On May 25, 2011, the Securities and Exchange Commission (the “Commission”) adopted rules and forms to implement Section 21F of the Exchange Act, "Securities Whistleblower Incentives and Protection," which was added by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This advisory includes a brief summary of the rules as proposed (for a full description of the proposed rules, please see our November 10, 2010 client alert available here), as well as the key differences, modifications and clarifications between the proposed and final rules.
As proposed, subject to certain requirements, "the Commission will pay an award or awards to one or more whistleblowers who: (1) voluntarily provide the Commission (2) with original information (3) that leads to the successful enforcement by the Commission of a federal court or administrative action (4) in which the Commission obtains monetary sanctions totaling more than $1,000,000." The Commission expanded on the component requirements as follows:
- Voluntarily provide the Commission… — In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information to the Commission before the Commission, certain other government agencies, a self-regulatory organization or the Public Company Accounting Oversight Board asks for the information from the individual or his employer (unless the employer fails to provide the individual’s documents).
- …with original information — Original information must be based upon the whistleblower's independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources.
- …that leads to the successful enforcement by the Commission of a federal court or administrative action — A whistleblower's information can be deemed to have led to successful enforcement in two circumstances: (1) if the information results in a new or reopened examination or investigation being opened and significantly contributes to the success of a resulting enforcement action, or (2) if the conduct was already under investigation when the information is submitted, but the information significantly contributed to the success of the action and would not have otherwise been obtained.
- …in which the SEC obtains monetary sanctions totaling more than $1 million.
The final rules were adopted substantially as originally proposed, with certain modifications. The key modifications from the rules as originally proposed include:
- The categories of persons who could act as whistleblowers was revised to potentially include auditors and internal compliance personnel, where they have a reasonable basis to believe that disclosure is necessary to prevent conduct likely to cause substantial injury to the financial interest or property of the company or its investors, or if there was a reasonable basis to believe that the company was impeding an investigation. However, as a general matter, information provided by a company’s officers or directors which is derived from the compliance process or information provided by internal compliance and internal audit personnel, information from attorneys subject to the attorney-client privilege and information gained in the course of an accountant's engagement will continue to be excluded.
- The reporting procedures were streamlined so that whistleblowers need only complete one form (the proposed rules required the completion of two forms).
- Regardless of whether a whistleblower's information leads to a successful prosecution, the whistleblower(s) will be protected from retaliation even if their information relates only to a possible violation of the rules.
- Incentives for internal reporting have been increased: (i) the "lookback" period for the whistleblower to report a possible securities violation to the Commission following his or her reporting through the company’s internal process was lengthened to 120 days (from 90 days), (ii) the Commission may (but is not required to) consider a whistleblower's participation in or interference with a company's internal compliance processes when determining the amount of an award and (iii) the Commission will give credit to the whistleblower when it is the whistleblower’s employer that passes the information along to the Commission. This permits individuals to receive monetary awards even if they report solely through internal procedures.
- In deciding the amount of awards, the Commission will consider the timeliness and quality of the whistleblower’s assistance.
In implementing the new rules, the Commission sought to address concerns that the new whistleblower provisions will create a “race to the bank,” in which employees circumvent company policies and go directly to the Commission in the hopes of obtaining a large award. Only time will tell whether the final rules effectively address these concerns.
Companies should be aware of the new whistleblower rules, and re-evaluate their own processes and procedures in light of the new rules, including the following:
- Ensure that your company implements and enforces policies and procedures which adequately prevent securities fraud and securities violations to begin with.
- Provide employees with well-defined procedures for reporting perceived problems internally, and ensure that such procedures are effectively communicated to employees.
- Consider drafting internal incentives which encourage employees to follow internal company procedures for reporting violations.
- Thoroughly train employees responsible for investigating reported violations as to how to resolve issues promptly and effectively.
- Educate company officers and directors of the potential consequences of any retaliation for employee whistleblowers which report potential violations.
For questions or more information, contact one of the members of the firm's Securities/SEC Practice Group, including:
Lewis U. Davis, Jr. — 412 562 8953; firstname.lastname@example.org
Hannah T. Frank — 412 562 1546; email@example.com
Jeremiah G. Garvey — 412 562 8811; firstname.lastname@example.org
Jennifer R. Minter — 412 562 8444; email@example.com
Brian S. North — 215 665 3828; firstname.lastname@example.org
Brian S. Novosel — 412 562 5266; email@example.com