Combined, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have awarded more than $2 billion to whistleblowers.
The agencies’ whistleblower programs, which were created alongside each other with the passage of the Dodd-Frank Act in 2010, passed the $2 billion threshold during the 2023 Fiscal Year. Kohn, Kohn & Colapinto has published indexes tracking all the whistleblower award orders issued by both the SEC and CFTC.
The transnational whistleblower programs cover individuals who voluntarily report original information about potential misconduct. If tips lead to a successful enforcement action, the whistleblowers are entitled to 10-30% of the recovered funds. The programs have created clear anti-retaliation protections and strong financial incentives for reporting securities and commodities fraud.
The $2 billion awarded to whistleblowers corresponds to several more billions collected from fraudsters thanks to whistleblower tips. Combined, the SEC and CFTC whistleblower programs have led to more than $9.5 billion in sanctions.
While the programs have been immensely successful, further reforms are needed to ensure that programs stay funded and that whistleblowers are not unfairly disqualified from awards. Bipartisan bills offering much-needed reforms to each program are currently pending in Congress. Swift passage of these bills can help ensure that the SEC and CFTC whistleblower programs continue to bring in billions of dollars for taxpayers.
SEC Whistleblower Reform Act
According to former SEC Commissioner Allison Herren Lee, who currently serves as Of Counsel at Kohn, Kohn & Colapinto, “the SEC’s whistleblower program has been a resounding success.”
Whistleblower tips have allowed the agency to recover more than $6.3 billion from fraudsters and return more than $1.5 billion to harmed investors. In total, the agency has paid out more than 300 whistleblower awards totaling approximately $1.9 billion.
Even with the program’s immense success, flaws do persist. Introduced by Senators Grassley (R-IA) and Warren (D-MA) on March 15, and cosponsored by Senators Collins (R-ME), Warnock (D-GA), and Cortez Masto (D-NV), the bipartisan SEC Whistleblower Reform Act of 2023 makes needed improvements to the existing program.
The legislation addresses the U.S. Supreme Court’s 2018 ruling in Digital Realty Trust, Inc. v. Somers which ruled that to be considered a whistleblower, an individual must report violations directly to the SEC and not just through internal channels where they work, stripping workers of protection from retaliation based on where they initially addressed the issue.
Unless whistleblowers take their concerns quickly and directly to the SEC, they will not be protected from retaliation – and retaliation is a well-grounded concern for whistleblowers. Data suggests that a large and growing percentage of whistleblowers experience some form of retaliation in the workplace, ranging from harassment to termination.
The provision makes clear that the definition of a “whistleblower” includes those who voluntarily report potential violations of securities law to “a person with supervisory authority over the whistleblower at the employer of the whistleblower.” This affords whistleblowers the protection from retaliation they deserve and reverses the harmful definition created by Digital Realty.
The SEC Reform Act would also reinforce safeguards to prevent companies from using policies or practices such as restrictive non-disclosure agreements (NDAs) designed to keep whistleblowers from reporting to authorities. These NDAs may allow firms to use the threat of expensive litigation to keep the truth from becoming known.
The SEC has filed several enforcement actions against companies for imposing such NDAs under its own Rule 21F-17(a). The Whistleblower Reform Act would codify this rule and clarify that NDAs designed to prohibit employees from blowing the whistle are illegal and non-enforceable.
The SEC Whistleblower Reform Act reflects a bipartisan consensus that a strong whistleblower program benefits investors, companies, and the public. If passed, this legislation will help ensure that the SEC Whistleblower Program remains an indispensable tool in the Commission’s efforts to address wrongdoing and protect investors.
CFTC Whistleblower Fund Improvement Act
The CFTC Whistleblower Program continues to grow at a remarkable rate. In the 2023 fiscal year, the CFTC Whistleblower Program received 1,530 whistleblower tips, surpassing the previous record of 1,506 tips received from FY 2022. In FY 2019 by comparison, the program only received 455 tips.
According to an October 12 press release, the CFTC has granted whistleblower awards amounting to approximately $365 million since its first award in 2014. Those awards are associated with enforcement actions that have resulted in monetary sanctions totaling more than $3 billion.
CFTC Commissioner Christy Goldsmith Romero notes the vital role whistleblowers play in the organization’s investigations: “The CFTC could not fully protect customers and markets without whistleblowers. Whistleblowers help identify fraud and other illegality, interpret key evidence, and save considerable Commission resources and time. The faster we can stop fraud, the more we can protect customers from harm.”
Despite the program’s recent growth and success, its financing is in danger. Founding partner of Kohn, Kohn & Colapinto LLP Stephen Kohn explains that the success of the CFTC whistleblower program has come at a cost.
“A congressionally set cap on the fund used to finance the program has created a financial crisis. A bipartisan fix has been introduced in the U.S. Senate, but urgent congressional action is needed to ensure that the CFTC whistleblower program can continue to be the remarkable success story that it has.”
Introduced in July, the CFTC Whistleblower Fund Improvement Act of 2023 provides a long-term fix to a funding crisis threatening the CFTC Whistleblower Program. The bill raises a cap on the funds used to finance the program. The cap, set in 2010, has not been altered to match the remarkable growth of the program.
Ensuring the program's financing would allow the CFTC Whistleblower Program to continue incentivizing and awarding whistleblowers with information on commodities fraud. Failing to do so could undermine the program and allow it to become a victim of its own success.
