The SEC recently adopted final rules establishing a whistleblower program pursuant to authority granted under the Dodd-Frank Wall Street Reform and Consumer Protection Act. This whistleblower program is intended to reward individuals who act early to expose violations by providing the SEC with significant evidence that contributes to successful enforcement actions. The following is a summary of certain key elements of the whistleblower program.
Who Qualifies as a Whistleblower?
Under the final rules, a whistleblower is a natural person who voluntarily provides original information to the SEC relating to a possible violation of the federal securities laws, or a rule or regulation promulgated by the SEC, that has occurred, is ongoing or is about to occur. The SEC said that a “possible violation” would require that the information being provided “should indicate a facially plausible relationship to some securities law violation,” thereby disqualifying frivolous submissions.
To be construed as having “voluntarily” provided the SEC with information, the whistleblower must have submitted information before a request, inquiry or demand that relates to the subject matter of the submission is directed to the whistleblower or anyone representing the whistleblower (i) by the SEC, (ii) in connection with an investigation, inspection or examination by the PCAOB or any self-regulatory organization, or (iii) in connection with an investigation by Congress, any other authority of the federal government, or a state Attorney General or securities regulatory authority. In addition, if a whistleblower has a pre-existing legal duty, a contractual duty to the SEC or the other authorities previously mentioned, or a duty pursuant to a judicial or administrative order to report information to the SEC, then any information submitted would not be considered voluntary.
In addition, the following persons are deemed to not be eligible for a whistleblower award:
- a person that is, or was at the time they acquired the original information, a member, officer or employee of the SEC, the Department of Justice, an appropriate regulatory agency, a self-regulatory organization, the PCAOB or any law enforcement organization;
- a person that is, or was at the time they acquired the original information, a member, officer or employee of a foreign government, any political subdivision, department, agency or instrumentality of a foreign government, or any other foreign financial regulatory authority;
- anyone convicted of a criminal violation that is related to the SEC’s action or a related action for which the person otherwise could receive an award;
- a person that obtained the original information through an audit of a company’s financial statements and making a whistleblower submission would be contrary to the requirements of Section 10A of the Securities Exchange Act of 1934;
- the spouse, parent, child or sibling of a member or employee of the SEC, or a person residing in the same household of such member or employee;
- a person that has knowingly and willfully made any false, fictitious or fraudulent statement or representation, or used any false writing or document, with intent to mislead or otherwise hinder the SEC or another authority.
What Is Original Information?
The whistleblower must provide “original information,” which means information that is (i) derived from the whistleblower’s independent knowledge or analysis, (ii) not already known to the SEC from any other source, (iii) not exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, hearing, audit or investigation, or from the news media, and (iv) provided subsequent to July 21, 2010, the date of the enactment of the Dodd-Frank Act.
“Independent knowledge” means any factual information in the whistleblower’s possession that is not derived from publicly available sources; while “independent analysis” requires the whistleblower’s own examination and evaluation of information that may be publicly available, but which reveals information that is not generally known or available to the public. Except for certain circumstances, however, the following are specifically excluded from being construed as either independent knowledge or independent analysis:
- information obtained from attorney-client privilege or other attorney conduct, except under certain circumstances;
- if the whistleblower is an officer, director, trustee or partner of an entity, information that was obtained by such person because another person informed them of allegations of misconduct, or information learned by such person learned in connection with the entity’s processes for identifying, reporting and addressing potential non-compliance with law;
- information learned by a whistleblower as an employee with principal duties involving compliance or internal audit responsibilities, or is an employee of an outside firm retained to perform compliance or internal audit work for an entity;
- information learned by a whistleblower as an employee or other person associated with a firm that is retained to conduct an internal investigation or inquiry into possible violations of law;
- information learned by a whistleblower as an employee or other person associated with a public accounting firm through an audit or other engagement required under the federal securities laws, if that information relates to a violation by the engagement client or the client’s directors, officers or other employees;
- information obtained by a means or in a manner that is determined by a U.S. court to violate applicable federal or state criminal laws; or
- information obtained by a whistleblower from a person who is otherwise subject to the foregoing unless the information is not excluded from that person’s use, or the whistleblower is providing the SEC with information about possible violations involving that person.
What is Required for the Whistleblower to Receive an Award?
The original information submitted by the whistleblower must have led to the successful enforcement of a judicial or administrative action. The information must be “sufficiently specific, credible and timely” to cause the staff to commence an examination, open or reopen an investigation, or to inquire concerning different conduct as part of a current examination or investigation, which ultimately leads to a successful action. In making its determination, the SEC will consider whether the information included allegations that formed the basis of the action, specific securities law provisions alleged to have been violated, culpable persons or entities ultimately named in the action or investors named as victims or injured parties in the action.
The information may also relate to a current examination or investigation by the SEC or other governmental entity or self-regulatory organization, but the submitted information must have significantly contributed to the success of the action. In making determining whether information has “significantly contributed,” the SEC will consider with the information brought the successful action in significantly less time or with fewer resources or contributed to additional successful claims or successful claims against additional individuals or entities.
