The U.S. Commodity Futures Trading Commission’s (CFTC) Whistleblower Incentives and Protection program went quietly into effect on October 24^th.  The CFTC rules (available here) have not drawn as much attention as the strikingly similar SEC whistleblower program.  The comparative scarcity of public commentary, however, does not fairly reflect the potential impact of the CFTC’s program for regulated entities.  Like the SEC program, the implications of the CFTC whistleblower rules are significant.  Below I (briefly) review the CFTC whistleblower rules, discuss the areas which have garnered some public attention, and highlight several key areas where the CFTC rules differ from the SEC whistleblower program.  Regulated entities should take note. 

The CFTC whistleblower rules, described more fully in an earlier Subject to Inquiry post, reward whistleblowers who provide to the CFTC original information that leads to a successful enforcement action resulting in monetary sanctions in excess of $1 million.  In such a case, the whistleblower is eligible for an award of 10-30% of the sanctions collected in a CFTC enforcement matter or, in certain circumstances, a related action based on the same original information.  The amount of any award is determined by the CFTC, in its discretion, based on certain criteria (e.g. the significance of the information and degree of assistance provided by the whistleblower). 

Under the CFTC rules, whistleblowers may be eligible for an award based on a tip, complaint, or referral made anytime after Dodd-Frank was signed into law in July 2010.  Moreover, whistleblowers may be eligible for an award based on the submission of information that relates to a violation that occurred prior to the enactment of Dodd-Frank. 

The CFTC whistleblower program closely mirrors the whistleblower rules adopted by the SEC earlier in this year.  And like the SEC rules, the following comprise the most talked about – and, indeed, the most significant – aspects of the final rules for regulated entities:

• The rules do not require a whistleblower to report potential securities laws violations internally through a regulated entity’s compliance, legal, or audit procedures before submitting a tip to the Commission;
• A whistleblower can receive a bounty based on an internal report, regardless of whether they report to the Commission, if the regulated entity later self-reports to the Commission; and
• The whistleblower protections set out in the program apply regardless of whether the information submitted reveals an actual violation.

The CFTC rules differ from the SEC rules in several key areas.  While this is not a comprehensive list of every distinction, the following items appear to be most critical for regulated entities to understand:

• Unlike the SEC rules, the CFTC rules contain no exclusion for employees of public accounting firms.  As a practical matter, this means outside auditors of CFTC-regulated entities may report to the CFTC suspected violations and qualify for a bounty. 
• CFTC whistleblowers can recover awards from multiple regulators.  A would-be SEC whistleblower is ineligible for an SEC bounty if he or she has already received an award from the CFTC based on the same information.  Under the CFTC rules, however, a whistleblower is eligible for an award regardless of whether he or she has previously been compensated by another regulator.  As a practical matter, this means a whistleblower may be eligible for a second bounty payment from the CFTC if he or she receives the SEC award first. 
• The SEC rules do not ordinarily impute to the whistleblower a formal request for production directed to the whistleblower’s employer (e.g. a subpoena or request for voluntary production).  Under the CFTC rules, however, a request for documents or information directed to an employer is presumptively attributed to the would-be whistleblower. 
• Under the Commodity Exchange Act, CFTC whistleblowers have two years from the date of allegedly retaliatory action to bring a retaliation claim.  This is noticeably shorter than the period afforded SEC whistleblowers, who have six years from the date of the alleged violation to file a claim, or three years from when the retaliation became known to the whistleblower. 

While the full impact of the CFTC rules is yet to be determined, it is important for regulated entities to understand the new Whistleblower Incentives and Protection program, and to take steps internally to address them.  Companies that have not already done so should develop, improve, and promote internally corporate compliance and reporting policies and procedures.  To that end, entities should consider reviewing and updating their internal whistleblower programs, putting in place a dedicated team to review internal complaints, and establishing procedures for handling tips. 

We will continue to report on the CFTC whistleblower program as enforcement and reporting trends become clear.

On October 5th, the United States Court of Appeals for the Second Circuit ruled that the Financial Industry Regulatory Authority (FINRA) does not have authority to bring lawsuits to collect fines imposed in disciplinary proceedings.  According to Diana B. Henriques of the New York Times, “The surprise decision curbs the power of [FINRA] … at a time when it has been under pressure to impose greater accountability on its licensed brokers and brokerage firms.”  The impact of the ruling, however, will be less sweeping than it appears. 

In John J. Fiero and Fiero Brothers, Inc. v. FINRA, the Second Circuit held that neither the federal securities laws nor the FINRA rules empower the regulator to bring court actions to collect disciplinary fines.  Leading to the dispute in Fiero Brothers, FINRA initiated disciplinary proceedings against Fiero Brothers, Inc., a penny-stock brokerage firm, and its owner John J. Fiero, both FINRA members, alleging that the brokerage firm engaged in manipulative and fraudulent selling practices.  As a result of the disciplinary proceedings, FINRA expelled Fiero Brothers, barred Fiero from associating with any FINRA-member firm, and imposed a $1 million fine against the firm and its principal, jointly and severally.  When Fiero Bros. and Fiero refused to pay the sanction, FINRA successfully sued to collect the unpaid fine. 

On appeal to the Second Circuit, the court ruled that FINRA lacked authority to bring lawsuits against regulated brokers and brokerage firms to collect monetary sanctions levied in enforcement actions.  The Court reasoned that while the Securities Exchange Act of 1934 and FINRA’s rules and bylaws grant the organization certain disciplinary powers over its membership – including the ability to impose sanctions – FINRA has “no authority to bring judicial actions to collect monetary sanctions.”  According to the Court, “the statutory scheme carefully particularizes an array of available remedies,” but does not include express authority “to seek judicial enforcement of the variety of sanctions [FINRA] can impose.” 

As Ms. Henriques reports, FINRA’s General Counsel, T. Grant Callery, says the organization will “continue to review the ruling and weigh our options.”  As a practical matter, two “options” emerge.  First, FINRA could seek to appeal the ruling to the Supreme Court of the United States.  This, however, is a time consuming proposition that is not guaranteed to end in a favorable decision.  A second option – and one that is eminently more likely to have the desired effect – would be for FINRA to change its rules according to the procedures set out in the Exchange Act.  In the Fiero Bros. opinion, the Second Circuit noted that “Section 19(b) of the Exchange Act establishes the mechanism by which SRO’s can change their governing rules.”  Through a rule “properly promulgated under [those] procedures,” FINRA might obtain authority to “enforce the collection of its disciplinary fines through judicial proceedings.” 

The decision has led many to believe FINRA will be powerless to effectively discipline its members, with a number of commenters concluding that the organization now has “no teeth.”  However, this conclusion is considerably overstated.  The facts presented in Fiero Bros. are strikingly narrow in the context of typical FINRA disciplinary proceedings.  FINRA does not usually impose a fine when expelling a firm or barring an individual.  In fact, the Fiero Bros. case is the only time FINRA has sought to collect a disciplinary fine through judicial proceedings.   

As a practical matter, FINRA’s regulatory powers are not substantially eroded by the Fiero Bros. ruling.  Indeed, FINRA’s General Counsel is confident that the decision will not impact the regulator’s “ability to enforce FINRA rules and securities laws, to discipline firms or protect investors.”  Even without the authority to hale a member into court, FINRA indisputably retains its two most potent regulatory powers: the authority to promulgate and enforce rules governing its members; and the power to indefinitely suspend or expel brokerage firms and bar brokers from the financial industry.  Through the threat of suspension, expulsion or debarment, FINRA will be able to continue enforcing the rules governing its members. 

We will continue to track the Fiero Bros. case, and any related action undertaken by FINRA.  Stay tuned: There may be more developments ahead.

The Office of Government Ethics proposed a new rule last week that would eliminate many exemptions to gift giving for federal employees. The proposed rule would eliminate most of the exemptions that were available in the past -- including gifts worth less than $20 and free attendance to widely attended and other social events when the gift givers are a registered lobbyist or an organization that employs them.

As noted in the Washington Post:

"That could force government employees to check whether gift-givers are lobbyists by looking in disclosure filings."

Strangely, and with no evidence to back this up, OGE's stated justification for the proposed rule was that it "is increasingly recognized that the more realistic problem is not the brazen quid pro quo, but rather the cultivation of familiarity and access that a lobbyist may use in the future to obtain a more sympathetic hearing for clients.” This proposed rule, like prior Obama Administration initiatives, fails to grasp that the Lobbying Disclosure Act (Act) was enacted to bolster transparency -- not to create disincentives to registration. The Act includes time and financial thresholds to be met before being required to register. This proposed rule could further give rise to what is known as "stealth lobbying" -- which is lobbying activity that stays below the registration thresholds and thus stays out of the public eye. Like the irrational limits the Obama Administration placed on former lobbyists coming into government, individuals and organizations that once registered (and perhaps over reported) may elect to navigate the registration thresholds to stay under the radar and simply not register at all. So much for promoting openness in government...