The SEC is now in the process of writing the rules for implementation of the much-ballyhooed whistleblower law enacted last summer as part of the Dodd-Frank financial overhaul bill (the "Act"). Much has been written about the new law; it is the subject of numerous seminars and programs. Some corporate counsel are worried it will undermine company compliance programs by encouraging employees to run to the government before reporting problems through internal channels to compliance or legal officers. Some commentators predict there will be a mother lode of new whistleblower allegations pouring in, others are not so sure. Some lawyers are even reportedly advertising for whistleblowers on movie screens in the New York area. The golden age of whistleblowing may be upon us, or it may all turn out to be a big bust.

The SEC has 9 months to come up with a set of "rules" (in regulatory jargon) to fill in all the ambiguities left by Congress in the legislation. Our esteemed elected lawmakers never seem too interested in the grainy details of legislation (unless it's a well-disguised gift to a favored contributor). While the whistleblower rules are just one of hundreds of complicated rules fleshing in the Dodd Frank bill left up to the SEC by Congress, the SEC is fast tracking the whistleblower rules, expecting to propose them by December 31, 2010 and adopt them by March 31, 2011. In the meantime, whistleblowers who came in with "original information" on or after July 21, 2010 are eligible for awards, as long as they obey the rules once they take effect.

Will the SEC use its rule-making authority to promote and protect whistleblowing or gum up the provision with so many hurdles that most whistleblowers will never make it to the promised land, assuming they are even willing to start down the "long and winding road" to becoming a successful whistleblower? Traditionally, the government's anonymous rule writers live for the opportunity to feast on broadly phrased legislative language. Some see it as their chance to shape the law as they would have written it. They also seem fixated on writing complex, multi-layered rules to cover every conceivable scenario, and then some. (I suspect that if federal rule-writers were charged with deciding how to cut a one foot length of duct tape from a roll (which as we know is not all that easy), their advice would consume at least 25 pages in the Federal Register).

So the SEC is at a real crossroads here: if it really wants the whistleblower program to be effective, it should resist the bureaucratic tendency to write complex rules that will over time inevitably discourage whistleblowers and minimize the potential of this law. This would be a tragic mistake for the agency and for the cause of effective enforcement of the securities laws. In the hope of curbing the enthusiasm of the rule writers, some unsolicited suggestions from this practitioner, who is now and hopes to continue to be representing worthy whistleblowers.

1. RESIST THE URGE TO WRITE DETAILED, INTIMIDATING RULES

The SEC needs to keep the whistleblower rules clear, simple, and user-friendly. Congress passed this law to encourage whistleblowers, incentivize them to come forward, and protect them from retaliation. The rules should, in every respect, encourage those goals and do nothing to discourage or frustrate would-be whistleblowers. The SEC could, for example, attempt to further define what "Original Information" is for purposes of an award. What does the law mean when it says such information can be "derived from the independent knowledge or analysis of a whistleblower"? What if a smart analyst, academic type, or financial geek looks at an industry or company, concludes that there must be something amiss (remember the backdating scandal several years back began with an academic analysis), and submits his assessment to the SEC, which launches investigations ultimately netting hundreds of millions in penalties? Does the professor get his 30% cut? It could be viewed as a windfall, to be sure. But it could encourage similar efforts from others. So what if someone wants a big reward for connecting the dots everyone else missed or ignored. Maybe the prospect of a big reward would have turned the head of a lone mortgage company executive in 2007 who was packaging shoddy home loans into billions in securities. Maybe he would have stepped forward and saved the housing market. What is "independent knowledge"? The possibilities are endless. Every case will be different and riddled with fine distinctions. Writing volumes of rules that attempt in advance to give clear guidance on all cases may simply be impossible, and indeed detrimental.

