CFTC Amends Rules to Protect Whistleblowers

The CFTC adopted several rule amendments in order to better protect whistleblowers from retaliation or intimidation by their employers and to establish a new review process for whistleblower claims. The amendments are based on a reinterpretation of the CFTC’s anti-retaliation authority under the Commodity Exchange Act (“CEA”).

The amendments create a new rule – Rule 165.20 – that (i) prohibits retaliation against a whistleblower or anyone else assisting in an investigation, (ii) authorizes the CFTC to bring civil enforcement actions against employers who retaliate against whistleblowers, and (iii) makes explicit that the anti-retaliation protections apply whether or not an award is made. One effect of the amendments will be to allow both the CFTC and a whistleblower to bring legal actions against employers for retaliation.

The newly adopted amendments make the following changes:

  • Rule 165.19 prohibits employers from taking action to prevent potential whistleblowers from communicating directly with the CFTC;
  • Rule 165.5(b) rescinds the requirement that, in order for a whistleblower to receive an award, they must be the original source of the information provided;
  • Rules 165.2(i)(2) and 165.2(l)(2) expand the list of entities to which a whistleblower can report misconduct before reporting to the CFTC and still maintain award eligibility;
  • Rules 165.2(i)(3) and 165.2(l)(2) expand the timeframe in which a whistleblower must file a Form TCR (i.e., a Tip, Complaint or Referral Form) from 120 to 180 days;
  • Rules 165.5(a)(3) and 165.11(a) allow a whistleblower to receive an award in both a Related Action and a covered judicial or administrative action;
  • Rule 165.11(b) prevents a whistleblower from receiving an award for a Related Action if they have received an SEC award for the same action;
  • Rules 165.15(a)(2) and 165.7(f)-(l) replace the Whistleblower Award Determination Panel with a Claims Review Staff, and implement an enhanced review process mirroring that of the SEC.

In addition, the CFTC rule amendments make other changes related to form filing, recordkeeping and confidentiality. The amendments also harmonize rules concerning the CFTC and the SEC whistleblower programs. The amendments will become effective 60 days after their publication in the Federal Register.

Lofchie Comment: The mythic image of the “whistleblower” is that of a brave individual facing down a giant corporation (and preferably of the future subject of a movie). Sometimes whistleblowing does work like that. At other times, a whistleblower is just someone out for money (or revenge). What does a company do when it becomes aware of a whistleblower who has gone straight to the government with an accusation, without first attempting to remedy the matter internally, and the allegations turn out to be (legally) mistaken or factually untrue? Can an employee who is concerned about being dismissed raise an allegation strategically as a defense against being fired? These are difficult real-world questions. Big companies doubtless will try to live with the whistleblower rather than risk allegations of mistreatment. For smaller companies, it’s a harder situation.

SEC to Reconsider Decision Approving Quadruple-Leveraged ETFs

According to a Wall Street Journal report, the SEC may reevaluate a decision by the Division of Markets and Trading to approve a proposed rule change that permits the listing and trading of the first quadruple-leveraged exchange-traded funds (“ETFs”). The report states that the decision “has been put on hold” and will be reviewed by SEC commissioners.

CFTC Launches FinTech Innovation Initiative

The CFTC launched “LabCFTC,” an initiative designed to “promot[e] responsible FinTech innovation to improve the quality, resiliency, and competitiveness of the markets the CFTC oversees.” The initiative, which will include the creation of a FinTech innovation office in New York City, is intended to address the regulatory challenges of increasingly automated trading, and to foster a regulatory environment more receptive to emerging FinTech companies. The initiative will consist of two major components:

  • GuidePoint will offer guidance to FinTech companies on how innovations may fit into the existing regulatory framework and help innovators navigate the regulatory process; and
  • CFTC 2.0 will implement emerging technologies in order to improve the CFTC’s effectiveness and efficiency.

CFTC Acting Chair J. Christopher Giancarlo emphasized that regulatory organizations must keep pace with technological innovation, and cooperate and engage in dialogue with FinTech companies, as the influence of technology on financial markets continues to expand:

“Good regulation should not inhibit technological innovation. Rather, innovation should foster better and smarter regulation. Regulators must engage in a constant and evolving dialogue with innovators precisely because we need to understand the impact they are having on the very marketplaces we are charged to supervise. We must partner with them, experiment with them, learn from them and innovate alongside them, if we are ever to keep pace with the digitization of modern markets and protect their 21st century participants.”

CFTC Commissioner Sharon Bowen lauded the initiative and suggested that the CFTC needs an expanded budget in order to keep up with the evolving marketplace.

Lofchie Comment: During his tenure as a Commissioner, the now-Acting Chair Giancarlo was constant in his attention to (i) making the CFTC more efficient through improved use of technology and (ii) exploring how technology can improve regulated markets without the regulators becoming a roadblock. (See generally news regarding Mr. Giancarlo and technology.) The latter focus area demonstrates an understanding that regulators too often lack. Change is inevitable. It takes special care and leadership to foster a regulatory environment that does not slow down or inhibit that change.

SEC Names General Counsel, Chief Counsel and Deputy Chief of Staff

The SEC named Robert Stebbins as General Counsel. Previously, Mr. Stebbins was a partner at Willkie Farr & Gallagher. The SEC named Jaime Kilma as Chief Counsel. Ms. Kilma served most recently as SEC Co-Chief of Staff, and before that, as Counsel to SEC Commissioners Michael S. Piwowar and Troy A. Paredes. The SEC also named Sean Memon as Deputy Chief of Staff. Mr. Memon joins the SEC from Sullivan and Cromwell.

