New SEC Whistleblower Program Effective Today

By Cydney Posner

The SEC announced today that its whistleblower program, mandated by Dodd-Frank, has now officially become effective.  (See my articles from 5/25/11 and 6/22/11.) Today, the SEC also launched a new webpage at 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 FAQs. Dodd-Frank directs the SEC to pay awards, subject to certain limitations and conditions, to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to a successful enforcement of a covered judicial or administrative action or a related action that results in monetary sanctions exceeding $1 million. The awards are to be between 10% and 30% of the total monetary sanctions collected. According to The New York Times, the SEC previously limited its whistleblower program to insider trading cases and limited awards to 10% of the penalties.

The SEC's original proposal to implement Dodd-Frank's whistleblower provisions was very controversial among legislators and the business community. The most contentious issue was the interplay of the whistleblower program and companies' internal compliance programs – more specifically, whether the SEC should mandate internal compliance reporting, prior to or contemporaneously with SEC reporting, as a prerequisite to eligibility for a whistleblower bounty. Critics charged that mandatory internal reporting would deter many whistleblowers, while advocates contended that allowing whistleblowers to bypass companies' internal compliance programs would have a corrosive effect on these programs and undermine companies' ability to identify and promptly remediate fraud or other wrongdoing. At the end of the day, the SEC was concerned that employees could be hampered in internal reporting in some instances -- for example, if management were involved – and did not mandate internal reporting as a prerequisite to awards. The NYT reports that, once the SEC adopted final rules in May, Sean McKessy, Chief of the SEC's Office of the Whistleblower, "began a charm campaign to tame some fierce opposition from corporations and their lawyers. He joined some 10 panel discussions and Webinars about the topic and huddled with various lawyers, ultimately reaching more than 1,000 people, he said."

To the NYT, the SEC "has already received an uptick in quality tips, including lengthy letters laying our elaborate schemes. On Day 1, the office has seven employees to review the claims." The SEC noted in its press release that the program is also expected to provide incentives for potential whistleblowers to come forward sooner with timely information and to help extend the resources of the SEC (apparently, there are fewer than 4,000 employees at the SEC to regulate more than 35,000 entities). New anti-retaliation provisions area also intended to encourage employees to come forward, while (according to the SEC at least) the program also provides significant incentives for employees to report any wrongdoing to their companies' internal compliance departments before coming to the SEC. As a result, companies will be encouraged to maintain "credible, effective" compliance programs.

According to thecorporatecounsel.net blog, and consistent with the message from our securities litigation colleagues, the hot buttons for whistleblowers are most likely to be Foreign Corrupt Practices Act violations. These are generally high ticket claims, involving the types of activities about which individuals within an organization have direct knowledge. The blog notes that, as widely feared, the " opportunities are so great that U.S.-based plaintiffs' lawyers are ramping up their advertising throughout Europe, Asia and Africa in order to bring SEC whistleblowers out of the woodwork. Some plaintiffs' lawyers have set up websites or retooled their websites to become SEC whistleblower lawyers…."

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