In an award determination issued in September, four whistleblowers received awards under the Commodities Futures Trading Commission’s (CFTC) Dodd-Frank whistleblower program. However, the CFTC reduced the award amounts out of concern that large awards would undermine the Commission’s policy goals. Whistleblower advocates warn that this decision is based on misinformation about the impact of large awards and will make the CFTC’s whistleblower program less effective.
The CFTC found that each of the four whistleblowers “provided significant information” which led to successful enforcement. However, the CFTC’s final determination reduced the overall award amount based on two regulations which require the Commission to analyze whether an award amount “enhances the Commission’s ability to enforce the Commodity Exchange Act, protect customers, and encourage the submission of high quality information from whistleblowers” or creates “potential adverse incentives.”
The CFTC issued a smaller award because it was concerned that “excessive monetary incentives may lead to misreporting and cause investigative waste.” Pointing to a significant increase in CFTC award applications between 2021 and 2023 after the Commission granted an award that reached nine figures, and a few examples of obviously nonmeritorious applications, the Commission held that “oversized awards encourage frivolous submissions, drain Commission resources, and impair the Commission’s ability to effectively enforce the CEA and protect customers.”
Notably, the Commission did not provide evidence that the increase in award applications between 2021 and 2023 increased the proportion of frivolous applications being submitted.
“At the outset, the Commission’s argument misrepresents the data,” said leading whistleblower attorney and National Whistleblower Center chairman Stephen M. Kohn. “Evidence shows that while publicity from large awards leads to some meritless applications, this effect is far outweighed by the useful information the government receives. Without demonstrating that a higher percent of those applications are frivolous, which the CFTC does not, you can’t in good faith call this an adverse incentive.”
Kohn pointed to several academic articles demonstrating that the “possibility of increased credible tips” incentivized by granting whistleblower awards “outweighs the potential burden.” A 2024 report from the United Kingdom’s most prestigious think tank, for example, held that “reward programmes are effective at increasing not only the quantity, but also the quality of information provided to regulators.” The United Kingdom has historically been averse to award incentives for whistleblowers.
Kohn also noted that in 2022, the Securities and Exchange Commission (SEC) – which runs a similarly structured whistleblower program – passed a new regulation forbidding the Commission from considering the dollar amount of an award for the purpose of decreasing the award, finding that “this amendment will help strengthen the whistleblower program by encouraging high-quality tips from insiders and others who have original information relating to potential securities law violations.” In contrast to the CFTC’s reasoning, the SEC found that reducing awards because they were too large would “discourage whistleblowers from coming forward.”
“The SEC has it right,” said Kohn. “Large awards are critical to incentivize whistleblower disclosures, which lead to huge government recoveries. The CFTC’s logic radically misunderstands how whistleblower award programs work.”
