SEC Implements Whistleblower Bounty Program and Protections: Implications for Companies
by Kit Addleman
The Securities and Exchange Commission adopted on May 25, 2011, final rules to implement the Section 21F of the Securities Exchange Act of 1934 entitled “Securities Whistleblower Incentives and Protection.” The new rules have significant implications for public companies and securities industry businesses.
First, under Section 21F of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and the whistleblower rules adopted by the SEC, individuals who report evidence of securities law violations to the SEC and other agencies will be rewarded with potentially large cash bounties if the information leads to successful enforcement actions. As a result of the financial incentives, employees of public companies may be motivated to report suspected problems outside of a company’s internal compliance and reporting systems. Second, Section 21F and the new rules provide protections for whistleblowers as well as increased liability for companies based on allegations of impeding or retaliating against whistleblowers.
This article outlines many of the key provisions of the SEC’s whistleblower rules and highlights several considerations for companies that may minimize the impact of these changes.
Bounty Payments
Prior to the passage of Dodd-Frank, the SEC had the ability to provide bounties to informants who provided information regarding insider trading violations under certain circumstances. Under the new Section 21F, the bounty provisions are significantly broader, encompassing any possible securities law violation, and the SEC is required to pay awards to whistleblowers who meet the established criteria. Further, the amount of a whistleblower recovery is significantly larger than that previously available – the award will be between ten and 30 percent of the total money sanctions, including penalties, disgorgement and interest, collected in enforcement actions where the sanctions exceed $1 million.
To qualify as a whistleblower and be eligible for the bounty payment, an individual (entities cannot qualify as whistleblowers) must: (1) voluntarily provide, (2) original information not previously know to the SEC, (3) that significantly contributes to a successful enforcement action (4) resulting in monetary sanctions totaling more than $1 million. The SEC’s rules clarify each of these requirements and exclude certain categories of individuals from claiming a whistleblower bounty. Specifically:
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To be considered voluntary, the whistleblower’s complaint must be made prior to the receipt of any request from the government including not only a request or subpoena from the SEC in an investigation or examination but also a request or demand in connection with an inspection, examination or investigation by a self-regulatory organization (“SRO”), the Public Company Accounting Oversight Board (“PCAOB”), any federal government authority, state securities regulator, or state Attorney General’s office. However, if the whistleblower reports information that is unrelated to the subject matter of the government’s request describing a different possible violation, the whistleblower can be eligible for a reward.
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The whistleblower’s information must be “original” and derived from independent knowledge or independent analysis. The SEC defines independent knowledge as factual information that is not derived from publicly available sources or from allegations made by someone else in a government report, judicial or administrative hearing or the news media but, rather, was obtained from a person’s own experiences, observations and communications. Information derived from publicly available sources may qualify, however, as independent analysis if the whistleblower adds evaluation, assessment and insight that causes the SEC staff to open an investigation or significantly contributes to a successful enforcement action.
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Both Dodd-Frank and the SEC rules exclude attorneys and auditors from qualifying for whistleblower awards. The SEC states that it will not generally consider information obtained through attorney-client privileged communications or through the performance of an engagement by an independent public accountant required by the securities laws. Further, certain individuals with responsibility for compliance, audit, supervisory, or governance responsibilities within a company are excluded if they learned the information in connection with the company’s processes for identifying, reporting and addressing non-compliance. Individuals who obtain information by any manner that violates state or federal criminal law are also excluded from claiming that they are entitled to a bounty.
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For determining whether a whistleblower’s information resulted in $1 million or more in monetary sanctions, the SEC’s rules make clear that the amount can be based on the aggregation of two or more actions, including both judicial and administrative proceedings, arising from the same set of operative facts. Additionally, the SEC will pay an award based on amounts collected in other related actions including those by the Attorney General of the United states, an appropriate SRO or a state attorney general in a criminal case.
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Whistleblowers can include those who are participants in the misconduct unless they are convicted of a criminal violation in connection with that conduct. The SEC’s new rules do not give whistleblowers amnesty but the cooperation will be taken into account by the SEC in fashioning relief to be ordered. Additionally, the bounty to be paid to any “culpable whistleblower” will be based only upon the misconduct by and monetary sanctions imposed against others. The SEC noted that this has long been recognized as an effective way to bring about justice – “use a rogue to catch a rogue.”
To continue reading this alert, click "Link to article" below and open the PDF linked at the bottom of the page. Topics include:
- Reporting through Internal Compliance Programs
- Protection from Retaliation
- Company Liability for Impeding Whistleblowing
- Next Steps and Managing Whistleblower Risks
For more information, please contact one of the Haynes and Boone attorneys below: