On March 4, 2019, the Commodity Futures Trading Commission (“CFTC”) announced a whistleblower award of over $2 million to an individual—unaffiliated with the company the CFTC charged—for providing expert analysis in conjunction with a related action instituted by another federal regulator. While the Securities and Exchange Commission, which possesses a similar whistleblower award regime,[1] has previously issued awards to multiple claimants for both related actions[2] and to company outsiders,[3] this is the first such award to be granted by the CFTC in either respect.
The award demonstrates the CFTC’s continued commitment to the Whistleblower Program, and to using all available means in conducting enforcement actions. This award also reflects both the CFTC’s willingness to collaborate with other federal regulators and to rely on external sources of expert data analysis and likely reflects the CFTC’s continued expansion of its Whistleblower Program, both in terms of sources of information and awards granted.
Background
The CFTC’s Whistleblower Program was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and made effective after the implementation of pertinent rules in October 2011. Under Dodd-Frank Section 748, the CFTC is empowered to pay whistleblowers between 10 and 30 percent of the monetary sanctions it collects from successful enforcement actions resulting in monetary sanctions of over $1 million.[4] Under the statutory provisions, the CFTC can award a whistleblower as a result of related judicial or administrative actions brought by another of a select group of regulators—including the U.S. Department of Justice, federal or state departments or agencies operating within their jurisdiction, futures and securities industry self-regulatory organizations, state attorneys general, and foreign futures authorities — if that action was based on original information provided to the CFTC.[5] Additionally, Dodd-Frank Section 748 defines “whistleblower”[6] in a manner that does not restrict the potential for an award only to persons with an insider relationship to those who have committed such acts in violation of the Commodity Exchange Act (“CEA”) or CFTC regulations.
The CFTC’s Whistleblower Program had previously issued seven such awards. However, the March 4 order follows three awards issued during the Summer of 2018, including the largest award to date of more than $45 million, and the first award given to a person living in a foreign country. These awards, in conjunction with statements made by CFTC staff in announcing this latest order, demonstrate the agency’s continued efforts to incentivize people to come forward in order to grow the Whistleblower Program “both in terms of tips received and awards ordered.”[7]The March 4 Order
The CFTC’s March 4 award is the first CFTC whistleblower award granted for both a CFTC action and a related action brought by another federal regulator. Additionally, the award recipient was the first given by the CFTC to a non-inside source who “provid[ed] critical information through independent analysis of market data.”
As is CFTC policy under the CEA’s confidentiality provisions, the CFTC withheld all information that would “reasonably be expected to reveal the whistleblower’s identity.” Thus, the name, details of the enforcement proceedings, and the exact dollar amount and percentage of the monetary sanctions awarded were all withheld from disclosure.
Takeaways
While many details of the award remain undisclosed, the CFTC’s collaborative efforts with another federal regulator, and the award being granted for expert market data analysis by an external expert provide an important window into the direction the CFTC’s Whistleblower Program may be headed. In announcing the award, James McDonald, Director of the CFTC’s Division of Enforcement stated, “The Commission is dedicated to working cooperatively with other federal regulators, and this case highlights how successful we can be when we appropriately share high-quality whistleblower information.” While the CFTC has been authorized to grant awards stemming from related actions since Dodd-Frank’s adoption, the March 4 order appears to indicate that CFTC staff expect the CFTC to actively avail itself of this authority where appropriate going forward.
Additionally, the March 4 order’s use of whistleblower information provided through expert, independent analysis of market data comes at a transformational time in financial market regulation, as numerous market participants invest substantial resources in finding technological solutions to difficult compliance issues (often referred to as “RegTech”). As the Financial Industry Regulatory Authority (“FINRA”) indicated in a September 2018 White Paper, multiple market participants are investing in developing RegTech solutions that incorporate cloud computing, big data analysis, and artificial intelligence and machine learning to assist in performing surveillance and monitoring for compliance purposes. FINRA also indicated that market participants had expressed interest in outsourcing these functions to external vendors. As big data RegTech solutions are increasingly developed in the financial industry and adopted through the use of external vendors, the CFTC’s willingness to look to external sources may form a key piece of the growth of the CFTC’s Whistleblower Program in the years to come.
[1] See 15 U.S.C. § 78u-6. The SEC was granted the authority to provide whistleblowers with financial awards in statutory amendments to the Securities Exchange Act of 1934 (“Exchange Act”) enacted under Section 922 of the Dodd-Frank Act. The CFTC was granted similar authority under statutory amendments to the Commodity Exchange Act found in Section 748 of the Dodd-Frank Act—which largely mirrored those amendments made to the Exchange Act.
[2] See e.g., In the Matter of the Claim for Award in Connection with Redacted Redacted Notice of Covered Action Redacted, SEC Rel. No. 34-77530 (Apr. 5, 2016); In the Matter of the Claim for Award in Connection with Redacted, SEC Rel. No. 34-75477 (July 17, 2015); In the Matter of the Claim for Award in Connection with Redacted, SEC Rel. No. 34-73174 (Sept. 22, 2014); In the Matter of the Claim for Related Action Award in Connection with United States v. Audrey C Hicks, 1:11-Cr-10407-Pbs (D. Mass. 2011) (Related Action), SEC Rel. No. 34-70293 (Aug. 30, 2013).
[3] See e.g., In the Matter of the Claim for Award in Connection with Redacted Notice of Covered Action Redacted, SEC Rel. No. 34-81857 (Oct. 12, 2017); see also Press Release, Securities and Exchange Commission, SEC Awards Whistleblower More Than $700,000 for Detailed Analysis, (2016), https://www.sec.gov/news/pressrelease/2016-10.html.
[4] The whistleblowers must provide such original information voluntarily. Furthermore, that information must directly lead to the success of the resulting enforcement action.
[5] 7 U.S.C. § 26. Based on the definition of “related action” found at § 26(a)(5), a related action resulting in a whistleblower award can include an administrative or judicial action brought by such entities enumerated under § 26(h)(2)(C)(I)-(VI).
[6] “Whistleblower” is defined to mean “any individual, or 2 or more individuals acting jointly, who provides information relating to a violation of this chapter to the Commission, in a manner established by rule or regulation by the Commission.” See 7 U.S.C. § 26(a)(7).
[7] See Press Release, Commodity Futures Trading Commission, CFTC Announces Whistleblower Award Totaling More Than $2 Million, (2019), https://www.cftc.gov/PressRoom/PressReleases/7882-19. Quote attributed to James McDonald, Director of the CFTC’s Division of Enforcement.