Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) has attempted to strengthen enforcement efforts by adding section 21F to the Securities Exchange Act of 1934.[1] The new section is entitled “Securities Whistleblower Incentives and Protections.”[2] In order to prevent the type of fraud that contributed to the financial crisis, the Dodd-Frank Act implements rules directed at encouraging employee reporting of questionable conduct. To promote employee disclosure a bounty system has been enacted whereby whistleblowers could receive an award between 10% and 30% of monetary sanctions collected by the SEC or other regulatory authority so long as such sanctions total $1 million or more.[3] Additionally, significant efforts have been undertaken to ensure that a whistleblower’s identity is fully protected, extending even so far as to preclude the release of information in response to a Freedom of Information Act request.[4]
Moreover, employees are also not required to seek recourse through internal compliance systems prior to filing a complaint with the SEC, however, a whistleblower can potentially receive a more lucrative award if he/she first utilized internal resources. In order to encourage internal reporting, the rule provides for a 120-day “lookback period” whereby a whistleblower may within 120 days of utilizing internal compliance mechanisms report to the SEC and maintain his or her ability to collect an award.[5] Upon discovery of a meritorious claim, the SEC takes into consideration the nature of the compliance program implemented by the company when assessing potential penalties.[6]
Most recently, the SEC issued its first bounty award. A whistleblower provided information that resulted in the discovery of a multi-million dollar fraud.[7] On August 21, 2012, the court ordered more than $1 million in sanctions and has collected $150,000 thus far. The whistleblower, who do not wish to be identified, received nearly $50,000 from the amount that had been collected.[8] Sean McKessy, Chief of the SEC’s Whistleblower Office touted the success of the program indicating that about eight tips a day are received. He further added “[t]he fact that we made the first payment after just one year of operation shows that we are open for business and ready to pay people who bring us good, timely information.”[9]
However, business groups are concerned that the bounty award may create a disincentive to report misconduct upon initial discovery. Employees may wait until the circumstances escalate to a sufficiently severe level so that the potential reward is even more lucrative. Companies can avoid whistleblower claims by enacting robust internal compliance procedures. As indicated by SEC Chairman Schapiro employees are encouraged to report internally as they stand to receive a higher bounty in cases in which internal procedures were utilized.[10]
- [1] U.S. Securities and Exchange Commission: Annual Report on the Dodd-Frank Whistleblower Program (2011), available at, http://www.sec.gov/about/offices/owb/whistleblower-annual-report-2011.pdf ↩
- [2]Id.] ↩
- [3]Employers Complain New SEC Rules Target Them, Long Island Business (Aug. 25, 2011). ↩
- [4]Exposing Wrong Doing, 40 Pension and Investment 10 (Mar. 19, 2012). ↩
- [5]Employers Complain New SEC Rules Target Them, Long Island Business (Aug. 25, 2011). ↩
- [6]Id. ↩
- [7] Press Release, SEC Issues First Whistleblower Program Award (Aug. 21, 2012) available at http://www.sec.gov/news/press/2012/2012-162.htm. ↩
- [8]Id. ↩
- [9]Id. ↩
- [10] Mary L. Schapiro, Chairman, SEC, Opening Statement at SEC Open Meeting: Item 2 — Whistleblower Program (May 25, 2011) available at http://www.sec.gov/news/speech/2011/spch052511mls-item2.htm. ↩