On November 3, 2010, the SEC proposed rules to implement the new Dodd-Frank Act whistleblower provisions. Dodd-Frank requires the SEC to pay an award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the securities laws that leads to a successful enforcement of an action brought by the SEC that results in monetary sanctions exceeding $1 million and of certain related actions. Dodd-Frank also prohibits retaliation by employers against individuals that provide the SEC with information about potential securities violations.
Dodd-Frank substantially expands the SEC’s authority to compensate individuals who provide the SEC with information about violations of the federal securities laws. Prior to Dodd-Frank, the SEC’s bounty program was limited to insider trading cases and the amount of an award was capped at 10% of the penalties collected in the action. The Dodd- Frank Act mandated awards range between 10% and 30% of penalties, where such sanctions exceed $1 million.
Certain people would generally not be considered for whistleblower awards under the proposed rules. These include:
- people who have a pre-existing legal or contractual duty to report their information
- attorneys who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules)
- independent public accountants who obtain information through an engagement required under the securities laws
- foreign government officials
- people who learn about violations through a company’s internal compliance program or who are in positions of responsibility for an entity, and the information is reported to them in the expectation that they will take appropriate steps to respond to the violation
– This exclusion – which is intended to prevent company personnel from “front running” legitimate internal investigations – ceases to be applicable if the company does not disclose the information to the SEC within a reasonable time or acts in bad faith. In these circumstances, such people can become whistleblowers.
The proposed rules include provisions to discourage employees from bypassing their own company’s internal compliance programs. For instance, the proposed rules:
- would treat an employee as a whistleblower under the SEC program as of the date that the employee reports the information internally – as long as the employee provides the same information to the SEC within 90 days; through this provision, employees will be able to report their information internally first while preserving their “place in line” for a possible award from the SEC
- permit the SEC to consider higher percentage awards for whistleblowers who first report their information through effective company compliance programs
Comments are due on the proposed rules by December 17, 2010. http://www.sec.gov/rules/proposed/2010/34-63237.pdf