SEC Proposes Whistleblower Regulations

SEC Proposes New Whistleblower Program Under Dodd-Frank Act (Press Release No. 2010-213; November 3, 2010. Section 922 of the Dodd Frank bill gives the SEC the authority to make awards to whistleblowers under regulations prescribed by the SEC of  not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions. See proposed rule and soon comments here under 34-63237.

Under the proposed rules, a whistleblower is a person who provides information to the SEC relating to a potential violation of the securities laws. To be considered for an award, a whistleblower must

Voluntarily provide the SEC …

• In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it.

… 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 SEC 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 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 was submitted, but the information is essential to the success of the action and would not have otherwise been obtained.

I understand that some in the business community had asked for much more restrictive rules.

1. Require informants to have first told the company hotline of the problem before the SEC;
2. Once the employee has provided the SEC information, they should be prohibited from providing any further information within the company; and
3. Prohibit a fiduciary such as a director from informing the SEC of fraudulent behavior.

Basically, they were telling the SEC that if employees have information related to a fraud being perpetrated on investors, that the person should be silenced. Some hotlines link back to the company’s general counsel, the very person responsible for defending the company.  Will they really protect innocent employees who report a potential fraudulent activity?

Once information has been provided, agencies might want the employee to wear a wire tap to gather additional information. Will this be prohibited?

If a director, who has a fiduciary obligation to investors, is aware of fraud, why is that something that should be kept from the SEC and stockholders?

Yes, these whistleblower regulations will make it difficult to operate meaningful company hotline programs, which aren’t going to offer anywhere near the monetary rewards of the SEC program. I’m not sure what the answer is, but it is not caving to suggestions like those listed above. Shareowners should carefully review the proposed regulations and should monitor comments as they are submitted.

For more information, see SEC Proposes Rules For Whistleblower Program (WSJ, 11/3/2010).