The Securities and Exchange Commission recently released the final versions of the Dodd-Frank whistleblower regulations, to become effective on August 12th. A previous post addressed the statutory whistleblower scheme, which these final rules implement fully.
The final form of the rules was accompanied by a release containing the SEC’s analysis of the comments received as to its proposed rules, and the reason for the resulting changes made in the final version. (The analysis, entitled “Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934,” is available as a .pdf file on the Commission’s website) (hereafter, “Release, at ____”). The SEC has estimated that the financial rewards awaiting whistleblowers whose disclosures meet the eligibility criteria will result in as much as 30,000 tips per year. (Release, at 209).
The final rules merit more extended analysis than is possible in this limited space. But one of the hot-button corporate compliance issues raised by the rules when first proposed was the effect on corporate compliance programs of a bounty system which, it was feared, would incentivize employees to avoid their company’s internal procedures in favor of direct report to the SEC. The corollary fear was that corporate management, and outside counsel, would not have an ability to determine when negative information about the company was reaching the SEC.
Sensitive to comments that the proposed rules insufficiently buttressed the role of internal compliance, the final rules seek to give compliance a boost without requiring first resort to internal mechanisms. Rule 21F-6 (17 C.F.R. § 240.21F-6), for example, lists a series of factors to be considered by the SEC in setting the amount of reward, and “participation in internal compliance systems” is a criterion which may increase a reward, while “interference with internal compliance and reporting systems” may cause a decrease (Release, at 118-126).
Of particular interest to those who conduct internal investigations as outside counsel, the final rules include the following points: (a) Rule 21F-4 (17 C.F.R. § 240.21F-4) requires that any qualifying disclosure be “voluntary,” which excludes information provided to the SEC pursuant to a duty to a contractual duty to the SEC. The SEC’s commentary makes clear that the Rule would not consider “voluntary” a statement made to the SEC pursuant to a cooperation or similar agreement with the Department of Justice obligating the individual to provide information to government agencies in general (Release, at 38); and (b) for the disclosure to qualify as “original information” it cannot, under the terms of the same Rule, derive from knowledge obtained by the individual as the result of what a United States court determines was a violation of criminal law, state or federal (Release, at 80).