The Securities and Exchange Commission ("SEC") will soon pay at least $100,000 to eligible whistleblowers in exchange for high-quality tips that lead to successful enforcement actions. Authorized by Section 922 of the Dodd-Frank Act, the SEC narrowly approved rules on May 25, 2011 to create a $300 million whistleblower program. The final rules, which were approved by a 3- 2 vote, include some changes from those proposed last November. In particular, the whistleblower program seeks to ameliorate concerns about whether an employee's new financial incentive to complain to the SEC would undercut the effectiveness of their company's internal compliance programs.
With regard to the whistleblower program, the SEC has stated that its primary goal is "to encourage the submission of high-quality information to facilitate the effectiveness and efficiency of the Commission’s enforcement program." In order to be considered for an award, which ranges from 10 to 30 percent of the total monetary sanctions, a whistleblower must:
- voluntarily provide the SEC . . .
- . . . with original information about a violation of the federal securities laws
- . . . that leads to the successful enforcement by the SEC of an administrative or federal court action
- . . . in which the SEC obtains monetary sanctions totaling more than $1 million (in the aggregate).
Although the program does not require employee whistleblowers to report violations internally before notifying the SEC, the SEC modified the proposed rules to encourage internal reporting.
- A whistleblower's voluntary participation in his company's internal compliance system before providing information to the SEC is a factor that may increase the amount awarded. Any interference may decrease the amount.
- A whistleblower can receive a bounty for reporting information to the company's internal compliance program and, if the company later self-reports the violation discovered as a result of the internally reported information, it is possible that all the information self-reported by the company will be attributed to the whistleblower, not just the information originally provided by the whistleblower.
- The window of opportunity for a whistleblower to "save their place in line" for an SEC claim is extended from 90 to 120 days from the date the information is internally reported.
The final rules also enhance the anti-retaliation provisions of the statute. Specifically, someone can qualify as a "whistleblower" based on providing information relating to a "possible" violation of the securities laws (a less stringent standard than the proposed rules use of "potential" violation) as long as the whistleblower has a reasonable belief that a violation has occurred. In other words, the protective status will not be affected by a later finding that a violation in fact did not occur. A whistleblower can establish the reasonableness of his belief by providing specific, credible and timely information that makes a significant contribution to an ongoing SEC investigation or by providing information through the company's internal compliance program that is later reported by the company to the SEC.
Two commissioners dissented from the final rules. SEC Commissioner Pardee expressly noted in his dissent that he did not believe the final rules would adequately preserve the beneficial effect of internal compliance programs.
It is difficult to predict what effect the SEC's whistleblower rules will have on internal compliance programs. Prior to the Dodd-Frank Act, the SEC's bounty program was limited to insider trading cases, and awards were capped at 10 percent of penalties collected. It seems clear that the addition of these significant economic incentives will increase the number of complaints the SEC receives. Although the SEC will not reward a culpable whistleblower who reports his own violation of securities laws, companies must continue to take seriously any reports of wrongdoing. In an era of scrutiny and reform after the financial crisis of 2007-2010 and the Madoff Ponzi scheme, management should expect SEC staff to follow-up extensively on complaints and to document responses. With the enhanced risk that employees make seek an SEC reward without notifying their employer, companies should consider whether their current compliance programs and reporting hotlines are sufficiently robust. Moreover, companies need to be in a position to investigate and address allegations of misconduct more quickly and effectively. They should assume that in many cases their internal programs and investigations will be scrutinized in the course of an SEC enforcement action.
The SEC's rules will become effective 60 days after they are submitted to Congress or published in the Federal Register.
To view the Final Rule, please click here.