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SEC Issues New Whistleblower Regulations

Date Published
Sep 18, 2011

On May 25, 2011 the Securities and Exchange Commission (“SEC”) adopted final rules to implement the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act created a whistleblower program that requires the SEC to pay an award to whistleblowers that “voluntarily” provide “original” information about violations of federal securities laws that result in monetary sanctions exceeding $1,000,000. The whistleblower is entitled to between 10% and 30% of the total amount of money collected by the SEC. The Dodd-Frank Act also prohibits employers from retaliating against employees for reporting securities violations to the SEC.

The rules, which go into effect on August 12, 2011, define certain terms from the Dodd-Frank legislation that are essential to the operation of the whistleblower program, and explain the SEC’s procedures for enforcing the program. The rules establish the Office of the Whistleblower, which will be responsible for administering the whistleblower program. In order to qualify for an award, whistleblowers must submit information regarding possible securities law violations to the Office of the Whistleblower by completing a Form TCR signed under penalty of perjury. The form may be submitted online via the Office of the Whistleblower’s website, facsimile, or regular mail. In addition, in order to protect whistleblowers from retaliation, the Act allows a whistleblower to anonymously submit information to the Office of the Whistleblower, as long as the whistleblower is represented by an attorney who submits the information on the whistleblower’s behalf. The SEC and any other government agencies assisting the SEC with its investigation must keep the information provided by the whistleblower confidential until the SEC is required to disclose the information in connection with a public proceeding initiated by the SEC.

Consistent with the Dodd-Frank Act, the rules explain that to qualify for an award, the information submitted by the whistleblower must be “original,” which they define as information derived from the whistleblower’s own independent knowledge that is not publicly available, unless the whistleblower was the original source of the publicly available information. But a whistleblower may still qualify for an award for submitting his or her own independent analysis of possible securities violations, even though that analysis is based on publicly available information. The rules also state that the information must be “voluntarily” submitted to the Office of the Whistleblower, meaning that it must be provided by an individual who does not have a contractual or other duty to provide the information to the SEC and is not being provided pursuant to a court order or request from the Government.

The nature and form of possible violations of securities law can vary widely. Common examples securities fraud schemes may, however, include:

  • Market manipulation of securities prices or volumes
  • Misstatements or omissions of fact about a company (including in statements submitted to the SEC)
  • Offering fraudulent or unregistered securities
  • Corporate mismanagement resulting in breach of fiduciary duties to shareholders
  • Fraudulent accounting practices to misrepresent corporate assets
  • Insider trading
  • Abusive short selling practices
  • Backdating stock options
  • Ponzi, pyramid, or other high-yield investment schemes

In addition, the new SEC whistleblower program creates an avenue for whistleblowers to report violations of the Foreign Corrupt Practices Act, which prohibits bribery or improper payments to foreign officials in order to obtain or retain business, or to direct business to a certain person.

The rules also set forth the criteria that the SEC will consider in determining the percentage award the whistleblower will receive within the 10-30% range. The SEC will consider the following four factors in determining whether to increase the award: 1) the significance of the information provided by the whistleblower, 2) the degree of assistance provided by the whistleblower, 3) law enforcement’s interest in making the whistleblower award, and 4) participation by the whistleblower in his/her employer’s internal compliance systems. On the other hand, the SEC will look to the following three criteria in determining whether to decrease a whistleblower’s award: 1) culpability of the whistleblower, 2) unreasonable reporting delay by the whistleblower, and 3) the whistleblower’s interference with his/her employer’s internal compliance and reporting systems.

The SEC has publicly announced that it has a fund of $450 million set aside for the express purpose of paying rewards to whistleblowers under these rules. Hopefully, the SEC will use that fund to properly incentive whistleblowing by making timely and substantial rewards. How the SEC handles whistleblower tips over the next year or two will likely set the tone for the future of the program.

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