For example, what if the SEC's Denver office is looking at something amiss in the Widget Corporation's Boulder office and an insider figures out the agency is missing another, more serious fraud at Widget's London office and comes in with that information? What if the insider tells a trusted but avaricious co-worker the information on Monday, that person brings it to the SEC on Tuesday and the "original" insider decides to come to the SEC on Wednesday? Who is the original source, or does the SEC decide there is no "original information" here because it was already looking at the company, albeit for something else? Should both insiders be considered whistleblowers, or neither? The possibilities, and the complications, are enough to make a first year law student's head spin with thorny hypotheticals.

And that is just one section of the Act. The rule writers must also grapple with the statute's vaguely stated criteria for determining how much the award will be, which require highly subjective judgments "in the discretion of the Commission" as to the "significance of the information provided by the whistleblower to the success" of the case, the "degree of assistance" provided by the whistleblower and his/her lawyer, and that old paragon of clarity the "programmatic interest of the Commission in deterring violations of the securities laws..." If the SEC now comes up with page upon page of arcane and prolix rules there will be a new web of regulation that may be perceived as providing the SEC with numerous "outs" to avoid an award. Such a thicket of rules will appear to would-be whistleblowers as an Everest-like wall that may not be worth the climb, given the already well-known downsides of whistleblowing. Suggestion: let the Commission gradually unfold something akin to the English Common Law, in effect writing the rules as its muddles through the cases and makes it ultimate award decisions.

2. WRITE RULES THAT SUPPORT COMPLIANCE PROGRAMS.

There has been considerable concern voiced in the corporate community that the new law, by monetarily rewarding direct disclosures to the SEC, will discourage employees from "reporting up" within their companies as encouraged or required in corporate ethics codes and compliance programs. Why report to the compliance officer and get a pat on the back, or at best a small bonus, when you can go directly to the SEC and be eligible for a potentially enormous whistleblower award? It has been suggested that companies offer similar monetary rewards for employees who follow the compliance rules and report internally, but that approach may not catch on, since giving employees a monetary reward for doing that which they are expected to do anyway is not a precedent that budget conscious employers will embrace.

Both SEC Chairman Mary Shapiro and Enforcement Chief Rob Khuzami have recently indicated they do not want the new rules to "undermine" compliance programs. The SEC could nip this problem in the bud by writing a rule that clarifies that "original information" includes information supplied by a corporation to the SEC where the "original source" is an internal whistleblower. The law as written appears to allow such information to qualify. Sec. 21F(a)(3)(B) provides in its definition of "Original Information" that the term includes information that "is not known to the Commission from any other source, unless the whistleblower is the original source of the information..." (italics added).

As I read it, this means a whistleblower does not have to run directly to the SEC with the information, as long as it is established that she was the "original source" of that information as provided to the company. If the SEC were to require corporations reporting (voluntarily or otherwise) potential fraud or other irregularities to identify to it the original source of the information, presumably they would identify the internal whistleblower as that source, thereby protecting that individual's eligibility for an award under the Act.

The SEC should craft a rule that makes such identification mandatory on the corporation's part. Even if the company fails to identify an original source whistleblower as part of its disclosure, or misidentifies the source, the SEC could presumably find out through its investigation that there was such an original source within the company who may be considered an eligible whistleblower.

If the whistleblower prefers to remain anonymous (perhaps delivering his information through a company hotline) the company could disclose that as well, in which case it would be up to the whistleblower to decide whether and when to come forward (preferably with some proof that she was the initial source). To insure this rule works in practice, companies should be required to make clear in their compliance training that the company will assist internal whistleblowers in becoming eligible for awards from the SEC.

Should the company sit on the information, and fail to present it to the SEC, the whistleblower may always then choose to go directly to the SEC. But such a rule that protects the whistleblower who reports up first internally will at least give the company the chance to evaluate the information without concern that it must outrun every whistleblower to be the first in the door at the SEC.

3. GIVE WHISTLEBLOWER CANDIDATES AN "EARLY DECISION"

The typical whistleblower is making a huge leap of faith. He is placing his fate in the hands of a big government agency, which he has no reason to trust. He wants some degree of comfort, as soon as possible, that he has made the right decision. One way the SEC can establish a good relationship from the start is to give the whistleblower a quick decision on the fundamental question of whether his complaint has been received, and whether he has provided qualifying "Original Information."

