Press Releases & Advisories
03 February 2011
Advisory: Dodd-Frank Act: Financial Incentives and Protection for Securities Whistleblowers
Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) on July 21, 2010. Section 21F of the Act – entitled “Securities Whistleblower Incentives and Protection” – establishes substantial financial incentives and protection for securities fraud whistleblowers. The Securities and Exchange Commission (“SEC”) recently published proposed rules to implement this provision, suggesting that corporate compliance and human resources officers may need to modify existing whistleblower policies in the near future.
The Dodd-Frank Act
Whistleblower Financial Incentives. Under the Act, a “whistleblower” is an individual who provides information relating to a violation of the securities laws to the SEC. The SEC must pay an award of between 10% and 30% of the monetary sanctions collected to a whistleblower who “voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action.” However, a whistleblower may only collect an award if a judicial or administrative action brought by the SEC under the securities laws results in monetary sanctions exceeding $1,000,000. A whistleblower is not entitled to an award if he or she “knowingly and willfully” makes a false statement or representation, or knowingly uses a false writing or document.
Whistleblower Protection. The Act also protects whistleblowers from retaliation by their employers. Specifically, the Act provides that “[n]o employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower,” including, among other things, providing information to the SEC, and initiating, testifying in, or assisting in any SEC investigation or judicial action.
The Act establishes a federal cause of action for a whistleblower who alleges discharge or other retaliation. An individual who prevails in such an action is entitled to reinstatement, two times the back pay otherwise owed to the individual with interest, compensation for litigation costs, and reasonable attorneys’ fees. An action for retaliation must be brought within six years of the date of the violation or within three years after the date “when facts material to the right of action are known or reasonably should have been known by the employee” alleging retaliation. However, no action may be brought more than ten years after the date on which the retaliation occurs.
The proposed rules to implement the whistleblower provisions of the Act, which collectively will be known as “Regulation 21F,” provide more detailed guidance regarding how the SEC intends to exercise its new authority under Section 21F to provide financial incentives and protection to whistleblowers.
Proposed Regulation 21F defines and expands several key terms of the Act.
Whistleblower. A “whistleblower” is defined as a natural person who “alone or jointly with others,” provides information to the Commission “relating to a potential violation of the securities laws.” This definition clarifies that the anti-retaliatory provisions of the Dodd-Frank Act apply even if the SEC ultimately concludes that the individual or entity in question did not in fact violate
the securities laws.
Voluntary Submission. Proposed Regulation 21F defines “voluntary” submissions of information to the SEC to include submissions made before receiving “any request, inquiry, or demand from the Commission, Congress, any other federal, state, or local authority, any self-regulatory organization, or the Public Company Accounting Oversight Board.” Voluntary submissions do not include submissions made by individuals who have an independent duty to report violations of the securities laws.
Independent Knowledge. To be eligible for a financial award, a whistleblower must provide the SEC with “original information” that, among other things, is derived from “independent knowledge.” A whistleblower’s knowledge is “independent” within the meaning of proposed Regulation 21F if it is not obtained from publicly available sources. Independent knowledge,
however, does not need to be firsthand. Instead, it may be obtained from the whistleblower’sexperiences, observations, or communications, subject to certain exceptions.
The following are defined by statute not to satisfy the “independent knowledge” requirement:
Attorneys who learn information regarding a client’s potential violation of the securities laws through privileged communication with a client.
Attorneys who learn information regarding any other entity’s potential securities laws violations (for example, through discovery) while representing a client.
Persons who obtain information through the performance of an engagement required under the securities laws by an independent public accountant.
Persons with legal, compliance, audit, supervisory, or governance responsibilities for an entity who receive information about potential violations. This exception becomes inapplicable, however, if the entity fails to disclose the information to the SEC within a reasonable time or if the entity proceeds in bad faith.
Persons who obtain information from or through an entity’s legal, compliance, audit, or similar functions or processes for identifying, reporting, and addressing potential noncompliance with applicable law. This exception also becomes inapplicable if the entity fails to disclose the information to the SEC within a reasonable time or if the entity proceeds in bad faith.
Retaliation Regulations. The SEC has not yet issued proposed regulations regarding the anti-retaliation provisions of the Act.
Internal Compliance. The SEC’s proposed rules do not require a potential whistleblower to use a company’s internal reporting or reporting procedures before going to the SEC. The SEC, however, recognizing the importance of internal programs, proposed steps to encourage employees to report potential violations internally first. These proposed rules include giving a whistleblower credit for using the company’s internal processes when determining her award and considering any information submitted to the SEC “voluntarily” even if the whistleblower was questioned by her employer’s counsel, audit or compliance staff.
Regardless of the outcome of the SEC rulemaking, Section 21F will have significant effects on companies’ internal compliance and human resources procedures. Specifically, companies’ internal policies and procedures could come under detailed review as a result of a whistleblower complaint. Companies should review their current internal policies and procedures to ensure that they are designed to encourage employee reporting and to appropriately handle any reported violations. Companies should also carefully review these policies and procedures to ensure that they have anti-retaliation policies in place.
Please contact Tom Connolly, Patrick O’Donnell or Amy Richardson at Wiltshire & Grannis LLP for additional information or to discuss specific concerns.