SEC proposes regulations to implement Dodd-Frank whistleblower provision

by Ben Vernia | November 13th, 2010

On November 3, the Securities and Exchange Commission “proposed rules to reward whistleblowers who provide the agency with high-quality tips,” implementing section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The SEC wrote, in an extensive explanation of the proposed regulations, that it was attempting to balance competing interests, foremost of which is the potential for whistleblower awards to “reduce to effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the federal securities laws.”

In addition, the SEC expressed concern that persons with legal obligations to address noncompliance (such as attorneys, auditors, or compliance personnel) not be encouraged to submit whistleblower claims. The agency also wrote that it wished to encourage high-quality tips, and to discourage false reports of wrongdoing.

Among the proposed rules’ features:

  • Whistleblowers must be “natural persons,” and not corporations or other entities (by contrast, there have been numerous significant False Claims Act settlements with corporate relators)
  • Information must be voluntarily submitted, which the SEC defined as prior to a formal or informal government request for information, and independent of a legal obligation to report wrongdoing.
  • The information must be “original” – i.e., from the whistleblower’s independent knowledge or analysis, unknown by the SEC from another source, and not exclusively derived from public disclosures.

The SEC proposed a two-step process for tip submissions: a standard form or online submission of the tip, followed by a form signed under penalty of perjury submitted to the agency’s Whistleblower Office. The proposed regulations identify criteria to be used in determining the amount to award whistleblowers (the statute provides between 10 and 30% of the monetary penalty obtained by the SEC or in a “related action” by another agency).

Comment: Throughout its comments to the proposed rules, the SEC expressed concern and uncertainty regarding the wisdom of some of its proposed choices, and the Commission made 41 specific, and two general requests for comments. The agency clearly recognizes the need to address up-front many of the issues which experience with past whistleblower statutes – specifically the False Claims Act – has identified as critical.

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