If for example, the whistleblower sends a complaint via the SEC website, he is clicking "submit" and sending his information into the void of cyberspace. If he hears nothing for days or weeks, he is in whistleblower limbo. Likewise, until he knows for sure his information is "original" he is hanging way out there with no assurance that he has even reached first base on the road to an award. The SEC should craft rules that insure contact will be made quickly with would-be whistleblowers, and that they receive at least a preliminary indication that their information will be considered "original", i.e. it is of a nature that, barring subsequent contrary evidence, will qualify for an award, assuming other requirements are met. Likewise, the rules should make clear that anyone filing "original information" is eligible for whistleblower consideration, even if they are unaware of the law and did not ask for such status. The law does not require such individuals to ask for whistleblower treatment, it simply requires them to "provide information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission." Sec. 21F(a)(6).

4. DISCOURAGE LAWYERS WHO TROLL FOR WHISTLEBLOWERS AND THOSE WHO WOULD DISCLOSE PRIVILEGED INFORMATION

It may prove difficult for the SEC to impose some degree of professional responsibility on the lawyers who represent whistleblowers, but it should at least make the effort, consistent with the First Amendment. Not surprisingly, given the prospect of large awards, there is emerging a group of lawyers who are actively seeking whistleblower clients. Many are drawn from the bar that has traditionally represented whistleblowers under other statutes, such as the False Claims Act, and lawyers who normally represent plaintiffs in securities fraud class actions. Many of these are excellent, ethical attorneys. The Act encourages whistleblowers to act through counsel, in part by giving such clients the right to remain anonymous throughout much of the process.

Nevertheless, in determining the amount of an award, the Act allows the SEC to "take into consideration...the degree of assistance provided by...any legal representative of the whistleblower..." Sec. 21F(c)(1)(B)(i)(II). This provision may allow for rule-making that will make clear that lawyers who publicize their whistleblower practice by, for example, giving notice to the world of a pending investigation by the SEC into the affairs of a named company triggered by their whistleblower client, will not be considered to have "assisted" the SEC in the investigation, thus jeopardizing the award.

Whistleblower cases are not analogous to class actions in which it may make sense to inform other investors of the lawyer's filing of a suit, or of the conduct of an "investigation" by the lawyer into the affairs of a given entity (such as one that has just made a disclosure of securities law issues in a public filing). Conversely, in a government investigation triggered by a whistleblower, the interests of the SEC (and potentially the Department of Justice) are usually best served by avoiding public disclosure until the enforcement staff can subpoena documents or talk to witnesses. These goals are not served by an attorney publicizing the whistleblower's allegations at the outset. These rules may be difficult to draft, but they could help in discouraging lawyers who, in their eagerness to publicize their success in gathering whistleblower clients, hinder the success of the investigation itself.

The rules should also discourage lawyers who may be aware of potential securities law violations by virtue of their possession of attorney-client privileged information from seeking to become whistleblowers. If, for example, a lawyer involved in an internal investigation for a company (either in house or outside counsel) decides to go directly to the SEC with information obtained in that investigation, before the client company decides to disclose it to the SEC, that lawyer should not be allowed to benefit by using privileged information received in the course of representing his client.

An exception to this rule should be made for attorneys who under the circumstances at hand feel obligated to make disclosure to the SEC consistent with the requirements of Section 307 of the Sarbanes Oxley Act. That provision allows an attorney, without the consent of an issuer client, to reveal confidential information related to his or her representation to the extent the attorney reasonably believes it necessary to prevent the issuer from committing a material violation likely to cause substantial financial injury to the financial interests or property of the issuer or investors; to prevent the issuer from committing an illegal act; or to rectify the consequences of a material violation or illegal act in which the attorney's services have been used. An attorney who makes a disclosure otherwise protected under these provisions should also be allowed whistleblower treatment if an award is otherwise justified under the Act.

