CFTC and SEC Dodd-Frank Whistleblower Rules

Transcription

1 CFTC and SEC Dodd-Frank Whistleblower Rules March 10, 2016 Geoffrey F. Aronow, Sidley Austin Thomas K. Cauley, Sidley Austin William Nissen, Sidley Austin Michael S. Sackheim, Sidley Austin

2 Upcoming L&C Webinars and Events The Other Side of the Coin: Bitcoin, Blockchain, Regulation and Enforcement March 24, :00 AM ET Webinar Presenter: Alan Avery, Benjamin Naftalis, Yvette Valdez and Stephen Wink of Latham & Watkins LLP NFA Bylaw 1101: Doing Business with Non-Members April 14, :00 AM ET Webinar Presenter: Rita Molesworth of Willkie Farr & Gallagher LLP SEF Rules and Compliance April 21, :00 AM ET Webinar Presenter: Steve Humenik of Covington & Burling LLP 38th Annual FIA Law & Compliance Conference May 4-6, 2016 Baltimore Waterfront Marriott Baltimore, MD Learn more and register at FIA.org/lc

3 Administrative Items The webinar will be recorded and posted to the FIA website following the conclusion of the live webinar. A question and answer period will conclude the presentation. Please use the question function on your webinar control panel to ask a question to the moderator or speakers. Questions will be answered at the conclusion of the webinar. CLE certificates will be ed shortly after conclusion of the webinar.

4 CFTC AND SEC Derivatives Whistleblower Rules Securities and Exchange Commission Section 21F of the Securities Exchange Act of 1934, added by section 922 of the Dodd- Frank Act SEC Rules 21F-1-17 Commodity Futures Trading Commission Section 23(h) of the Commodity Exchange Act, added by section 748 of the Dodd-Frank Act CFTC Rules and Appendix A to Part 165 Definition of a Whistleblower A whistleblower is a natural person who, alone or jointly with others, provides the SEC or CFTC with information that relates to a possible violation of the federal securities or commodities laws, rules or regulations, that has occurred, is ongoing, or is about to occur Voluntary Information All information must be voluntarily submitted Must be original information

5 CFTC AND SEC Derivatives Whistleblower Rules (cont d) Information must lead to a successful enforcement action by the SEC or CFTC, or a related action brought by certain other regulators or law enforcement agencies, resulting in a monetary penalty of $1 million or greater Information must be reported in advance of a request from the regulator Award is 10% - 30% of the amounts recovered Original Information Original information must be based on the whistleblower s independent knowledge or independent analysis and must not already be known to the SEC or CFTC Internal Reporting To encourage employees to report possible violations to their employer s internal compliance program initially, the SEC and CFTC rules provide a 120-day look back provision whereby if the whistleblower provides information to an internal compliance program, the whistleblower will have a 120-day time period during which he or she can alert the SEC or the CFTC of the same information, and it will be considered provided to the regulator as of the date the information was provided to the internal compliance program.

6 CFTC AND SEC Derivatives Whistleblower Rules (cont d) The SEC and CFTC rules provide that a whistleblower will be eligible for an award if he or she reports original information through their employer s internal legal or compliance reporting procedures before or at the same time it is reported to the SEC or CFTC, and the employer then reports the information to the regulator. The SEC and CFTC may attribute all the information provided to the regulator by the employer to the whistleblower. Persons Who Cannot be Whistleblowers Officer, Director, Trustee or Partner of an employer who receives information about the wrongdoing from an employee or the employer s internal compliance process Attorneys through an attorney-client privileged communication or in connection with the legal representation of a client, subject to certain exceptions Accountants under the SEC rules, but external auditors of public accounting firms are not excluded under the CFTC rules Persons whose principal duties involve Compliance and Internal Audit responsibilities, subject to certain exemptions Persons retained to conduct an investigation into the possible violations Individuals convicted of a crime relating to the underlying SEC or CFTC enforcement action Persons who obtain information in violation of criminal law

