March 30, 2011
It is good to be with all of you this afternoon. I appreciate that we are able to join together through the magic of technology. I know many of you aren't located in the cities where most of our financial regulatory work occurs: Washington, New York and Chicago. That makes it all the more refreshing to be able to talk with folks in many parts of the country. That is, in addition to those of you in the cities I named.
When I hear about groups doing good work, whose mission it is to work every day for a noble cause, I get a little Pollyannaish myself. That is, I want to look for the good and positive things that can be done. I know you all strive to do good work and I commend you for it, not that you need to hear it from a government regulator. We do, however, share some common goals. I like to think that people in government are in that group seeking good, although on the whole, we don't hit the mark as often as we should.
Today, I want to focus on just one issue. To be candid, it is a pleasure to talk about a single issue. We have over 40 rulemakings going on at the CFTC. Our brethren regulator, the Securities and Exchange Commission, has many more. We've all been very busy trying to come up to speed on issues, review and publish proposals, consider comments, and then if we feel comfortable—like we got it right—go final on rules and regulations. Talking about the logistics of the process is easy, however. Moving through it is another matter.
Here is an example of what I mean. We are supposed to have all of our rules finalized by mid-July. That's what the law says—the Dodd-Frank Wall Street Reform and Consumer Protection Act. For our part, we had a goal of getting the proposals out by the end of last year. We came close. We made a lot of progress. In order to get those proposals out for comment, however, sometimes we had to put something forward that wasn't as good as I think any of us would have liked.
There was at least one proposal that was so far from getting the support of the Commission that we simply put forth a list of questions. If you think about it, that makes some sense because much of what we are writing rules for are things that have not been regulated whatsoever—namely over-the-counter swaps. Sometimes I think some of us felt like Sergeant Schultz on Hogan's Heroes who would say, "I know nothing." Maybe it was "nothink." I'm not sure. Suffice it to say, we needed to know more and the only effective way for us to do that was to get public comments. It has been a great learning process and it has been a lesson in democracy too. Folks comment. They meet with us. We learn. We ask questions. We meet with others. It is actually pretty refreshing, but it is time-consuming.
I do want to say that some of the proposals were very good, particularly those with which we had familiarity, or those that didn't require a long learning curve. Nevertheless, the real rubber doesn't meet the road until we go final on a rule. So, while we may have supported publishing a rule to "get it out for comment," we will have a lot more work to do before we go final. Essentially, you could propose a donut. We'd look silly, but we'd get comments. Going final is the real deal.
So, as I said, let's discuss one issue: whistleblower provisions (Section 748). Let me say right off, this is one of those new requirements in the new financial reform law that pleased me. Not only does the new law seek to better ferret out corporate fraud and abuse, but the recovery of funds can go to important consumer education and outreach activities at the CFTC. That is something I've been calling for since 2007 and an area we need to significantly improve upon. I say improve upon because it currently doesn't exist. Zero. Nada. Zippo. Can you even believe we don't have consumer education or outreach folks? If you are an average person and you write to us, good luck getting a response. Coming from Capitol Hill where every piece of mail gets answered, that simple function seems like a no-brainer on the list of must do items. Anyway, we have budget issues, and haven't been able to resource those functions yet, although I think there now is a desire to do so. The whistle blower recovery dollars could help in that regard. So, not only was I pleased to see the provision for all the good that it could do to address and reduce corporate fraud and abuse, but from the consumer education and outreach side, I was pleased.
That said, like some of the other issues, the whistle blower provision was new to us. We put forth a proposal and folks started commenting. What I've come to realize, and the primary reason I wanted to spend more time with you today, is that we really missed the mark that Congress intended us to hit. The SEC also has a proposal. I like to be respectful of my colleagues there. They are all smart and dedicated public servants. And again, they have an even larger burden than we do. However, I think they missed the target too—maybe even wider than we missed.
Here's the deal: this new provision was meant to, and still can, serve as an important tool in both Commissions’ enforcement arsenals. It can give needed incentives for folks—precisely the people we want to hear from, those who have an eye “from the inside” on essential information about nefarious schemes—to come forward, with needed protections. However, we need to alter what we have proposed in some fundamental ways.
One of my favorite television shows when I was a kid was "The Andy Griffith Show." I used to whistle that theme song over and over. Truth be told, I still do. One of the best places I've found to do so, although there are many, is on the House side of the U.S. Capitol. I worked there for a decade. Between the Cannon House Office Building and the Jefferson Building, part of the Library of Congress, there is a tunnel. The door is always closed at the library end and that helps create the great echo chamber. I'd love to go into that tunnel and whistle that song. Sometimes if there were people in it, I'd just wait until they left so I could be there and whistle by myself. It was a clear and clarion whistle. There was nothing in doubt about it at all. That's the type of whistleblower rules and regulations we need. No equivocation. Clear, consistent, concise and workable.
