The SEC recently adopted final rules that implement the whistleblower program mandated by Dodd-Frank, which is designed to reward individuals who provide the SEC with original information that lead to successful enforcement actions. Despite the well-voiced concern that allowing whistleblowers to report directly to the SEC may undercut internal compliance programs, the final rules do not mandate that whistleblowers initially report misconduct to their companies, though they do provide for additional, new incentives to utilize these programs. According to SEC Chairman Mary Schapiro, the final rules strike “the correct balance — a balance between encouraging whistleblowers to pursue the route of internal compliance when appropriate — while providing them the option of heading directly to the SEC.” The final rules are available here and the corresponding SEC press release and fact sheet are available here.
Who is A Whistleblower And To What Is A Whistleblower Entitled?
A whistleblower is someone who provides the SEC with information that relates to a possible violation of the federal securities laws which has occurred, is ongoing or is about to occur. The final rules provide that a whistleblower who voluntarily provides the SEC with original information that leads to the successful enforcement by the SEC of a legal action under the federal securities laws will receive an award that ranges between 10% and 30% of the total monetary sanctions collected by the SEC if the sanctions exceed $1 million. Regardless of whether the award requirements are satisfied or whether an enforcement action proves successful, to receive protection from retaliation, a whistleblower must possess a reasonable belief that his or her company is possibly violating federal securities laws; accordingly, individuals who submit frivolous reports would not be able to claim protected status.
Must Claims Be Directly Reported To The Company?
No. Whistleblowers need not report information through an internal compliance program to be eligible for an award. Thus, the final rules afford whistleblowers with the option to directly report misconduct to the SEC or, alternatively, to report misconduct to their company. In response to public concern regarding the efficacy of internal
compliance programs due to the ability of whistleblowers to directly report misconduct to the SEC, the SEC sought to further encourage whistleblowers to utilize internal compliance programs before reporting their claims to the SEC by adding new incentives in the final rules, which include the following:
- When determining the size of an award, the SEC may pay larger awards to a whistleblower who reports a possible violation through internal compliance programs rather than
- reporting directly to the SEC and smaller awards to whistleblowers who obstruct or interfere with internal compliance programs.
- A whistleblower can receive an award for reporting information internally when the company subsequently self-reports the possible violation discovered as a result of the whistleblower’s internally reported information. The whistleblower would then be given credit by the SEC for all of the information selfreported to the SEC by the company.
- The date of a whistleblower report to the SEC relates back to the date that the whistleblower reported a possible violation internally, provided that the whistleblower submits the same information to the SEC within 120 days of the initial disclosure to the company.
Does The SEC Aggregate Sanctions That It Collects?
Yes. In determining whether the $1 million threshold has been satisfied, the SEC will aggregate sanctions from separate proceedings if the proceedings were based upon the same nucleus of operative facts.
Do Limitations On Awards Paid To Wrongdoers Exist?
Yes. The final rules do not necessarily disqualify a whistleblower who has engaged in fraud or other misconduct, even if it is the same fraud or misconduct the whistleblower is reporting. The degree and nature of the fraud or misconduct is a factor that the SEC will consider in determining the amount of the award to be paid to a whistleblower.
What Is The Potential Impact Of The Final Rules?
Although the final rules seek to encourage whistleblowers to use internal compliance programs while simultaneously affording whistleblowers the opportunity to contact the SEC directly, many potential whistleblowers who are driven solely by economic motivations may opt to report directly with the SEC to ensure their ability to claim and collect awards. Despite this possibility, companies should conduct a thorough audit of their internal compliance programs and assess their effectiveness. Because the motivations of whistleblowers are usually varied and complex, the quality of an internal compliance program may significantly impact whether a whistleblower chooses to report (a) directly to the SEC or (b) to their company. Regardless of the reporting avenue, most complaints will require significant costs (both temporal and monetary) to effect closure. Moreover, the existence and efficiency of a program will affect the SEC’s decision that an investigation or enforcement action is warranted or that a subject company has cured any fraud or other misconduct such that no investigation or enforcement action is warranted.
The final rules will most likely spur an uptick in the volume information reported to the SEC. Ultimately, though, the true impact of the final rules upon the quality of reports received by the SEC and the SEC’s ability to efficiently process those reports and internal compliance programs and the ability of companies to identify and remediate promptly fraud or other misconduct will each significantly depend upon the SEC’s prospective implementation and administration of the rules.
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