SEC Adopts Final Dodd-Frank Whistleblower Rules
by Roger Bivans and Erik Lopez
The Securities and Exchange Commission recently adopted rules implementing the whistleblower program established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Now, persons who voluntarily provide the SEC with original information regarding a violation of the securities laws, including the Foreign Corrupt Practices Act, may be eligible to receive a bounty if the information leads to a successful SEC action exceeding $1 million in sanctions. Dodd-Frank requires the SEC to pay successful whistleblowers a bounty ranging from 10 percent to 30 percent of the aggregate penalties collected.
Broad Whistleblower Protections
Dodd-Frank’s anti-retaliation provisions apply to all “whistleblowers,” regardless of whether an investigation is commenced or a bounty is awarded. Any natural person who has a “reasonable belief” that information provided relates to a “possible” violation of applicable law will be considered a whistleblower entitled to anti-retaliation protection. The “reasonable belief” standard requires a genuine subjective belief that information relates to a possible violation and that belief must be one that a similarly-situated employee might reasonably possess.
Only whistleblowers who “voluntarily” provide the SEC with “original information” that leads to qualifying enforcement action may receive an award. To be “voluntary,” the information must be submitted before a request, inquiry or demand by specified federal, state and quasi-governmental authorities.
“Original information” must be derived from the whistleblower’s independent knowledge or analysis and cannot already be known to the SEC. It can only be derived from public sources if the whistleblower provides enough independent analysis to make it qualify as original information.
Some persons are generally not eligible for awards, including:
- those with a duty to report to the SEC;
- people who obtain the information in connection with legal representation;
- individuals convicted of a criminal violation related to the covered action;
- anyone who obtains the information in a manner determined by a U.S. court to violate U.S. federal or state criminal law;
- foreign government officials;
- officers, directors, trustees or partners of a company who are informed by another person of allegations of misconduct (such as through a hotline); and
- compliance and internal audit personnel and independent public accountants.
People in a legal, compliance, investigative or audit role, however, may be eligible to receive bounties if:
- they have a reasonable basis to believe disclosure is necessary to prevent conduct likely to cause substantial injury to the financial interest or property of the company or investors;
- they have a reasonable basis to believe the company is engaging in conduct that will impede an investigation of the misconduct; or
- 120 days have lapsed since they provided information to the audit committee, chief legal or compliance officer or supervisor.
The SEC only requires a simple form for whistleblowers to submit information. Even anonymous reporting is allowed if whistleblowers retain counsel, and their identity may remain confidential unless required to be disclosed in a court or administrative proceeding. The claims procedure is simple, requiring completion of a one-page, online form.
Incentives to Use Internal Compliance Programs
Although internal reporting is not required, the rules provide incentives to use internal compliance processes:
- Voluntary participation in internal compliance can increase award amounts.
- Whistleblowers who report internally receive credit if the company ultimately reports the information to the SEC.
- A whistleblower can report to the SEC up to 120 days after first reporting internally and receive a “look-back” date of submission.
The intent of the rules is to provide the SEC with timely, more relevant information to defer, detect and prevent fraud. While the rules provide a significant financial incentive for employees to report misconduct to the SEC, the company has little, if any, role in whether or not an employee is entitled to a bounty. Instead, companies are now challenged to create a culture in which compliance and internal reporting is valued.
Roger Bivans is a Partner with Baker & McKenzie LLP in Dallas. He can be reached at email@example.com. Erik Lopez is an associate at Baker & McKenzie LLP in Dallas. He can be reached at firstname.lastname@example.org.