SEC Proposes New Whistleblower Program Under Dodd-Frank Act
Video: Open Meeting
Chairman Schapiro Discusses Proposed Whistleblower Program:
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FOR IMMEDIATE RELEASE
Washington, D.C., Nov. 3, 2010 — The Securities and Exchange Commission today voted unanimously to propose a whistleblower program to reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions.
The SEC’s proposed rule under the Dodd-Frank Wall Street Reform and Consumer Protection Act maps out a simple, straightforward procedure for would-be whistleblowers to provide critical information to the agency. It conveys how would-be whistleblowers can qualify for an award through a transparent process that provides them a meaningful opportunity to assert their claim to an award.
To be considered for an award, 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 a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.
“We get thousands of tips every year, yet very few of these tips come from those closest to an ongoing fraud,” said SEC Chairman Mary L. Schapiro. “Whistleblowers can be a source of valuable firsthand information that may otherwise not come to light. These high-quality leads can be crucial to protecting investors and recovering ill-gotten gains from wrongdoers.”
The proposed rule reflects the consideration of a number of potentially competing interests, and balances the need to encourage whistleblowers to come forward without promoting unintended consequences.
The SEC is seeking public comment on the proposal through December 17.
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Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the SEC to pay rewards to individuals who provide the Commission with original information that leads to successful SEC enforcement actions and certain related actions. Dodd-Frank substantially expands the agency’s authority to compensate individuals who provide the SEC with information about violations of the federal securities laws. Prior to Dodd-Frank, the agency’s bounty program was limited to insider trading cases and the amount of an award was capped at 10 percent of the penalties collected in the action.
The new SEC whistleblower program is primarily intended to reward individuals who act early to expose violations and who provide significant evidence that helps the SEC bring successful cases.
Under the proposed rules, a whistleblower is a person who provides information to the SEC relating to a potential violation of the securities laws.
To be considered for an award, a whistleblower must …
Voluntarily provide the SEC …
- In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it.
… with original information …
- Original information must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources.
… that leads to the successful enforcement by the SEC of a federal court or administrative action …
- A whistleblower’s information can be deemed to have led to successful enforcement in two circumstances: (1) if the information results in a new examination or investigation being opened and significantly contributes to the success of a resulting enforcement action, or (2) if the conduct was already under investigation when the information was submitted, but the information is essential to the success of the action and would not have otherwise been obtained.
… in which the SEC obtains monetary sanctions totaling more than $1 million.
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The proposed rules further define and explain these requirements.
Key concepts would include …
Avoiding unintended consequences:
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 last 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 Commission within a reasonable time or acts in bad faith. In these circumstances, such people can become whistleblowers.
Certain other people — such as employees of certain agencies and people who are criminally convicted in connection with the conduct — are excluded by Dodd-Frank.
The SEC also would not pay culpable whistleblowers awards that are based upon either the monetary sanctions that such people themselves pay in the resulting SEC action, or on sanctions paid by entities whose liability is based substantially on conduct that the whistleblower directed, planned, or initiated. The purpose of this provision is to prevent wrongdoers from benefitting by, in effect, blowing the whistle on themselves.
Providing Information to the SEC and Seeking a Reward:
The proposed rules also would describe procedures for submitting information to the SEC and for making an award claim after an action is brought. The claim procedures would provide opportunities for whistleblowers to fairly present their case before the Commission makes a final award determination.
The SEC also would pay an award based on amounts collected in related actions brought by certain agencies that are based upon the same original information that led to a successful SEC action.
Supporting Internal Compliance Programs:
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 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.
The proposal seeks public comment and data on a broad range of issues relating to the whistleblower program. After careful review of the comments, the Commission will consider what further action to take on the proposal.