On November 3, 2010, the Securities & Exchange Commission released proposed rules for implementing Section 21F of the Securities Exchange Act of 1934, titled “Securities Whistleblower Incentives and Protection.” Section 21F was added to the Exchange Act by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203, signed by President Obama on July 21, 2010. The Commission’s proposed rules are available here. Comments on the proposed rules are due to the Commission on or before December 17, 2010. Comments already received can be viewed here.

Section 21F of Dodd-Frank creates a whistleblower program and provides significant monetary incentives for whistleblowers to voluntarily provide the Commission with original information that leads to a successful enforcement action. Subject to certain rules, which are the subject of the Commission’s recent rule-making activity, a whistleblower stands to receive between 10 and 30 percent of the monetary sanction obtained, as long as such sanction is $1 million or more. Reports may be made confidentially, and retaliation against employees for reporting information to the government under the whistleblower program is prohibited.

Since monetary sanctions could be well in excess of $1 million, the awards provided for under Section 21F are significant. And, in contrast to the other statutes that provide whistleblower incentives, such as the federal False Claims Act, there is no need for the whistleblower to initiate litigation on the government’s behalf. Even a lawyer is optional, except for persons desiring to make a confidential submission. All that is required is to provide information, subject to the rules that will govern the program, that leads to a successful enforcement action. No distinction is made between private and public companies for purposes of Section 21F.

While the proposed rules and the Commission’s description of them are quite extensive (over 180 pages), and raise a host of weighty issues, two aspects are particularly noteworthy.

Competition With Private Workplace Efforts. Some, such as the Wall Street Journal Law Blog’s Ashby Jones, have noted that there is a concern that the awards called for under Section 21F could interfere with or compete with internal compliance programs set up by companies to learn of potential fraud or wrongdoing at an early stage. Indeed, the Commission’s commentary on the proposed rules expressly discusses this possibility, and the Commission notes that it has attempted to address these concerns. While the proposed rules do not require a potential whistleblower to first report to an internal company watchdog, the rules and the commentary accompanying them do contain incentives to make internal reporting the first step. Among these incentives are the possibility of a higher award if the whistleblower first tries to utilize available internal reporting avenues and the benefit of a “90 day look back” provision that allows a whistleblower 90 days after making an internal report before making a report to the government without the information losing its qualifying status under the whistleblower program. Realizing that these and the other incentives provided for may not be sufficient to preserve beneficial internal compliance programs, the Commission seeks comments specifically directed to this issue.

Impact on Civil Discovery. A second noteworthy feature of the proposed rules is that they do not in any fashion impede a private civil litigant from disclosing to the government documents or other information learned through civil action discovery so long as they meet the other rules applicable to such submissions. Thus, while attorneys and certain other advisors are barred from using civil discovery findings as the basis for a whistleblower submission, the client in such a proceeding is not limited at all. Moreover, while submissions cannot be based on information acquired in violation of state or federal law, the proposed rules are silent as to whether or not documents or information disclosed to the government in violation of a court order, such as a protective order, may form the basis of a valid whistleblower submission. The Commission has specifically asked for comments directed to whether or not it should exclude from awards under Section 21F those persons who provide information in violation of court orders.

While the Commission’s proposed rule-making under Section 21F has only just begun, and the final rules may well differ in key respects from those proposed, the whistleblower protections enacted by Dodd-Frank are not going away. Corporations would be well-advised to consult with counsel regarding the implications that the new whistleblower provisions will have for their internal compliance program and for any on-going private litigation.