On May 25, 2011, the SEC adopted final rules to implement the whistleblower provisions of the Dodd-Frank Act. Regulation 21F under the Exchange Act expands the SEC’s ability to reward whistleblowers who alert the SEC to federal securities law violations. Pursuant to the requirements of Regulation 21F, the SEC will pay awards of between 10% and 30% of the monetary sanctions that the SEC and other authorities are able to collect to whistleblowers who voluntarily provide the SEC with original information about a possible violation of federal securities laws that leads to a successful enforcement action with monetary sanctions exceeding $1 million. The SEC will aggregate smaller actions arising from the same set of facts when determining whether reported violations meet the $1 million threshold.
Under Regulation 21F, only a natural person, either alone or jointly with others, is eligible to be a whistleblower. Regulation 21F generally allows for whistleblower anonymity and otherwise provides that the SEC will not reveal a whistleblower’s identity, except under certain circumstances. Anonymous whistleblowers must be represented by an attorney who is required to provide certification as to the whistleblower’s identity and the completeness and accuracy of the whistleblower’s submission. In order to receive an award as a whistleblower, the following requirements apply:
- the whistleblower must voluntarily provide the SEC with the information,
- the whistleblower must provide original information based on his/her independent knowledge or analysis, and
- the whistleblower’s information must lead to successful enforcement by the SEC of a federal court or administrative action, which could be satisfied: (1) if the information was sufficiently specific, credible and timely to cause the staff to (a) commence an examination, (b) open an investigation, (c) reopen an investigation that the SEC had closed, or (d) inquire concerning different conduct as part of a current examination or investigation and the SEC’s successful enforcement was based on the information, (2) if the conduct was already under investigation when the information was submitted, but the information significantly contributed to the success of the action, or (3) if the whistleblower reported information through the company’s internal reporting system and the company reported the information to the SEC, leading to successful enforcement.
Regulation 21F does not require whistleblowers to report possible securities law violations through a company’s internal reporting system before submission to the SEC in order to be eligible for an award; however, the SEC adopted certain provisions in an effort to incentivize whistleblowers’ utilization of internal compliance and reporting systems. In determining the amount of the award, a whistleblower’s participation in a company’s internal compliance and reporting system is a factor that can increase the amount of the award, while interference with the internal compliance and reporting system can decrease the amount. In addition, when a possible violation is reported to the SEC by a company based on information provided by a whistleblower through the company’s internal compliance and reporting system, all the information provided by the company to the SEC in any resulting investigation will be attributed to the whistleblower, potentially increasing the amount of the whistleblower’s award.
Regulation 21F provides that culpable whistleblowers may not recover awards and are not given amnesty. Additionally, individuals whose job descriptions require them to investigate and uncover corporate wrongdoing generally may not receive an award.
Regulation 21F becomes effective 60 days after its publication in the Federal Register.