Progress with Dodd-Frank’s Whistleblower Programs: CFTC and SEC Working to Deter the Next Big Schemes to Harm Investing Public

Too often missing in today’s discussions of Dodd-Frank’s one-year anniversary is appreciation of efforts by CFTC and SEC leadership to build from scratch the effective new whistleblower programs mandated by Dodd-Frank.

With scant resources, each agency is creating an essential mechanism to protect today’s investors from the next fraudulent scheme.

Let’s start with the CFTC. When I met with Chairman Gary Gensler and his CFTC staff in March to discuss the CFTC’s proposed whistleblower rules, I was struck by Chairman Gensler’s focus on what improvements could be made to its “draft” commodities whistleblower rules.

The only non-lawyer in the room, Gensler seemed to grasp more quickly than anyone potential abuses that its draft rules would not correct.

CFTC Commissioner Bart Chilton has also recognized how essential an effective whistleblower program is to protect investors.

More importantly, even the CFTC’s initial cut at its rules showed that it would not simply copy the SEC whistleblower rules’ approach, but would independently design a meaningful program to protect the public by attracting significant whistleblower information to ferret out frauds.

Likewise, the SEC–whose whistleblower rules have been finalized–has shown a welcome commitment to making SEC whistleblowers welcome. Chair Mary Schapiro, Director of Enforcement Robert Khuzami, and other staff such as Steve Cohen, Jordan Thomas, and Sarit Klein put more than considerable thought and effort in refining the SEC whistleblower rules announced in May 2011.

Some in Congress seek to keep the SEC and CFTC so underfunded that they cannot protect the public effectively. As former SEC counsel Professor Don Langevoort observed, “Congress maintains increasingly tight control over SEC policy largely through the budgetary process, and having the Commission be habitually needy and under-resourced fits well within this strategy. The campaign contributions from various sources with an interest in securities regulation are large, and influential members of Congress hardly maximize their own political advantage by stepping aside and leaving the SEC free to do its work as it sees fit.”

The thinking public knows that the “return on investment” of effective whistleblower programs is high–for every dollar spent, multiples are recovered. Experience with the False Claims Act, and the use of IRS whistleblower information, has proved that point.

Those who vilify these agencies for working to establish effective SEC and CFTC whistleblower programs would prefer to make the legal landscape more welcoming for the next Madoff.

We applaud this public service by the SEC and CFTC in designing these essential tools for stopping or deterring fraud. We look forward to reviewing the results of the CFTC’s work when it announces its final whistleblower rules.