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The Whistleblower Rules

May 27, 2011

On May 25th, the SEC adopted new final rules implementing the whistleblower provisions of the Dodd-Frank Act. In approximately two months, those rules will be effective.

The Basics. The new whistleblower program is intended to reward individuals who expose federal securities violations. To be considered for an award, a whistleblower must (1) be a natural person who (2) voluntarily provides the SEC with original information that (3) leads to a successful SEC enforcement action in which (4) the SEC obtains monetary sanctions totaling more than $1 million. Smaller enforcement actions that arise from the “same nucleus of operative facts” may be combined for purposes of reaching the threshold for award eligibility.

Photo by Electronic Frontier Foundation; some rights reserved.

“Voluntariness.” A submission of information will be deemed “voluntary” if the whistleblower does not otherwise owe a duty to report the knowledge and makes the submission before receiving a related request, inquiry, or demand from the SEC, the PCAOB, a self-regulatory organization, Congress, a federal agency, or a state attorney general or securities regulator. A request from a state treasurer’s office or insurance regulator that triggers a whistleblower submission to the SEC can be eligible for a reward.

Internal Compliance. The final rule does not require a putative whistleblower to internally report his or her concerns prior to notifying the SEC. Instead, the adopting release of the rule intends to “incentivize whistleblowers to utilize their companies’ internal compliance and reporting systems.” The SEC will use a whistleblower’s participation in a company’s internal compliance systems as a factor that can increase the amount of an award. Conversely, a whistleblower’s interference with internal compliance can decrease an award.

To further encourage internal reporting the Commission added a provision that was not part of the original proposal. That provision, Rule 21F-4(c)(3), provides: if, after a whistleblower internally reports information that the company in turn self-reports to the Commission, the whistleblower can be credited for the information and be rewarded not only for the knowledge the whistleblower reported to the SEC, but also for the information the company gave the SEC.

Ineligible Information and Personnel. The reporting of certain types of knowledge will not be eligible for whistleblower bounties. Information subject to the attorney-client or work product privileges, or information whose disclosure would violate an attorney’s ethical obligations, will be ineligible for whistleblower bounties. Certain categories of people will also be ineligible as whistleblowers. Included are the company’s officers, directors, and trustees if they obtain the information through processes for identifying, reporting, and addressing potential non-compliance with the law. Similarly, employees whose principal duties involve compliance or internal audit responsibilities, as well as employees of outside firms that are retained to perform compliance or internal audit work for a company, cannot be whistleblowers.

Exceptions. Information or persons who would otherwise be ineligible for a whistleblower bounty may be rewarded if disclosure is necessary to prevent substantial financial harm to the company or its shareholders, or if disclosure is necessary to prevent the obstruction of an investigation.

View the adopting release and final rule here.

To read past blogmosaic posts about the Dodd-Frank whistleblower rule, click here.

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