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SEC’s New Whistleblower Program Goes into Effect

By: Staff Editor
Date: August 26, 2011

Whistleblower provisions in Dodd-Frank

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, required the SEC to implement a whistleblower program. The Act also provided the SEC with the authority to pay financial rewards to whistleblowers who provide new and timely information about any securities law violation. The SEC adopted final rules on May 25 to implement the Dodd-Frank whistleblower program. Prior to the enactment of the Dodd-Frank Act, the SEC only had authority to reward whistleblowers in insider trading cases.

Even though the program came into effect on August 12, 2011, any whistleblower who reported information that meets the requirements since July 2010 (when the Dodd-Frank Act passed) is eligible for an award.

Not sure how to deal with the SEC’s new whistleblower regulations? Then attend the following ComplianceOnline webinars:

SEC Whistleblower Program

The SEC’s whistleblower program aims at strengthening the agency’s ability to protect investors and investigate issues related to securities regulatory violations. The program is designed to result in:

Better tips – The agency claims that it has seen an increase in the quality of tips received since the creation of the program
Timely tips – Tips have to be timely and whistleblowers will receive incentives for giving the agency timely information
Maximizing outside resources – The SEC has fewer than 4,000 employees to regulate more than 35,000 entities, making enforcement difficult. The robust whistleblower program will make it easier for the agency to find and deter wrongdoing at firms
Protection against retaliation – Employees who turn whistleblowers will be provided with tools to protect themselves against employers who retaliate
Improving internal compliance – The SEC believes that providing significant incentives to employees who report any wrongdoing to their company’s internal compliance department before approaching the agency will result in stronger internal, effective compliance programs.

The SEC has outlined its whistleblower program on a dedicated website, www.sec.gov/whistleblower, which includes information on eligibility requirements, directions on how to submit a tip or complaint, instructions on how to apply for an award, and answers to frequently asked questions.

SEC Whistleblower Final Rule

The SEC formulated its final rule for whistleblowers as required by the Dodd-Frank Act in May. The rule gives the definition of a whistleblower and requirements in order to be eligible for an award.

The rule defines a whistleblower as a person who provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing or is about to occur.

In order to be eligible for an award, the rule requires that a whistleblower must:

Voluntarily provide the SEC information	A whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it directly from the whistleblower or the whistleblower’s representative.
Provide original information	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.
Provide information that leads to successful enforcement by the SEC of a federal court or administrative action	A whistleblower’s information can be deemed to have led to a successful enforcement action if: The information is sufficiently specific, credible and timely to cause the SEC to open a new examination or investigation, reopen a closed investigation, or open a new line inquiry in an existing examination or investigation. The conduct was already under investigation when the information was submitted, and the information significantly contributed to the success of the action. The whistleblower reports original information through his or her employer’s internal whistleblower, legal, or compliance procedures before or at the same time it is passed along to the SEC; the employer provides the whistleblower’s information (and any subsequently-discovered information) to the SEC; and the employer’s report satisfies points (1) or (2) above.

Response from industry

The response from the industry to the new program has been mostly negative. The US Chamber of Commerce has strongly opposed the new rule since it was proposed. It had raised the prospect of challenging the whistleblower rules in court, but a spokesman said no decision has been made yet.

However, Robert Khuzami, Director of the SEC's Division of Enforcement, said, “Early and quick law enforcement action is the key to preventing securities fraud and avoiding investor losses, and the whistleblower program gives us the tools to help achieve that goal.”

Sean McKessy, Chief of the SEC's Office of the Whistleblower, added, "Securities fraud is not a victimless crime. That's why why it is so important for people to step forward when they witness an ongoing securities fraud or learn about one that has taken place or is about to occur. Our new whistleblower award program makes it easier for people to take that step."

Additional Resources