTC intends to model aspects of the SEC’s whistleblower program, including (1) agency enforcement of whistleblower anti-retaliation provisions; (2) prohibition of confidentiality agreements that would restrict whistleblowers from providing information to the CFTC; and (3) a reorganization of the whistleblower claims-review process within the CFTC.

Direct CFTC Enforcement of Whistleblower Anti-Retaliation Provisions

In its 2011 rulemaking session, the CFTC determined that it did not have authority to initiate an enforcement action over retaliation claims.  Citing the private right of action for whistleblowers under the Commodity Exchange Act (CEA), the CFTC stated that it lacked ‘‘the statutory authority to conclude that any entity that retaliates against a whistleblower’’ could be subject to enforcement action ‘‘as a separate and independent violation of the CEA.’’  The inconsistency between this interpretation and the SEC’s interpretation of its own authority to directly enforce the anti-retaliation provisions of the SEC’s whistleblower protection rules has repeatedly garnered attention from whistleblowers’ rights advocates.

To address this imbalance, the CFTC now proposes to set aside its 2011 interpretation, opining that it failed to take into full consideration the “statutory context” of the CEA, including CEA § 23(h)(1)(A), which references retaliation as a separate violation, and additional CEA sections that provide the CFTC with broad rulemaking authority and the power to prosecute violations of the CEA.  The Notice also highlights efforts to bring the CFTC’s whistleblower protections in line with the SEC’s protections, stating that the CFTC “is taking a necessary step to end the incongruous situation where whistleblowers enjoy protection from retaliation through SEC enforcement action under the securities laws, but no such protection through Commission enforcement action under the CEA.”

Prohibition of Confidentiality Agreements Restricting Potential Whistleblowers

In addition to a new direct right to enforce the CEA’s whistleblower anti-retaliation protections, the CFTC proposes to specifically amend its rules to prohibit the enforcement of confidentiality and pre-dispute arbitration clauses relating to actions by potential whistleblowers in any pre-employment, employment or post-employment agreements.

This proposal follows a spate of recent high-profile SEC enforcement actions against public companies for violating Section 21F of the Exchange Act, and Rule 21F-17 promulgated thereunder, which prohibits “any action to impede an individual from communicating directly with [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”  (See, e.g., Orders Instituting Cease and Desist Proceedings for BlueLinx Holdings, Inc., Health Net, Inc. and KBR, Inc.)  Thus, it appears the CFTC may be positioning itself to take similar actions against its regulated entities for perceived interference with whistleblower tips.

Relatedly, the Notice also proposes new provisions to prohibit employers from 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 commission with information.

Redirecting Whistleblower Claims Review to Division of Enforcement

The CFTC is also proposing to discontinue the current “Whistleblower Award Determination Panel” and replace it with a review process headed by Division of Enforcement “Claims Review Staff.”  This move reflects a significant delegation of authority to the Enforcement division.  Currently, the panel is comprised of three members from separate offices or divisions of the CFTC, except for the Enforcement division, which is precluded from serving on the panel.

Under the CFTC’s proposed rules, the Claims Review Staff would be chosen by the Enforcement Director, in consultation with the Executive Director.  The committee would be comprised of three to five staff members from the Division of Enforcement, though no member may have had any direct involvement with the underlying enforcement action.  These panel members would be joined by at least one staff member from outside the Enforcement division.  The Claims Review Staff would hold responsibility for initial evaluations of eligible whistleblower claims, setting forth a preliminary assessment as to whether the claim should be granted or denied, providing a proposed award percentage amount and ultimately issuing a final assessment.

Once again, in suggesting these changes to the oversight of whistleblower claims administration, the CFTC notes that “this approach is also consistent with the SEC’s practice” of having its Division of Enforcement staff conduct the initial review of whistleblower claims.

The Road Ahead

The CFTC’s whistleblower program has gotten off to a patchy start.  Though the program was launched in 2011, the CFTC did not award its first whistleblower bounty until 2014.  In April 2016, the CFTC announced its third award in approximately five years—a whopping $10 million award—followed by a comparatively moderate $50,000 award in late July 2016.  Given the uptick in the use of its bounty program and the recently proposed rules to augment the agency’s ability to protect and reward whistleblowers, regulated entities should continue to review their compliance programs to ensure they encourage internal reporting without running afoul of the CFTC’s renewed focus on whistleblower protections.

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