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Daniel Viola, Sadis & Goldberg

The CFTC provides more robust protection to whistleblowers


By Daniel Viola, Sadis & Goldberg – In the wake of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), overhauling the financial regulatory system. Congress required the US Securities & Exchange Commission (the SEC) and the US Commodity Futures Trading Commission (the CFTC) to develop a whistleblower rights program to incentivise people to report potential violations. The SEC and CFTC adopted the final rules governing this program in 2011.

Pursuant to the Dodd-Frank Act, persons can receive financial awards if they provide original information about relevant violations that result in a successful enforcement action. To qualify for an award, you must satisfy the following conditions:

  • The person must “voluntarily provide” the information at issue.
  • The person must provide the “original information.”
  • The information must lead to a “successful enforcement action.”
  • The successful enforcement action must lead to “monetary sanctions exceeding USD1,000,000” in a single judicial or administrative action.

If all four conditions are met, then a whistleblower is entitled to an award. Under the law, the amount of the award can be anywhere between 10 and 30 percent of the sanctions collected. 
 

The CFTC has paid out four awards since the inception of its whistleblower program.  In 2016, the CFTC handed out three awards, including one for more than USD10 million, the biggest in its history. By contrast, the SEC has awarded approximately USD153 million to 43 whistleblowers since 2011.  In 2016, the SEC paid more than USD57 million to 13 whistleblowers.

On 22 May, 2017, the CFTC unanimously approved amendments to the CFTC’s whistleblower rules. See CFTC Press Release 7559-17. The new amendments (the Amendments) will strengthen the CFTC’s anti-retaliation protections for whistleblowers and enhance the process for reviewing whistleblower claims.  The Amendments are intended to add efficiency and transparency to the process of deciding whistleblower award claims and will harmonise the CFTC’s rules with those of the SEC’s whistleblower program.
 

Whistleblowers can now bring a private action against their employer should the employer retaliate against the employee in connection with the whistleblowing incident within two years of the employer retaliating against the tipster.  Furthermore, such employer is prohibited from demoting, suspending, harassing or discriminating in any way against an employee who acts in any lawful manner to bring to the CFTC’s attention or assists the CFTC in any way relating to a whistleblower inquiry.  Employers will also be prohibited from preventing would-be whistleblowers from reaching out directly to the CFTC by using a confidentiality, pre-dispute arbitration or similar agreement.  
 

The CFTC’s Division of Enforcement considers the whistleblower program to be an integral part of its efforts to identify and prosecute unlawful conduct. The Amendments will likely strengthen and enhance its efforts to protect customers and promote market integrity.
 

The Amendments establish a claims review process for the CFTC to consider and issue a preliminary determination as to whether an award claim should be granted or denied. The whistleblower will now have an opportunity to request to view the record and may contest the preliminary determination before the CFTC issues a final determination.  
 

The Amendments also clarify key areas of the whistleblower eligibility requirements as follow: 

  • A whistleblower may be eligible for an award providing the CFTC original information without being the original source of the information;
  • A whistleblower retains eligibility for an award based on information provided by the whistleblower to certain specified persons or authorities, now to include foreign futures authorities, prior to the time the whistleblower provided the information to the CFTC;
  • Where a whistleblower first provides information to certain specified persons or authorities before reporting to the CFTC, the timeframe for a whistleblower to submit a Form TCR (Tip, Compliant or Referral) to the CFTC has been extended from 120 days to 180 days; and
  • The CFTC may waive it procedural requirements based upon a showing of extraordinary circumstances.

It is important to note that the final rules regarding awards for related actions include:

  • A whistleblower may receive an award in a covered judicial or administrative action, in a related action, or both; and
  • The CFTC will not make an award to a whistleblower for a related action if the whistleblower has been granted an award by the SEC for the same action under the SEC’s whistleblower program.

The CFTC has also made commitments to maintain the confidentiality of the whistleblower. They have stated that they will not disclose information that could reasonably identify a whistleblower without the whistleblower’s consent, except in the event that it is compelled by the court or in connection with certain limited proceedings of government or regulatory entities.  
 

The Amendments should encourage more whistleblowers to come forward. However, companies may be concerned that would-be whistleblowers will be further encouraged to bypass internal compliance procedures and go directly to the government with information alleging wrongdoing. Regardless, no one should be punished for doing the right thing, especially those with the courage and integrity to blow the whistle on corporate fraud or other illegal activities. Whether you have suffered retaliation because you did the right thing and spoke out when your employer violated the law or acted improperly, or whether you have information but are afraid to speak out, there are a wide range of whistleblower laws designed to protect you. 


Daniel G Viola is the Head of the Regulatory and Compliance Group. He structures and organizes broker-dealers, investment advisers, funds and regularly counsels investment professionals in connection with regulatory and corporate matters. Viola served as a Senior Compliance Examiner for the Northeast Regional Office of the SEC, where he worked from 1992 through 1996. During his tenure at the SEC, Viola worked on several compliance inspection projects and enforcement actions involving examinations of registered investment advisers, ensuring compliance with federal and state securities laws. Viola’s examination experience includes financial statement, performance advertising, and disclosure document reviews, as well as, analysis of investment adviser and hedge fund issues arising under ERISA and blue-sky laws.

After leaving the SEC, Viola founded VIOCO, Ltd. (“VIOCO”), which provided consulting services to investment advisers and broker-dealers in the field of regulatory compliance, including compliance policy planning and implementation of soft dollar reviews, mock SEC compliance audits, and compliance training for supervisory personnel. VIOCO also served as a consultant to provide mandated corrective consulting to investment advisers that were sanctioned by the SEC.

From 1997 to 2002, Viola served as General Counsel for Andover Brokerage LLC, which was ultimately acquired by SunGard (NYSE:SDS). Andover was a self-clearing member firm of the NASD, currently known as FINRA and a trading/technology firm that provided direct-access trading, order routing, and brokerage and clearing services to the professional traders. From 2002 to early 2006, Viola served as the General Counsel to the Carlin Financial Group, which was ultimately acquired by RBC Capital Markets, LLC. Mr. Viola then founded his own law firm and eventually merged it into Sadis & Goldberg’s law practice in late 2006.

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