CFTC Publishes Whistleblower Proposal—Double Jeopardy for SEC Registrants?
The CFTC has published its proposed whistleblower rules. In a keynote address to the Practising Law Institute’s Securities Regulation Institute on November 11, 2010, CFTC Chair Gary Gensler stated the CFTC rules were intended to be the same as the recently announced SEC whistleblower proposal, except where the Dodd-Frank Act required a different result. That certainly seems to be the case, so much so that the CFTC forgot to change all of the references in the proposed forms it copied from the SEC from “SEC” to “CFTC” (see Part IV: Instructions for Completing Form WB-DEC; Section C, Question 3b; page 103 of the proposed rules).
SEC registrants often engage in transactions subject to the jurisdiction of the CFTC, a violation of which could cause a person to submit information to the CFTC as a whistleblower. In such an instance, it is not hard to imagine a set of circumstances where that same violation is also a violation of securities law. For instance, a CFTC violation could lead to a claim that the SEC reports were misleading in some respect and therefore result in a violation of securities laws. It therefore also is not hard to imagine that the same CFTC whistleblower would simultaneously submit information to the SEC as a whistleblower.
The dual whistleblower possibility has a number of implications. First, public companies that engage in significant transactions or are otherwise subject to CFTC jurisdiction should ensure their compliance programs are functioning at the highest level reasonably possible. Second, the CFTC and the SEC should do more to coordinate their proposed rules to envision this possibility. It seems obvious that the respective agencies should take into account awards paid by the other agency to the same individuals for the same conduct when granting further awards, to the extent permissible by statute. The SEC takes this into account somewhat in its proposed Rule 21F-3(d) (Payment of Awards). That provides the SEC will not make an award for a “related action” if the whistleblower has already been granted an award by the CFTC for that same action. However, it appears a whistleblower would still be eligible to collect an award from the SEC in an SEC action. Curiously, the proposed CFTC rules do not appear to include a similar explicit provision like SEC Rule 21F-3(d), which seems to lead to a real possibility a whistleblower could collect twice on the same dollars.
There are other curious differences between the two proposed rules. For instance, proposed SEC Rule 21F-4(b)(4)(iv) provides compliance personnel and others generally cannot collect a whistleblower award unless the entity did not disclose the information to the SEC “within a reasonable period of time.” The counterpart CFTC Rule 165.2(g)(4) requires the entity to self-report to the CFTC within 60 days. This inconsistency is certaintly going to make it diffuclt for entities subject to dual jurisdiction to determine when to self-report.
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Contact Steve Quinlivan for more information.