FDIC Vice Chair Urges Partitioning of Nonbanking Activities

FDIC Vice Chair Thomas Hoenig discussed his recent proposal to require that banks partition certain nonbanking activities (see previous coverage for more detail).

At a Conference on Systemic Risk and Organization of the Financial System held at Chapman University, California, Mr. Hoenig described a shift in the banking industry towards consolidation among the largest banks. He noted some of the key factors that have led to this trend: (i) technological developments and financial engineering, (ii) 1990s legislation easing the strain of banking regulations, (iii) significant mergers of commercial and investment banks, and (iv) fallout from the 2008 financial crisis, including the introduction of the Dodd-Frank Act in 2010.

Mr. Hoenig noted that, while the Dodd-Frank Act included some structural changes (such as the Volcker Rule), Congress, in large part, chose “regulatory control over structural change.” Mr. Hoenig warned that such over-reliance on regulation potentially could slow down economic growth. He instead advocated for structural change, suggesting that:

“. . . universal banks would partition their nontraditional activities into separately managed and capitalized affiliates. The safety net would be confined to the commercial bank, protecting bank depositors and the payment system so essential to commerce. Simultaneously, these protected commercial banks would be required to increase tangible equity to levels more in line with historic norms, and which the market has long viewed as the best assurance of a bank’s resilience.”

Mr. Hoenig recommended implementing a variety of other safeguards to supplement the partition, such as setting limits on the amount of debt the ultimate parent companies could downstream to subsidiaries. He also mentioned the possibility that, by allowing for resolution through bankruptcy, his proposal could reduce regulatory burdens, including the elimination of risk-based capital and liquidity, the Comprehensive Capital Analysis and Review, Dodd-Frank Act Stress Testing, the Orderly Liquidation Authority, Living Wills, and parts of the Volcker Rule.

Lofchie Comment: One problem with the proposal is the distinction it makes between traditional and nontraditional activities. This distinction is based upon the time in which a particular type of financial activity was created and the substance of the activity. For example, entering into swap transactions (particularly as to rates and currencies) and clear swaps and futures should be viewed as core banking activities: they are activities that are completely about credit intermediation. To assert that they are not “traditional” banking activities because they were not done in the 1950s or the 1850s would be not so different from stating that email is not a traditional form of bank communication. It may not be traditional, but it is the modern version of the telephone, and it is core to what banks do.

Federal Register: CFTC Solicits Comments on KISS Initiative

The CFTC is soliciting comments on Project KISS (“Keep It Simple, Stupid”), an initiative focused on simplifying rules and practices in order to make compliance less costly. As discussed previously, the CFTC is asking those who comment on Project KISS to concentrate on enhancements rather than rewrites or repeals. The request for comments was published in the Federal Register, and comments are due by September 30, 2017.

Lofchie Comment: Firms are advised to take this offer seriously, as there is no doubt that Commissioner J. Christopher Giancarlo would like to make changes that would bring down the expenses of doing business. While an invitation to rethink a larger part of the rule structure would be more alluring than a KISS, it’s only a first date.

OCC Publishes Revised Sections of Comptroller’s Licensing Manual

The Office of the Comptroller of the Currency (“OCC”) published revised versions of the “Public Notice and Comments” and “Fiduciary Powers” booklets of the Comptroller’s Licensing Manual.

The “Public Notice and Comments” booklet provides information about public notice requirements and procedures. The revised version replaces the booklet published in March 2007. The “Fiduciary Powers” booklet outlines policies and procedures for banks and federal savings associations exercising fiduciary powers. The revised version replaces the booklet published in June 2002.

House Passes Fair Access to Investment Research Act of 2017

The House of Representatives passed the Fair Access to Investment Research Act of 2017 (H.R. 910). The bill is intended to establish a safe harbor that would permit broker-dealers to issue research reports that cover exchange-traded funds (“ETFs”). The bill provides that research reports are not “prospectuses” (and so are not subject to Securities Act requirements that apply to prospectuses).

According to the Congressional Budget Office (“CBO”), the bill would eliminate an existing right of action that “allows public and private investors to pursue damage claims against broker-dealers who issue research reports on exchange-traded funds.” The CBO stated that it has not found any cases to date that established liability for information in research reports on ETFs, nor does it expect to find such cases in the future.

SIFMA issued a statement commending the passage of the bill because it would “reduce obstacles to research on [ETFs] and registered investment companies,” and because its clarifications would “allow broker-dealers to produce more research on ETFs, providing consumers with greater access to information and fueling capital formation and job creation.”

Currently, the bill is being reviewed by the Senate Committee on Banking, Housing and Urban Affairs.

Lofchie Comment: The reason that no claims are made against research on ETFs is that no one publishes such research. The reason no one publishes this research is because, under current law, the research might be deemed a prospectus. The reason this statutory amendment makes sense is that current law discourages the production of research that would be very useful to investors. It makes no sense to implicitly bar the production of research on one of the largest and most important investment tools in the market.

FDIC Publishes Handbook for Organizers of New Depository Institutions

The FDIC published a handbook for new depository institutions. The handbook was designed to help potential organizers become familiar with the deposit insurance application process and the path by which to obtain deposit insurance. The handbook offers, among other things, guidance on the three phases of establishing an insured institution: pre-filing activities, the application process and pre-opening activities.

Lofchie Comment: What is interesting about this publication is that it would seem to have no readership. There are virtually no new banks. See Federal Reserve Bank of Richmond, “Explaining the Decline in the Number of Banks since the Great Recession“; see also George Sutton, “What Dearth of New Banks Means for the Industry’s Future” (American Banker). Thus, the really significant question is not how does one start a new bank, but, rather, why does no one want to do so?