CFTC Expanding Whistleblower Program

The return from Thanksgiving holiday has been tough for advocates of whistleblower protections and common sense financial regulation. Last week, the Supreme Court heard Digital Realty Trust v. Somers, which concerned whistleblower protections under the Dodd-Frank Act. The Court appears poised to eviscerate internal whistleblower protections, as the justices seemed sympathetic to Digital’s argument that whistleblowers must report alleged misconduct to the Securities and Exchange Commission (SEC) to avail themselves of anti-retaliation protections. As the National Whistleblower Center explained in its highly-praised brief, both foundational rules of statutory construction and pragmatic policy concerns should push the Court to rule in favor of the whistleblower. Unfortunately,  Supreme Court watchers are currently predicting the opposite: a unanimous decision against whistleblower protections.

If that were not enough on the financial regulatory front, the Consumer Financial Protection Bureau (CFPB) has also become caught up in controversy. Following Director Richard Cordray’s sudden departure, he named Leandra English the acting director of the agency. The Trump administration, however, claimed it, not Cordray, had the power to name the temporary leader of the agency. The President picked Director of the Office of Management and Budget (OMB), Mick Mulvaney to temporarily head the CFPB. As a Congressman, Mulvaney had previously called the CFPB a “sick, sad joke.” Last week, a federal judge has ruled that Mulvaney is the temporary head of the agency, though the case is being appealed.

The news concerning a lesser-known, but still highly important financial regulator is more promising. The Commodities Futures Trading Commission (CFTC) appears set to expand whistleblower protections. As the regulator of the financial derivatives market, the CFTC has grown in clout over the past decade. This is largely because mania in the over-the-counter derivatives market was a leading cause of the financial crisis of 2007-2008. Such being the case, whistleblower protections for those who report wrongdoing and illegal conduct in the derivatives market are important for financial markets and our economy.

As with the SEC’s aforementioned whistleblower program, the CFTC’s whistleblower protections stem from the 2010 Dodd-Frank Act passed in wake of the financial crisis. The CFTC program pays monetary awards which lead the CFTC to bring a successful enforcement action exceeding a million dollars and also awards to whistleblower who provide information to the CFTC that result in a successful action brought by a different government entity. The total amount the whistleblower receives is between 10% and 30% of the sanctions collected by the commission. Factors affecting the percentage include the significance of the information, the degree of assistance provided, and the whistleblower’s culpability or lack thereof in the illegal conduct he or she reported. Employers cannot retaliate against whistleblowers or encumber potential whistleblowers from communicating with the CFTC.

Unfortunately, the program got off to a slow start. During the last fiscal year, the CFTC did not pay out any money in awards, and the Commission only paid out four awards totaling $11 million since 2011. But the CFTC has amended its whistleblower rules to ramp up the program.

Early results are clear. This year the CFTC expects to pay out $45 million in whistleblower awards. Christopher Ehrman, the director of the CFTC’s whistleblower office, has stated “this year for us is going to be huge.” Over 465 whistleblowers have submitted repots to the CFTC this year, a significant jump over previous years. Past reports have involved activities such as virtual currency trading, market manipulation, and fraud in foreign currency exchanges.

While it may seem bad that reports of misconduct have spiked, in reality the jump in CFTC whistleblower submissions is about an increase in reporting rather than a spike in underlying illegal conduct. Whistleblowers have long been on the front lines of conducting effective financial regulation, as financial scandals ranging from Enron to tax fraud in Swiss banks have been uncovered because of whistleblowers. Incentivizing whistleblowers is one of the most efficient ways to ensure that financial scandals come to light and to protect consumers and taxpayers from fraud and illegal conduct.

It is terrific news that the CFTC has chosen to encourage whistleblowers. Hopefully the new CFPB director, be it Mick Mulvaney or Leandra English, will take the same approach.