SEC Whistleblower Program


The SEC Whistleblower Program

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.

I. What is the SEC Whistleblower Program?

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted. Section 922 of Dodd-Frank added Section 21F to the Securities Exchange Act of 1934. This section, entitled “Securities Whistleblower Incentives and Protection,” authorized an SEC Whistleblower Program to help detect and prevent fraud. On May 25, 2011, the SEC adopted final rules (“Rules”) to provide procedures for the implementation of the SEC Whistleblower Program. The Rules became effective on August 12, 2011.

The purpose of the SEC Whistleblower Program is to provide monetary incentives for individuals to come forward and report possible violations of the federal securities laws to the SEC. As the Chairman of the SEC stated, the Program is “intended to break the silence of those who see a wrong.” See Speech by SEC Chairman: Opening Statement at the SEC Open Meeting: Item 2 – Whistleblower Program, May 25, 2011. Under the SEC Whistleblower Program, eligible whistleblowers may receive an award between 10% and 30% of the monetary sanctions collected in an SEC action or related actions that imposed sanctions in excess of $1 million.

II. Nuts and Bolts of the Whistleblower Program.

A. Definition of an Eligible Whistleblower

An “eligible whistleblower” is a person who voluntarily provides the SEC with “original information about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur.” See Rule 21F-2. In addition, the information provided must lead to a successful SEC action or related action resulting in an order of monetary sanctions exceeding $1 million. See Rule 21F-3. While a whistleblower may submit information alone or jointly with other individuals, a company or other entity is not considered an eligible whistleblower. See Rule 21F-2.

“Original information” is information not already known to the SEC that is based upon the whistleblower’s independent knowledge or independent analysis. See Rule 21F-4. Information derived from another proceeding or allegation is not considered “original information.” Id. The information must be provided “voluntarily” meaning that the whistleblower must provide the information prior to receiving a request, inquiry, or demand for such. Id.

The requirement that the information lead to a successful SEC action means that the information must be “sufficiently specific, credible, and timely to cause the staff to commence an action, reopen an investigation, or to inquire concerning different conduct as part of a current examination or investigation” and the Commission brings “a successful judicial or administrative action based in whole or in part on conduct” that was the subject of the whistleblower’s original information. See Rule 21F-4(c)(1). Alternatively, information is also considered to “lead to a successful SEC action” if the information “significantly contributed” to the success of an action involving conduct that was already under investigation by the Commission. See Rule 21F-4(c)(2).

B. Internal Compliance Processes

The SEC Whistleblower Program does not require individuals to report potential violations through their employers’ internal compliance processes prior to submitting the information to the SEC. However, the Rules reflect the notion that individuals should be incentivized to participate in internal compliance processes. Therefore, to encourage individuals to participate in internal compliance processes the Rules contain the following provisions:
  • The amount of an award may be increased for participation in internal processes or decreased for undermining internal processes. See Rule 21F-6(b)(3).
  • A whistleblower that makes an internal report will be given credit for any information provided by the company to the SEC as if it had been provided by the individual. See Rule 21F-4(b)(5).
  • If a whistleblower provides information to an entity’s internal compliance procedure for reporting possible securities law violations and then within 120 days submits the same information to the SEC, the SEC will deem the disclosure to have been made on the date of the original disclosure. See Rule 21F-4(b)(7).
C. Individuals Excluded from Receiving an Award

The Rules generally exclude the following categories of individuals from eligibility to receive an award:
  • Principals of the subject company including its officers, directors, trustees, or partners
  • Attorneys and those who received the information through a communication that was subject to the attorney-client privilege
  • Employee or other person whose principal duties include compliance or internal audit functions
  • Individuals retained to conduct an inquiry or investigation about potential law violations
  • Employees and persons associated with an accounting firm who obtained information through an engagement required under the federal securities law
  • Individuals that obtained the information in violation of a federal or state criminal law
  • Foreign government officials
  • Individuals that have a preexisting duty to report information to the Commission
See Rule 21F-4(b)(4).

D. No Amnesty for Whistleblower

The Rules do not provide amnesty for an individual who provides information to the SEC. See Rule 21F-15. Accordingly, the SEC is not precluded from bringing an action against a whistleblower based on his or her own conduct in connection with a violation of federal securities laws. The SEC may, however, take the individuals cooperation into consideration.

