WASHINGTON — A rule that would encourage whistleblowers to report commodities trading infractions is beginning to draw the same ire that a similar rule for securities trading sparked.
For its next meeting scheduled for Tuesday, the Commodity Futures Trading Commission said it will consider rules related to whistleblowers, swap mandatory clearing, credit ratings and registered entities, all part of the sweeping Dodd-Frank bank reform legislation. The agency also will review a proposed customer clearing documentation rule, leaving 41 other measures awaiting final review.
The Securities and Exchange Commission in May adopted a rule that would allow whistleblowers to be rewarded with 10% to 30% of the fines and penalties collected. The CFTC is now weighing a similar rule.
Calling the whistleblower rule “the path taken by the SEC,” Geoffrey Aronow, a former director of enforcement at the CFTC and partner at law firm Bingham McCutchen LLP in Boston, worried that it has the potential to undermine internal investigation processes in place at financial institutions.
“These rules will divert matters that firms might otherwise have investigated themselves to the agency, which may well lack adequate resources to handle all the whistleblower complaints,” Aronow said.
Andrea Kramer, a partner at Chicago-headquartered law firm McDermott Will & Emery LLP, pointed out that CFTC may not have enough money to follow up on the whistleblower contacts or tips.
Other than the five rules to be considered in next week’s meeting, many derivatives practitioners are awaiting the definition of some critical terms including swap, security-based swap, swap dealer and major swap participant. That’s not expected to be addressed next week.
“What are the swaps in the first place? Answers to questions like that will tell the market participants whether they are in Dodd-Frank or not,” Kramer said.
Kramer said energy companies, for example, are confused whether products like renewable energy certificates are swaps, and whether they should be regulated by the CFTC or by the Federal Energy Regulatory Commission. Another question is whether an electricity company that has a trading department will be considered a commercial end user or a swap dealer.
Alton Harris, a founding partner of Chicago law firm Ungaretti & Harris LLP and former counsel to the Senate securities subcommittee, agreed.
“There’s quite a scramble going on to not fall into the categories of swap dealer or major swap participant, because those who fall in the categories would have to face far more regulations than those who fall out,” he said.