In response to its investigation of the Bernard Madoff scandal, the Securities and Exchange Commission ("SEC") recently proposed the establishment of a whistleblower "bounty program" to provide remuneration to individuals who alert the SEC of violations of federal securities laws. The same proposal is also discussed in the Treasury Department's report, "Financial Regulatory Reform, A New Foundation." Section 21A(e) of the Securities Exchange Act of 1934 ("Exchange Act") currently allows the SEC to award a bounty of up to ten percent of any civil penalty imposed to persons who provide information of insider trading violations.

SEC Inspector General H. David Kotz testified before Congress and gave "legislative suggestions" to "strengthen the ability of investors and the regulatory agencies to uncover frauds." The "bounty program" would award a bounty "for information leading to the recovery of a civil penalty from any violator of the federal securities laws." In addition, Kotz suggested that the Exchange Act itself be modified so that a whistleblower's reliance on public information does not necessarily bar recovery. The proposed extension of the "bounty program" is modeled on similar programs established by the Department of Justice and Internal Revenue Service that have resulted in increased civil recoveries.

The SEC appears committed to spurring enforcement efforts through the encouragement of private individuals to report suspected wrongdoing to the SEC. The current limited insider trading "bounty program" is infrequently used: that the SEC awarded only four bounties totaling US$67,570 in the past twenty years.1 Kotz acknowledged the limitations of this insider trading "bounty program" and asserted that legislation enacting specific criteria for awarding bounties and requiring the SEC to give status reports on an investigation to whistleblowers would ensure that a fully implemented, broad based "bounty program" would be used to strengthen enforecement efforts. The enactment of a "bounty program" to increase whistleblower reports concurrent with the expansion of the SEC's authority in response to recent scandals will likely increase the frequency and scope of SEC investigations.