7 CFTC AND SEC Derivatives Whistleblower Rules (cont d) Anonymity Whistleblowers may submit information anonymously through an attorney who knows his or her identity There is no requirement that the identity of the whistleblower be made public by the SEC or CFTC, unless disclosure is required to be made to a defendant or respondent in a government proceeding SEC and CFTC May Communicate Directly with Whistleblowers Communications may be conducted even if the employer is represented by counsel Anti-Retaliation Prohibitions Protects against discharge, demotion, suspension, threats and harassment Covers internal reporting, according to SEC and court decision Confidentiality Provisions in Employment and Severance Agreements that Impede Disclosure The regulators believe these provisions violate the CFTC and SEC whistleblower rules Implementation by Regulators As of December 2015, the SEC reportedly has a $400MM war chest, has awarded $52MM in 22 cases As of December 2015, the CFTC reportedly has a $269MM war chest, has awarded $530,000 in 2 cases

8 Internal Investigations and the Whistleblower In the Matter of KBR, Inc., Release No (SEC Apr. 1, 2015) Settlement Order Confidentiality clause in document signed as part of internal investigations No evidence ever used to impede whistle-blowing Violation of SEC Rule 21F-17, prohibiting any action to impede communications with SEC staff with regard to securities law violations, including enforcing or threatening to enforce a confidentiality agreement CFTC view of anti-retaliation provisions of CEA differs Private right of action only; no regulatory component

9 Internal Investigations and the Whistleblower (cont d) BUT... SEC rule not tied solely to anti-retaliation provisions Ethical rule considerations Private cause of action Impact of KBR on how internal investigations are conducted. Potential impact not just on written agreements, but possible impact on Upjohn warnings, 449 U.S. 383 (1981) (in an internal investigation, counsel for the organization advises the employee that counsel represents the organization, not the employee). Maintaining the confidentiality of internal investigations following KBR.

10 Employment & Severance Agreements: Whistleblower Considerations Outgrowth of KBR decision. Andrew Ceresney: SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision. Sean McKessy: Other employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations. Typical to include confidentiality clauses in employment and severance agreements Outright prohibitions Notifications of requests/demands for information Awareness of others providing information Need to carve out (carefully) communications under statutory whistleblower provisions.

11 Employers: Internal Whistleblower Reporting and Anti- Retaliation Issues; Creating a Non-Hostile Environment Promote compliance within the company Provide periodic compliance training to all Provide training to supervisors Emphasize management support of compliance Require reporting of violations Make reporting easy and allow anonymous reporting Require annual certification that employees are not aware of violations Follow up promptly on internal reports Advise reporting party (if known) of investigation and outcome Limit knowledge of investigation and its contents Non-retaliation Limit knowledge of identity of reporting party Ensure no retaliation against reporting party

12 Summary: Effective Whistleblower Policies and Procedures Culture of compliance Robust compliance process, including involvement of the highest level of the organization Code of conduct Robust internal investigatory policies and procedures Require internal reporting of violations, keep the reporting employee aware of the internal investigation Document your internal investigations of reports of wrongdoing Conduct employee interviews of potential whistleblowers with counsel present Consider anonymous reporting, hotlines, anonymous s, an ombudsman

13 Summary: Effective Whistleblower Policies and Procedures (cont d) Policy to not create a hostile environment for whistleblowers Policy to not widely report the identity of a whistleblower, should be on a need-to-know basis Review non-disclosure policies Review employment and severance agreements for non-disclosure provisions Be cautious when disciplining or terminating an employee who is a whistleblower Require annual not-aware-of-violations certifications from employees Human Resources departments should be brought into the process

14 Questions? Please use the question function on your webinar control panel to ask a question to the moderator or speakers. For more information please contact: Geoffrey F. Aronow, garonow@sidley.com Thomas K. Cauley, tcauley@sidley.com William Nissen, wnissen@sidley.com Michael S. Sackheim, msackheim@sidley.com