SEC Whistleblower Program

The SEC’s whistleblower program was implemented under Section 922 of the Dodd-Frank Act and is primarily intended to reward individuals who provide original information to the SEC that leads to a successful enforcement action. Dodd-Frank also prohibits retaliation by employers against individuals who provide the SEC with information about possible securities violations.

In passing the Dodd-Frank Act, Congress substantially expanded the agency’s authority to compensate individuals who provide the SEC with information about violations of the federal securities laws. Prior to the Act, 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. Under Dodd-Frank, awards can now be up to 30 percent of the monetary sanctions or recovery obtained by the SEC.

Before turning to the rules regarding the SEC’s whistleblower program, it is worth noting what the rules do not require. In adopting the final rules, the SEC rejected a proposal in which employees would have been required to internally report their information to management before being eligible to present information under the SEC’s whistleblower program. This proposal was strongly supported by corporations.

The final rules define a whistleblower as a person who provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing, or is about to occur.

In order to be considered for an award under the SEC whistleblower program, the final rules require that a whistleblower must: (1) voluntarily provide the SEC, (2) with original information that (3) leads to the successful enforcement by the SEC of a federal court or administrative action, (4) in which the SEC obtains monetary sanctions totaling more than $1 million.

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 directly from the whistleblower or the whistleblower’s representative.

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.

A whistleblower’s information can be deemed to have led to a successful enforcement action if: (1) the information is sufficiently specific, credible and timely to cause the SEC to open a new examination or investigation, reopen a closed investigation, or open a new line inquiry in an existing examination or investigation; (2) the conduct was already under investigation when the information was submitted, and the information significantly contributed to the success of the action; or (3) the whistleblower reports original information through his or her employer’s internal whistleblower, legal, or compliance procedures before or at the same time it is passed along to the SEC; the employer provides the whistleblower’s information (and any subsequently-discovered information) to the SEC; and the employer’s report satisfies prongs (1) or (2) above.

With regard to the $1 million requirement, the rules permit aggregation of multiple SEC cases that arise out of a common nucleus of operative facts as a single action. These may include proceedings involving the same or similar parties, factual allegations, alleged violations of the federal securities laws, or transactions or occurrences.

Certain people generally will not be considered for whistleblower awards under the final rules. These include:

People who have a pre-existing legal or contractual duty to report their information to the Commission;
Attorneys (including in-house counsel) 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);
People who obtain the information by means or in a manner that is determined by a U.S. court to violate federal or state criminal law;
Foreign government officials;
Officers, directors, trustees or partners of an entity who are informed by another person (such as by an employee) of allegations of misconduct, or who learn the information in connection with the entity’s processes for identifying, reporting and addressing possible violations of law (such as through the company hotline).
Compliance and internal audit personnel; and
Public accountants working on SEC engagements, if the information relates to violations by the engagement client.

However, under certain circumstances, compliance and internal audit personnel, as well as public accountants, can become whistleblowers when: (1) the whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors; (2); the whistleblower believes that the entity is engaging in conduct that will impede an investigation; or (3) at least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.

Certain other people, such as employees of certain agencies and people who are criminally convicted in connection with the conduct, are already excluded by Dodd-Frank.

In order to prevent wrongdoers from benefitting by, in effect, blowing the whistle on themselves, the rules do not allow the SEC to pay a culpable whistleblower an award that is based on either: (1) the monetary sanctions that such culpable individuals themselves pay in the resulting SEC action, or (2) the monetary sanctions paid by entities whose liability is based substantially on conduct that the whistleblower directed, planned or initiated.

The rules also describe the procedures for submitting information to the SEC and for making a claim for an award after an action is brought. The claim procedures provide opportunities for whistleblowers to present their claim before the SEC makes a final award determination.

Under the final rules, the SEC also will 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.

Regarding the increased anti-retaliation provisions, a whistleblower who provides information to the SEC is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. In addition, the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the Commission, including threatening to enforce a confidentiality agreement.

Although the rules do not require that employee whistleblowers report violations internally in order to qualify for an award, the rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to use their own company’s internal compliance programs when appropriate to do so. For example, the rules make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations. In addition, an employee is considered a whistleblower under the SEC program as of the date that the employee reports the information internally – as long as the employee provides the same information to the SEC within 120 days. Through this provision, employees are able to report their information internally first while preserving their “place in line” for a possible award from the SEC. More importantly, the rules provide that a whistleblower’s voluntary participation in a company’s internal compliance program is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.

For more information, email quitam@bafirm.com.

Notice

This website is designed to provide general information only. This information is not and should not be construed to be legal advice. The transmission of the information found on this website also does not result in the formation of a lawyer-client relationship.

You should be aware that qui tam and financial fraud claims are subject to Statutes of Limitations. The area of limitations periods is complex. There are also first to file rules, public disclosure bars, original source issues, and varying limitations in pursuing retaliation claims. If you wish to pursue your claims, you should promptly seek the opinion of an attorney regarding the merits of your qui tam or financial fraud claim and the applicable statute of limitations.