By Cydney Posner

This morning, the SEC voted to propose rules and forms to implement the whistleblower provisions of the DFA (Section 922), Section 21F of the Exchange Act, entitled "Securities Whistleblower Incentives and Protection." Section 21F requires the SEC to pay awards to eligible whistleblowers who voluntarily provide the SEC with "original information" about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action or a related action. The rules are intended to incentivize insiders and others to come forward as early as possible with high quality leads. The rules provide for enhanced anti-retaliation measures for whistleblowers, significant financial incentives (10% to 30% of recovery collected) and simple procedures.

The SEC found the development of these rules especially challenging because of the potential for unintended consequences (e.g., the possibility that the rules would undermine internal corporate compliance programs – how about those developed under SOX-- or that the SEC would be inundated with spurious or other leads that are not "high quality," requiring the limited enforcement staff to triage tips.) As a result, the rules attempt to provide balance. For example, the rules propose that, among the criteria for determining the amount of an award, the SEC would take into account whether the matter was first reported internally; however, internal reporting would not be a predicate to making a whistleblower claim. Does this mean that companies will now offer their own financial incentives? Will there be a new wave of lawyers making their livings from these procedures, as with Section 16 and Prop 65?

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