WHISTLEBLOWER INCENTIVES AND PROTECTIONS FOR EMPLOYEES THAT BLOW THE WHISTLE ON SECURITIES VIOLATIONS: The Dodd-Frank Wall Street Reform and Consumer Protection Act
On May 25, 2011 The Securities and Exchange Commission (“SEC”) adopted final rules and forms to implement Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) entitled “Securities Whistleblower Incentives and Protection.” The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010 (“Dodd-Frank”), established a whistleblower program that requires the SEC Commission to pay an award, under regulations prescribed by the Commission and subject to certain limitations, to eligible whistleblowers who voluntarily provide the Commission 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. Dodd-Frank also prohibits retaliation by employers against individuals who provide the SEC Commission with information about possible securities violations.
Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter “the Act”) implements both safeguards, and a potential reward, for whistleblowers. The Act states that whistleblowers must receive protection from employer retaliation, and encourages a potential monetary reward for their helpfulness. The Securities and Exchange Commission (SEC) has finalized rules to carry out the Act. This article will summarize the new regulations.
Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
This Section requires the SEC to award those whistleblowers who provide information on a violation of a federal securities law, but only if the violation results in a monetary sanction over $1 million dollars. The whistleblower will then be awarded with a monetary amount ranging between 10-30% of the sanction imposed by the SEC.1
A “whistleblower” is seen as a person who voluntarily provides original information regarding a violation of a federal securities law.2 Specifically, a person needs to reveal information per their own will, not due to a “request, inquiry, or demand.”3 The information revealed must be information from one’s independent knowledge and thinking, not from accusations heard in “in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation.”4
Not anyone, however, will be considered a whistleblower. Those who are members, officers, or employees of regulatory agencies, self-regulatory organizations, law enforcement organizations, The Department of Justice, and the Public Company Accounting Oversight Board will not be considered as whistleblowers.5
Protections Provided to Whistleblowers per the Act
The Act aims to provide protection to all whistleblowers from employer retaliation, even if the whistleblower’s information does not result in a monetary sanction exceeding $1 million dollars, or does not lead to a successful prosecution. The Act allows for a whistleblower to bring an action in federal court, and seek remedies including, but not limited to, reinstatement, double back pay with interest, reimbursement of litigation cost, expert witness fees, and reasonable attorney’s fees6. The action however, must be taken within six years from the time the retaliation occurred or no more than three years after the facts are known or reasonably should have been known to the employee.7
An additional protection is that the Act allows for the identity of the whistleblower to be protected. Whistleblowers can provide information anonymously through their attorneys, with the attorney certifying that he or she has verified the identity of the whistleblower. A whistleblower will only be required to reveal his or her identity to receive payment.8
The Award: Details and Limitations
Although the Act encourages an award for whistleblowers, there are limitations. First off, timing is of the essence. If the whistleblower submits information to a corporation’s internal compliance program, this information must be submitted to the SEC within 120 days from the date the information was reported to the corporation.9
Secondly, the information submitted by the whistleblower must be under penalty of perjury. Such a requirement ensures that information is truthful and given with the intention of ending injustice in a corporate environment.
An additional requirement is that the SEC will not award those who obtained information as a result of the authority granted per their occupation10. For example, information acquired per an audit of a corporation’s financial statements, communication governed by the attorney-client privilege, or as an accountant is information that will not be awarded. This is so because such information is either confidential, or obtained through the course of one’s occupational duties.
Lastly, limitations exist in determining the exact amount of the award. Criteria considered include the significance of the information, the whistleblower’s assistance, the interest in law enforcement, compliance with a corporation’s internal compliance system, and whether or not the whistleblower is convicted of a criminal violation11. Those convicted of a criminal violation related to the reported violation will not be given an award12.
The SEC’s Perspective on Whistleblowers and the Act
Although the SEC has been very supportive of implementing the Act’s requirements, the SEC still encourages whistleblowers to first submit information to their employer. Relying on one’s internal corporate compliance structure will aid corporations in becoming aware of violations and/or employees’ awareness of these violations. This in turn will aid corporations in daily functioning and compliance with necessary federal securities regulations. Although the SEC honors and complies with the regulations of Section 922, it does not want to take away from the significant role of corporations and their respective corporate compliance programs.
The final report can be read as follows: Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934
2 Rule § 21F(a)(6), and 21F-4(a)(1).
3 Rule 21F-4(a)(1).
4 § 21F(a)(3).
5 Rule §21(c)(2)(A).
6 Rule §922 (h).
7 Rule §922 (h).
8 Rule §21F(h)(2)(A).
9 Rule Rule 21-4(b)(7).
10 Rule 21F-4(b)(4)(iii)(A)-(D).
11 Rule 21F-6(b)(3)..
12 Rule 21F-15.