For purposes of the program, an action generally means a single captioned judicial or administrative proceeding brought by the SEC. However, an action may constitute multiple proceedings if they arise from the same nucleus of operative facts. In addition, to the extent an award has already been made, the SEC will aggregate subsequent proceedings that individually, results in a monetary sanction of $1 million or less, and that arises from same nucleus of operative facts.
How Will the Award Amount be Determined?
Any award will be at least 10 percent but no more than 30 percent of the total monetary sanctions collected by the SEC. As for determining the actual percentage for the award, the following will be considered positively in setting the percentage:
- significance of the information provided;
- assistance provided by the whistleblower;
- law enforcement interest in making a whistleblower award; and
- the whistleblower’s participation in an entity’s internal compliance programs.
The following, however, will be construed negatively in setting the percentage for the award:
- culpability of the whistleblower;
- unreasonable reporting delay by the whistleblower; and
- interference by the whistleblower with an entity’s internal compliance and reporting programs.
Of course, the SEC has pointed out that “the appropriate percentage of a whistleblower award will involve a highly individualized review of the facts and circumstances surrounding each award” using the analytical framework outlined above.
Are Whistleblower Submissions Confidential?
Generally, the SEC will treat all information obtained during investigations as confidential and nonpublic. However, the SEC will disclose information:
- when disclosure to a defendant or respondent is required in connection with a court or administrative action;
- when the SEC determines that disclosure to another governmental entity, such as the Department of Justice, a state attorney general or a state regulatory authority, the PCAOB, a self-regulatory organization or foreign securities or law enforcement authorities, is necessary to achieve the purposes of the Exchange Act and protect investors; and
- if required under the Privacy Act of 1974.
To the extent that disclosure is made to another entity that is permitted under the SEC’s rules, except for foreign securities or law enforcement authorities, such entity is subject to the same confidentiality requirements of the SEC. With respect to any disclosure to foreign authorities, the SEC will obtain appropriate assurances of confidentiality before sharing any information.
A whistleblower may also submit information to the SEC anonymously with the assistance of an attorney. The whistleblower must provide its attorney with information signed under penalty of perjury and, in turn, the whistleblower’s attorney will provide the submitted information to the SEC certifying that, among other things, the attorney has verified the whistleblower’s identity. The SEC will require that the whistleblower’s identity be disclosed to it prior to payment of any award, however.
In addition, the Exchange Act and the final rules provide anti-retaliation protections to whistleblowers if they possess a reasonable belief that the information provided relates to a possible securities law violation. The protections apply regardless of whether a whistleblower is ultimately entitled to an award.
What Is the Impact on Internal Compliance Programs?
The program includes a number of specific provisions designed to encourage prospective whistleblowers to report possible violations to internal compliance programs before, or at the same time, they report to the SEC. In particular, the final rules provide that if:
- a whistleblower reports original information through an employer’s internal whistleblower, legal or compliance procedures before or at the same time it reports them to the SEC;
- the employer provides the SEC with the whistleblower’s information or with the results of an investigation initiated in response; and
- the information provided by the employer to the SEC led to successful enforcement;
then the whistleblower will receive full credit for the information provided by the employer as if the whistleblower had provided the information to the SEC. This particular rule endeavors to create an incentive for internal reporting as all information provided to the SEC by the employer, which may include information additional to that provided by the whistleblower to the employer, will be credited to the whistleblower for purposes of determining the award, thereby increasing their probability of receiving an award.
The final rules also include a “look-back” provision that will count an earlier date that the whistleblower reported information to an entity’s internal compliance program, or to Congress, any other federal authority, a state attorney general or securities regulatory authority, any self-regulatory organization or the PCAOB, as the submission date for purposes of the whistleblower program, if the whistleblower submits the information to the SEC within 120 days of such earlier reporting. Though, not requiring submission to an internal compliance program, this “look-back” provision is intended to support internal compliance programs by affording prospective whistleblowers with flexibility in reporting.
In addition, the final rules provide for an exception to the general rule previously described that precludes information from officers, directors, auditors or other designated persons as being considered the “independent knowledge” or “independent analysis” of such person. Under the exception, such persons can be whistleblowers after at least 120 days have elapsed (i) since the whistleblower provided the information to the audit committee, chief legal officer or chief compliance officer (or their equivalents), or to a supervisor, or (ii) since the whistleblower received the information, if received under circumstances indicating that the entity’s other senior responsible persons, or a supervisor, were already aware of the information. Accordingly, such generally precluded persons have an incentive to report internally in order to become an eligible whistleblower after the lapse of the 120-day period.
Lastly, as noted above, the criteria for determining the amount of the award includes a positive factor for participating in internal compliance programs and a negative factor for unreasonable reporting delay and interference in internal compliance programs.
Together, the provisions described above are intended to support internal compliance programs by giving appropriate incentives to report violations internally.