With that in mind, while these kinds of provisions may be new to the SEC and our agency, they aren't new to the federal government at all. One of the things both regulators should have done on our proposals, and clearly didn't do, was to learn from our peers in other areas of the federal government.
There are four major areas where we can learn and that I believe our proposals raise significant concerns: non-discretionary awards, discretion to comply with internal procedures, blanket exemptions, and spacious agency discretion—discretion that could circumvent Congressional internet.
As you all know and said in your comment letter, the Department of Justice, has long and successful experience with the Federal False Claims Act (FCA) whistleblower provisions—it’s chief civil fraud enforcement tool—and similar laws have been used by the IRS and certain states, with comparable success.
The numbers you all (TAF) furnished to the Commission suggest that more than 7,000 whistleblowers have reported fraud to the Department of Justice. The U.S. Treasury and state governments have collected almost $30 billion in fines and settlements from whistleblower cases since 1986. Obviously, they are doing something that works and makes corporate America a cleaner place.
So, let's look at some of the central tenets of the FCA as we put a final rule together. There is still time to benefit from the history we’ve had with that statute.
The first area that concerns me is to ensure that we provide a guaranteed, non-discretionary award if the proffered information actually gives the government a win in a case. Some have suggested that we not guarantee such awards even if a recovery is made. If there are no guarantees of any reward, the experience is that folks won't come forward. Many times these are senior officials. Once they blow the whistle, they may not be able to find another job in their industry. They need to have some reasonable hope that they will continue to be able to provide for their family when they come forward. We should want to encourage that good behavior.
Discretion to Comply with Internal Procedures
We need to make sure we don’t require things that impede that effort like following all company internal procedures before making a whistleblower effort. If an employee sees a problem, they may want to follow those procedures. In fact, as the Chamber of Commerce notes, “The experience of the many companies with robust internal reporting programs, as well as empirical evidence, demonstrate that all stakeholders benefit when those with knowledge of potential wrongdoing report internally, thus enabling management to promptly investigate and take remedial action.” I actually agree. I also met with the Chamber and others and we discussed many of these issues. However, their argument on this point predisposes that the company in question has robust internal reporting programs. Certainly not all companies fall into this category. Government needs to regulate for the least responsible entities, too. There are many valid reasons to not require that a whistleblower first work through internal procedures at a company when those procedures may be ineffectual or compromised.
In addition, I get concerned about attaching so many bells and whistles (no pun intended) to the system that we make it essentially useless. The current proposals do that. For example, if whistleblowers do report their concerns internally before coming to us, it also leaves room for lots of covering-up to occur before we even have a chance to investigate. We can all recall movies where a company or individual knows they are going to be investigated and employees head to the paper shredders in an effort to remove evidence of wrongdoing.
Similarly restrictive is the provision within the proposal to disqualify any whistleblower with legal compliance, audit, supervisory or governance responsibilities for an entity. This is such a vast restriction as to render the entire new authority ineffectual. I mean come on: excluding folks in all supervisory positions from blowing the whistle? Really, the custodial supervisors, the kitchen supervisors would be exempt? Give me a break.
Furthermore, the very folks who would have the most important information and evidence could be these very key folks in supervisory positions. Go back to why Congress I think inserted this provision to begin with: to catch crooks and to safeguard consumers against corporate America’s abuses. We need to have a narrow restriction, and be clear and concise in our definition so as to not have a regulation that actually deters folks from coming forward.
Spacious Agency Discretion
Finally, the proposal gives the agency such discretion that even if recovery occurs, even if the agency wins in court, the whistleblower might not receive a payment. For example, the rule would require that the whistleblower “significantly contribute” to the agency action in going forward. Those words can later be interpreted to deny a recovery claim. Congress wanted mandatory awards for whistleblowers when there is a recovery. The law requires that the agency “shall pay an award” should a whistleblower voluntarily provide original information that led to the successful enforcement action. What is so complicated about that? We should use that as our guidepost in setting up a final rule.
There are other definitional issues that expand the agencies’ discretion in a way that could chill reporting. We need to examine those, too. We need to ensure that what we are doing is consistent with what Congress intended. We need to ensure that we encourage whistleblowers, not create uncertainty.
I’m encouraged about the enhanced ability this new enforcement tool provides to the Commission in detecting, deterring, and prosecuting fraud, abuse and manipulation in America’s risk management and price discovery markets. We just need to take a whistling lesson from Andy and Opie Taylor and ensure that the provisions are clear and concise. I believe that this can significantly benefit markets and consumers, and I look forward to implementation of a robust and active whistleblower program at the CFTC.
Last Updated: March 30, 2011