III. Applying for An Award and Awards are Calculated.

A whistleblower is only eligible for an award if the information he provided leads to a successful enforcement action or related actions that result in monetary sanctions in excess of $ 1 million. Therefore, the award process does not begin until after the entry of a final judgment or monetary sanctions that exceed $ 1 million. The SEC will post Notices of Covered Actions online. To apply for an award, an individual that believes they are entitled to an award must complete and return Form WB-APP within 90 calendar days of the posting of the Notice of Covered Action.

Eligible whistleblowers may receive an award of between 10% and 30% of the total monetary sanctions collected. See Rule 21F-5. The SEC has discretion in determining the amount of the award and considers certain factors which take into consideration the unique facts and circumstances in each case. Accordingly, the existence of the following facts may increase the amount of the award:
  • Significance of the information provided
  • Assistance provided by the whistleblower
  • Law enforcement interest
  • Participation in internal compliance systems
However, the existence of the below facts may decrease the amount of a potential award:
  • Culpability or involvement of the whistleblower in the subject matters
  • Unreasonable delay in reporting
  • Interference with internal compliance or reporting systems
See Rule 21F-6.

IV. Protection for Whistleblowers

A. Anti-Retaliation

One of the primary concerns of potential whistleblowers is whether their employers will retaliate against them. Therefore, the Dodd-Frank Act and the Rules contain strong anti-retaliation provisions to protect whistleblowers. Section 21F(h) of the Dodd-Frank Act prohibits employers from retaliating against individuals who provide the SEC with information about possible securities violations. The following acts constitute retaliation pursuant to Section 21F(h)(1)(A): “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower.”

For purposes of anti-retaliation protection, a whistleblower is an individual that possesses a reasonable belief that the information provided relates to a potential securities law violation and provides such information in accordance with Section 21F. Accordingly, the anti-retaliation provisions apply whether or not the individual ultimately satisfies the requirements and conditions to qualify for a monetary award.

Section 21F(h)(1)(B)(i) creates a private right of action for individuals who believe they have been wrongfully retaliated against by an employer. Accordingly, Section 21F(h)(1)(C) provides for the following types of relief:

(i) reinstatement with the same seniority status that the individual would have had, but for the discrimination

(ii) two times the amount of back pay otherwise owed to the individual, with interest; and

(iii) compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.

Finally, Rule 21F-2 provides that the SEC may also take legal action in an enforcement proceeding against an employer that retaliates against an individual for providing information to the SEC.

B. Confidentiality

While the SEC is committed to protecting the identity of whistleblowers, there are limits to its ability to protect this information from disclosure. For example, the SEC may disclose the information when it is required in connection with a federal court or administrative action, or when the SEC determines that it is necessary to accomplish the purposes of the Whistleblower Program and to protect investors. See Rule 21F-7.

An individual may make a submission to the SEC anonymously. In order to make an anonymous submission, the individual must be represented by an attorney and declare under penalty of perjury that the information submitted is true and correct to the best of his/her knowledge and belief. See Rule 21F-9. However, before the SEC will pay an award, the individual must disclose his/her identity to the SEC and the SEC must verify the individual’s identity. See Rule 21F-7.

V. How Is the Program Working in the Real World?

In February 2012 at the annual SEC Speaks conference, SEC Chairman Mary Schapiro stated that the whistleblower program had “already provided the agency with hundreds of higher-quality tips, helping [the SEC] to avoid investigatory dead-ends and – at the same time – prodding companies to enhance their internal compliance programs.” See Speech by SEC Chairman: Remarks at the Practicing Law Institute’s SEC Speaks, February 24, 2012.

On August 21, 2012, the first award was issued pursuant to the SEC Whistleblower Program. In that case, the whistleblower assisted the SEC in stopping a multi-million dollar fraud and was awarded nearly $50,000 for providing “information that allowed the SEC’s investigation to move forward at an accelerated pace and prevent fraud from ensnaring additional victims.” See SEC Press Release, 2012-162. This information led to a court ordering over $ 1 million dollars in sanctions and the award represents 30% of the sanctions the SEC collected in its enforcement action against the defendants. Id. The SEC did not approve a monetary award for a second individual in this same matter because that individual did not provide information that lead to or significantly contributed to the SEC’s enforcement action. Id.
If you have questions regarding a possible securities law matter, or to arrange for a consultation concerning your legal matter, please contact Robert Mitchell at rdm@tblaw.com or at (602) 452-2730.
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