The SEC recently announced its implementation of a new whistleblower program designed to reward “individuals who provide the agency with high-quality tips that lead to successful enforcement actions.” The new rules (PDF) – created pursuant to Section 922 of the Dodd-Frank Act – will become effective 60 days after they are published in the Federal Register or submitted to Congress.
To be eligible for an award under the new program, a whistleblower must voluntarily provide original information leading to the successful enforcement by the SEC and monetary sanctions greater than $1 million.
As highlighted in our previous posts (available here and here), the final rules – much like the proposed rules (PDF) – do not require whistleblowers to first report allegations internally to qualify for bounties. However, in an effort to encourage employees to utilize internal compliance programs when appropriate, the SEC has adopted a number of incentives, including:
- giving whistleblowers the benefit of an internal reporting date as their effective reporting date for award purposes – provided that the same information, first reported internally, is also reported to the SEC within 120 days; and
- for purposes of determining the amount of the award, taking into account the employee’s effective use or, when appropriate, misuse of their internal compliance program.
The final rules also adopt an anti-retaliation policy, which protects whistleblowers who provide information on reasonable belief that it “relates to a possible securities law violation that has occurred, is ongoing, or is about to occur.”
OUR TAKE: The SEC’s dual system by which whistleblowers may report directly to the SEC or internally through existing programs may stifle companies’ efforts to minimize and resolve alleged compliance issues before any SEC involvement. Whether whistleblowers will pursue SEC bounties over working through existing compliance programs, however, may depend on the how the SEC applies its rules, and pays bounties, over time.