5. WRITE RULES THAT PROTECT WHISTLEBLOWER IDENTITY

Whistleblowers are normally quite concerned about being identified to the party against whom they are making a complaint. Some prefer to remain anonymous, which the Act permits. Some may not care who knows who they are, but that is the rare case. In drafting rules, the SEC should aim to protect the identity of the whistleblower, and the substance of her complaint, to the greatest extent possible.

One area where this may be complicated is the case of high level whistleblowers whose position, such as CEO, CFO, Director or other high level officer is such that their information could "bind the company" under traditional civil or criminal law standards. Situations in which SEC staff is required to go through corporate counsel before contacting corporate employees are set forth in the SEC Manual under Section 3.3.6.1 "Contacting Employees of Issuers." In general, the staff is to follow ABA Model Rule 4.2, which prohibits a lawyer representing a client from communicating about the subject of the representation "with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer...is authorized to do so by law..."

Does this mean SEC staff, upon receiving a whistleblower complaint from a high level corporate officer, must first seek permission from corporate counsel before contacting or interviewing the whistleblower? There are examples given in the manual as to when staff may contact an employee directly, such as when the "staff is not aware of an attorney who represents that person in its investigation." Presumably, a corporate officer who is being represented by his own counsel, or who (as is usually the case) has been told by company counsel that they do not represent him, could be contacted. But if the SEC is aware, for example, that an internal investigation is underway at the company and the company has hired counsel to represent it and perhaps its officers (until they are told otherwise), the Model Rule might require consultation with such counsel before speaking to the whistleblower.

Of course, this would presumably result in the whistleblower being identified to company counsel who is being asked by the SEC for permission to talk to the whistleblower. Exposing the whistleblower in this manner is an absurd result and directly contrary to the spirit of the Act. The rules should make clear that the SEC staff is not required to seek the permission of company counsel before receiving and using otherwise non-privileged information from any employee in the company, including those whose statements could constitute admissions that bind the company or whose acts could be imputed to the company. The SEC Manual already provides an exception to the general no contact rule if there is a "compelling reason" to contact the employee, and a whistleblower case should qualify as such a reason. Likewise, a written rule promulgated by the SEC allowing such contact would presumably satisfy Model Rule 4.2 as well.

CONCLUSION—MAKE THE LAW WORK AS INTENDED

There are undoubtedly numerous other difficult issues to address in the rule-making process now underway at the SEC. Some Scrooge-like types may want rules designed to make awards as difficult as winning the Powerball lottery. But throughout the process the SEC should endeavor to write rules that ultimately encourage the success of the whistleblower program and make substantial awards more, not less, likely. Just as in baseball the "tie goes to the runner", in every "close" case, the rules should favor the would-be whistleblower. The sad history of whistleblower laws suggests that regulatory and judicial efforts to narrow the scope of awards, and to erect legal obstacles to those who take the substantial risks associated with being whistleblowers, inevitably reduce the success of the program.

It will not be in the best interest of the SEC to craft rules that so restrict the possibility of awards that, over time, they result in just a handful of successful whistleblowers but a large and vocal group of frustrated applicants who were denied for one or another technical reason. Even worse will be those legitimate whistleblowers who were simply ignored or whose information never led to a filed case. The ghost of Bernie Madoff hangs over the SEC even today. The SEC Inspector General and various members of Congress will be quick to pounce if the SEC somehow manages to fail to meet expectations with this program

In short, the SEC needs to make this law work, even if it results in a more than a few windfalls, or in awards that on occasion go to whistleblowers with (in legal parlance) "unclean hands." The Agency itself may well be the biggest winner if, a few years down the road, it can point to a string of big cases that were built from the disclosures of whistleblowers. That effort depends in large part on a concise set of benevolent rules designed to support and encourage whistleblowers in presenting their information and securing their rewards.

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.

Daniel J. Hurson is former Assistant Chief Litigation Counsel at the SEC and a former Assistant U.S. Attorney. He practices securities enforcement and white collar defense law in his own firm in Washington D.C. His email is dan@hursonlaw.com. His website is http://www.hursonlaw.com