On May 25, 2011, the U.S. Securities and Exchange Commission (“SEC”) issued its final rules regarding the “whistleblower” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, that Act authorizes payment of a “bounty” to individuals who provide “original information” of fraud to the SEC or similar agencies, if that information results in enforcement penalties of $1,000,000 or more. The bounty may be as large as 30% of the total penalties recovered.
The new rules answered the open question of whether employees would be required to exhaust their employer’s internal compliance process before reporting alleged fraud to the SEC. The answer, not surprisingly, was “no.” However, the SEC did create a few incentives for would-be whistleblowers to participate in internal compliance programs. Among other things, the new rules provide that:
- A whistleblower is still considered the source of the information, and eligible for an award, if he/she reports the violations internally and the company informs the SEC.
- A whistleblower is considered to have reported the information to the SEC as of the date he/she reports it internally to the employer, as long as he/she provides the same information to the SEC within 120 days.
- A whistleblower’s voluntary participation in an internal compliance program is a factor that can increase the amount of an award, while his/her interference with internal compliance and reporting is a factor that can decrease the amount of an award.
Despite these measures, the Act and the new rules provide powerful financial incentive for employees to bypass internal compliance programs and run directly to the SEC with any allegation of fraudulent conduct.
The new rules can be found at: http://www.sec.gov/rules/final/2011/34-64545.pdf.