On May 25, 2011, the U.S. Securities and Exchange Commission ("Commission") issued new whistleblower rules pursuant to Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The rules provide a significant financial incentive to individual whistleblowers who voluntarily provide original information to the Commission that leads to a successful judicial or administrative action by the Commission resulting in monetary sanctions exceeding $1,000,000. In that event, the whistleblower will be entitled to between ten and thirty percent of monetary sanctions collected, with the precise amount determined at the Commission's discretion.

Qualifying Whistleblowers

Under the rules, only individuals (not companies or other entities) may qualify as whistleblowers eligible for an award. Certain individuals, however, are not eligible for an award, including:

  • individuals who have a preexisting legal or contractual duty to report their information to the Commission or certain other government entities;
  • attorneys, including in-house counsel, and others who attempt to use information protected by the attorney-client privilege or obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under federal or state attorney conduct rules);
  • persons who obtain the information in a manner that is determined by a U.S. court to violate federal or state criminal law; and
  • certain U.S. government and non-U.S. government officials.

In addition, compliance and internal audit personnel are generally ineligible for whistleblower awards. Directors, trustees and certain senior executives of a company also are not eligible to be whistleblowers with respect to information provided to them by another person, or information provided to them in connection with the company's process for handling potential noncompliance with the federal securities laws, subject to certain exceptions. However, these executives may be eligible for a whistleblower reward with respect to information they learn directly. For example, if a company's treasurer personally discovers that another company officer is engaging in fraudulent conduct, the treasurer may obtain an award for a whistleblower submission to the Commission. However, if the treasurer was informed of the fraudulent conduct by a subordinate, consistent with the company's compliance program, then the treasurer would not be eligible for an award.

Directors, trustees, certain senior executives, and compliance and audit personnel may become eligible for an award when:

  • the whistleblower reasonably believes that disclosure of the information to the Commission is necessary to prevent substantial injury to the financial interest or property of the company or investors;
  • the whistleblower reasonably believes that the company is engaging in conduct that will impede an investigation of the misconduct (e.g., destroying documents); or
  • the company's audit committee, chief legal officer, chief compliance officer and/or the whistleblower's supervisor have known the information for at least 120 days.

The rules provide a significant financial incentive to individual whistleblowers who voluntarily provide original information to the Commission that leads to a successful judicial or administrative action resulting in monetary sanctions exceeding $1,000,000.

Voluntary Submission

In order to be eligible for an award, a whistleblower must provide information to the Commission voluntarily. Under the Commission's rules, the information must be provided to the Commission before an individual receives a request from the Commission or other regulatory authority that relates to the same subject matter. A request for information that renders the provision of information involuntary includes:

  • any request, inquiry or demand for information from the potential whistleblower by the Commission;
  • requests made in connection with an examination or inspection, or an investigative request, by a self-regulatory organization; and
  • investigative requests by Congress, any other federal or state authority, the Department of Justice, a registered entity or a registered futures association.

Original Information

In order to qualify for an award, a whistleblower must provide "original information" about a possible violation of the federal securities laws that has occurred, is ongoing or is about to occur. Generally speaking, "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.

The rules include provisions designed to incentivize— but not require—employees to report compliance matters internally. Under the rules, a whistleblower will still be eligible for an award if he or she first reports information through an internal reporting process (or to Congress or certain other authorities), and then subsequently submits the same information to the Commission within 120 days. In this case, the whistleblower would be eligible for an award even if an internal report causes the whistleblower's employer to self-report the matter to the Commission before the whistleblower submits information to the Commission.

A whistleblower will still be eligible for an award if he or she first reports information through an internal reporting process (or to Congress or certain other authorities), and then subsequently submits the same information to the Commission within 120 days.

Successful Judicial or Administrative Action

A whistleblower will be deemed to have provided information leading to a successful judicial or administrative action if the information reported to the Commission is sufficiently specific, credible and timely to cause the Commission staff to commence or recommence an examination or investigation, or inquire concerning different conduct as part of an ongoing effort, and the Commission brings a successful action and recovers more than $1,000,000 based in whole or in part on conduct that was the subject of the information. To determine whether the relationship between the information provided and the allegations in a subsequent complaint or order is sufficiently close, the Commission staff will consider the similarity of the people, entities, places, times, conduct and victims. The Commission staff also will consider whether the information provided included allegations, provisions of the securities laws, culpable persons or victims that were identified in the complaint or order. Information will also be deemed to have led to a successful action if the information concerned conduct already under investigation by the Commission and certain other government entities, and the submission materially added to the information the Commission already possessed and significantly contributed to the success of an action.

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.

Monetary Reward

The Commission is required to award 10% to 30% of the sanctions collected to an eligible whistleblower. For purposes of determining the amount of an award, the Commission will aggregate any recovery the Commission obtains in an enforcement action with recoveries obtained in certain related actions based on the same information that led to the Commission's successful action. According to the rules, the factors that will cause the Commission to approve a higher award to an eligible whistleblower include:

  • the significance of the information provided;
  • subsequent assistance provided by the whistleblower;
  • law enforcement interest in the matter;
  • whether the whistleblower reported the matter through internal compliance systems; and
  • whether the reported misconduct involved regulated entities or fiduciaries.

Factors that decrease an award include:

  • culpability of the whistleblower in wrongful conduct;
  • unreasonable reporting delay; and
  • interference by a whistleblower with a company's internal compliance and reporting systems.

Anti-Retaliation

Under the Dodd-Frank Act and the Commission's rules, employers are prohibited from discriminating against a whistleblower because of any lawful act taken by the whistleblower:

  • in providing information to the Commission, or in any way assisting an investigation or judicial or administrative action; or
  • in making disclosures required under the Sarbanes-Oxley Act or the Securities Exchange Act of 1934, or any other law or rule subject to the Commission's jurisdiction.

Financial services firms should re-examine their policies in light of the rules, and reinforce the expectation that employees report compliance matters internally, consistent with their policies and procedures.

A whistleblower is protected if he or she possesses a reasonable belief that the information provided to the Commission 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.

The Dodd-Frank Act creates a private cause of action that allows an individual to sue for alleged retaliation in violation of the statute. Persons bringing successful retaliation claims under the Dodd-Frank Act are entitled to:

  • reinstatement with the same seniority status that the individual would have had but for the discrimination;
  • two times back pay, with interest; and
  • compensation for litigation costs, expert witness fees and reasonable attorneys' fees.

Financial services firms must take caution not to impermissibly retaliate against employees who provide information to the Commission under the rules.

Special Considerations for Investment Advisers and Other Financial Services Firms

Unlike other Commission registrants, registered investment advisers and registered investment companies are required by federal law to have rigorous internal compliance programs. Most compliance programs require employees to report compliance matters internally to the chief compliance officer or a related office. Financial services firms should re-examine their policies in light of the rules, and reinforce the expectation that employees report compliance matters internally, consistent with their policies and procedures. At the same time, however, financial services firms must take caution not to impermissibly retaliate against employees who provide information to the Commission under the rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.