CFTC Dodd Frank Whistleblower Rules

CFTC DODD FRANK WHISTLEBLOWER RULES

As of August 25, 2011 the Commodity Futures Trading Commission (“CFTC”) adopted its final rules on “Commodity Whistleblower Incentives and Protection.”  According to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the CFTC must pay an award, subject to certain limitations, to eligible whistleblowers that voluntarily provide the CFTC with original information about a violation of the Commodity Exchange Act (“CEA”) that leads to a successful enforcement action.  In other words, the CFTC is now required to reward certain persons that expose fraud within the industry that it regulates.  Dodd-Frank also prohibits retaliation by employers against persons who provide the CFTC with information about possible CEA violations.  CFTC regulated employers should make themselves aware of the existence and possible implications of these new final whistleblower rules which become effective on October 24, 2011.

A brief summary of the new rules follows.  The final regulations are substantially similar to those that were proposed.  We encourage you to seek assistance if you have any questions regarding these new rules or how they may potentially affect your current or intended business.  The information contained in this summary is not intended to be all-inclusive and does not constitute legal advice.

Key Points of CFTC Whistleblower Rules

• The CFTC must pay awards to whistleblowers that provide original information to the CFTC that leads to the successful prosecution of a CFTC enforcement action resulting in monetary sanctions exceeding $1,000,000. The amount of the award, as determined by the CFTC, will be between 10 to 30 percent of sanctions collected in either the CFTC’s action or a related proceeding that is based upon the original information provided by the whistleblower.

• Whistleblowers may receive an award based upon violations that occurred prior to the enactment of Dodd-Frank.

• A whistleblower who submits information after July 16, 2011 may have a private cause of action for any employer retaliation against whistleblower activities.

• Ineligibility to receive a whistleblower award from the CFTC does not preclude application of the anti-retaliation protections.

• To receive a whistleblower award, the CFTC will not require internal reporting within the company prior to bringing the case to the CFTC.

• Similar to the SEC whistleblower rules, internal reporting can be considered when determining the amount of the award.  In such cases, whistleblowers who report internally can still qualify for an award as long as they provide information to the CFTC within 120 days of the internal reporting.

• CFTC staff is authorized to communicate directly with whistleblowers without seeking consent from the firm or its counsel, so long as the whistleblower initiates the communication.

• The rights and remedies afforded to whistleblowers cannot be waived by any agreement, policy, form, or condition of employment, including any pre-dispute arbitration agreement.

• Unlike the SEC’S whistleblower rules, the CFTC’s rules do not include a reward for persons who through their own research of public sources provide the CFTC with an independent analysis revealing a likely violation of the CEA.

• Similar to the SEC’s whistleblower rules, the CFTC’s rules generally will not award the following persons:

-          Attorneys who obtain their information through a communication subject to the attorney-client privilege or in connection with the representation of a client;

-          Individuals who obtain their information through a violation of federal or state criminal law;

-          Most officers, directors, trustees, partners, or other individuals at a firm who learn about the misconduct through the firm’s internal channels for identifying and addressing possible violations; and

-          Most employees whose principal duties involve compliance or internal audit functions.

• The above- excluded employees can still qualify for an award, however, if one of the following conditions exists:

-          The person believes that disclosure to the CFTC is necessary to prevent misconduct that is likely to cause substantial financial harm;

-          The firm is impeding an investigation of the alleged misconduct; or

-          At least 120 days have passed since the whistleblower reported information to their supervisor or to the firm’s audit committee, chief legal officer, or chief compliance officer.

• Unlike the SEC’S whistleblower rules, the CFTC’s rules do not exclude employees of public accounting firms from eligibility or protection against retaliation.

Further Guidance

Understanding and complying with these new rules is critical for virtually all firms subject to CFTC jurisdiction.  As a result, you may wish to consider contacting a regulatory professional like Turnkey Trading Partners (TTP) to assist you in this effort.  TTP has the business acumen, as well as relationships with experienced legal professionals, to provide you with the guidance you need to address the new rules affecting your business.

-James Bibbings and Nicole Kuchera

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James Bibbings is the President and CEO of Turnkey Trading Partners (TTP), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements.  He has also provided financial markets content for MSN, Yahoo, Financial Times, Bloomberg, the Wall Street Journal’s Market Watch, FinAlternatives, Safe Haven, Financial Sense, Forex Journal, FX Street, Forex Factory, and many other highly acclaimed investment publications.  Two sought after informational pamphlets regarding futures and forex registration authored by Bibbings are currently available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

Nicole Kuchera, JD, LLM is an Associate in Henderson & Lyman’s Financial Services Practice Group. She concentrates her legal practice on transactional and litigation support for securities, futures, forex and derivatives industry clients, such as Introducing Brokers, Commodity Trading Advisors, Commodity Pool Operators, Broker-Dealers, Investment Advisers, Futures Commission Merchants, Hedge Funds and Forex Dealer Members.  Ms. Kuchera counsels clients regarding a wide range of compliance and regulatory matters involving the rules and regulations of the SEC and the CFTC, as well as self-regulatory organizations and exchanges.  She also represents financial services industry clients in a wide range of litigation matters in various forums, including state and federal courts and in industry arbitrations and mediations.  Ms. Kuchera also represents clients in general corporate matters, such as business formation, licensing and industry registration.