Whistleblowers’ role in cross-borders swap regulation

Under the proposed rule, the CFTC estimated that more than 300 firms would register as swap dealers. The agency now expects only about 125 firms to register under the final rule. The CFTC did not specify whether this figure is based on the phase-in or final threshold, or whether the figure includes foreign firms. The law gives the CFTC stronger authority to prosecute those who intentionally evade regulation.

This type of violation is particularly amenable to oversight by insiders because the CFTC has declined to apply a technical definition to “evasion.” Rather, the agency will examine the totality of circumstances around a firm’s conduct to determine whether the firm was evading regulation.

Whistleblowers will have an important role because the evasion inquiry focuses on the firm’s intent. Whistleblowers will be in a position to provide the type of direct evidence rarely available to outside regulators. Because defendants may argue that they mistakenly violated the new, technical provisions, being able to provide evidence of scienter will be especially important during the regulations’ early days.

Further, whistleblowers need not have technical knowledge to identify evasive transactions. But insiders’ technical knowledge will help identify new frauds because the CFTC’s various exemptions leave room for fraudsters to game legal loopholes. Some of those exemptions, like the hedge exemption, focus not only on the transaction, but also on the purpose behind it.

The Dodd Frank Act’s whistleblower rewards programs provide ample incentive to disclose violations. Though evasion cases could be worthwhile alone, these cases could reveal much larger frauds. Because evasive transactions are treated as swaps, they count toward the aggregate annual notional value of a firm’s swaps. Therefore, repeat offenses may trigger a firm’s duty to register as a swap dealer or major swap participant. Through its evasion, the firm also will have then failed to meet entity-level obligations. Further, each evasive transaction may violate transaction-level requirements concomitantly, like mandatory clearing.

Finally, two points from the agency’s requested FY 2013 budget suggest that this is a particularly good time to bring a CFTC whistleblower rewards claim.

First, the CFTC has sought to nearly double its swap and intermediary oversight budget, adding roughly 70% to the activity’s work force. This suggests that the CFTC believes that the new swap regulations will require substantial oversight to ensure compliance.

Second, the Commission is seeking to add almost fifty employees to its enforcement division.  

Coupled with a whistleblower’s office that has a light workload compared to the Securities and Exchange Commission, this situation presents substantial potential for whistleblowers to bring successful rewards actions.

In sum, although cross-borders swap regulation appears much farther away than it did last summer, whistleblowers can help at least ensure that firms are not committing regulatory arbitrage by moving transactions to less-regulated jurisdictions.

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About the Author

Mr. Oswald serves as the 2011-2013 President of the Metropolitan Washington Employment Lawyers Association. He served as the 2011 Employee-Representative Chair of the D.C. Superior Court Whistleblower Protection Act Jury Instruction Committee and as a member of the 2010 District of Columbia Judicial and Bar Conference Planning Committee. Mr. Oswald is a member of the National Employment Lawyers Association’s Executive Compensation, Trial Advocacy, and Whistleblower Committees.

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