With considerable fanfare, the new US financial reform
legislation creates at both the Securities and Exchange
Commission and the Commodity Futures Trading Commission a new
program where persons having knowledge of wrongdoing may alert
the agency and receive a hefty cash award if the matter is
This whistleblower provision is meant to open a new
offensive against the bad guys by making nearly every company
employee a government agent whose secrets will be disclosed for
the betterment of mankind.
At the CFTC, the program (new section 23 of the Commodity
Exchange Act for those who care) will begin with a Customer
Protection Fund to be held at the US Treasury. After deposit of
fines exacted by the CFTC in other enforcement cases, this fund
would top off at $100m.
The informant’s disclosures must be new and
previously unknown to the regulator but, if so, the person can
receive a bounty of 10% to 30% of the cash collected by the
CFTC from the resulting action. The exact amount is left to the
CFTC’s discretion, based on "relevant factors" to
be determined by the agency.
This will result in long lines outside the
CFTC’s headquarters in Washington, right?
Maybe not. Whistleblower programs tend to work well when the
likely informants have more to gain from speaking up than from
In particular, losing one’s job and possibly
being banished from the industry should be made the lesser of
the economic outcomes. (While the CFTC’s program
forbids employers to retaliate against informants, there are
myriad other excuses to sack someone.)
On Wall Street, however, individuals who have valuable
information are more likely to occupy higher places in the food
chain. They tend to have big bank accounts and bright futures.
The downside from informing could be substantial, even if a
reward is offered.
Instead, consistent with the trader mentality which they
either share or observe in their colleagues daily, they are far
more likely to request a private conversation with the
management that could lead to an even bigger bank account and
So let us not be too disappointed if both the quantity and
quality of information generated by the CFTC’s
program fall short of expectations. It may generate more
in-house episodes of "let’s make a deal" than
fodder for the prosecutors.
And, if so, it is even more fascinating that we will never
Philip McBride Johnson is a member of the
exchange-traded derivatives regulatory practice at Skadden,
Arps, Slate, Meagher & Flom in Washington and a past
chairman of the CFTC.