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Dodd-Frank Corporate Whistleblower Protection

The Securities and Exchange Commission (“SEC”), via its whistleblower program,[1] awards whistleblowers who report securities-law violations that lead to SEC enforcement actions resulting in more than $1 million in sanctions. See 15 U.S.C. § 78u-6(b)(1). Since the program was implemented in 2011,[2] the SEC has awarded more than $150 million to whistleblowers.

The Dodd-Frank Act includes an anti-retaliation provision that prohibits retaliation for reporting potential securities violations to the SEC.  Pursuant to the Supreme Court’s decision in Digital Realtythe whistleblower protection provision of the Dodd-Frank Act also protects internal whistleblowing where the whistleblower has also made a disclosure to the SEC.

For more information about Dodd-Frank whistleblower incentives and protections, call our SEC whistleblower attorneys at 202-262-8959.

See our article: Dodd-Frank Whistleblower Protection Post-Digital Realty.

Program Requirements

The SEC awards whistleblowers who (1) “voluntarily” provide (2) “original information” that (3) “led to the successful enforcement” (4) of a “covered judicial or administrative action, or related action.” 15 U.S.C. § 78u-6(b)(1).

  • Information is voluntarily provided if the whistleblower has no duty to report it but does so anyway “before a request, inquiry, or demand that relates to the subject matter of [the] submission is directed to [the whistleblower] or anyone representing [the whistleblower] (such as an attorney).” 17 C.F.R. § 240.21F-4(a).
  • A tip constitutes “original information” if it meets three criteria: (1) the information must come from the whistleblower’s “independent knowledge or analysis”; (2) the SEC must not have received the information from any other source; and (3) the information must not be “exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media.” 15 U.S.C. § 78u-6(a)(3). The second and third requirements do not apply where the whistleblower is the original source of the information. 15 U.S.C. § 78u-6(a)(3)(B)–(C).
    • There is a 120-day lookback period—i.e., where an individual reports his or her information internally and then, within 120 days, reports that information to the SEC, the SEC will treat that information as if it had been reported to the SEC on the date of the internal report. 17 C.F.R. § 240.21F-4(c)(3).
  • There are two standards for determining whether information “led to the successful enforcement” of an action: one applies to information about conduct not under investigation, and another applies to information about conduct already under investigation.
    • Information regarding conduct not under investigation leads to a successful enforcement where it (1) causes the SEC “to commence an examination, open an investigation, reopen an investigation that the Commission had closed, or to inquire concerning different conduct as part of a current examination or investigation,” and (2) the SEC brings a successful action “based in whole or in part on the conduct identified in the original information.” 17 C.F.R. § 240.21F-4(c)(1).
    • Information about conduct already under investigation leads to a successful enforcement where it “significantly contributed” to the action’s success. 17 C.F.R. § 240.21F-4(c)(2). Factors the SEC considers in applying this standard include whether, as a result of the information, the SEC was able to accomplish its successful enforcement action “in significantly less time or with significantly fewer resources,” bring other successful claims, or bring successful actions against others. Exchange Act Release No. 34-64545, 76 Fed. Reg. 34,300, 34,325.
  • A “covered judicial or administrative action” is any SEC action that results in monetary sanctions of more than $1 million. 15 U.S.C. § 78u-6(a)(1). A “related action” is any action that is based on the same information reported to the SEC and is brought by “(I) the Attorney General of the United States; (II) an appropriate regulatory authority; (III) a self-regulatory organization; [or] (IV) a State attorney general in connection with any criminal investigation.” 15 U.S.C. § 78u-6(a)(5), (h)(2)(D)(i)(I)–(IV).

Program Benefits

The SEC whistleblower program provides qualifying whistleblowers with (A) monetary rewards, (B) protection against employer retaliation, and (C) confidentiality. 15 U.S.C. § 78u-6(b)(1), (h)(1)(A), (h)(2)(A).

A.   Monetary Rewards

Where all requirements are met, the whistleblower will receive an award of between 10% and 30% of the monetary sanctions collected as a result of the tip. 15 U.S.C. § 78u-6(b)(1). The determination of whether to make an award is subject to appeal. 15 U.S.C. § 78u-6(f). The amount awarded is at the SEC’s discretion. 15 U.S.C. § 78u-6(c)(1)(A). The SEC takes the following into consideration in determining the amount of the award:

(I) the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action;

(II) the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in a covered judicial or administrative action;

(III) the programmatic interest of the Commission in deterring violations of the securities laws by making awards to whistleblowers who provide information that lead to the successful enforcement of such laws; and

(IV) such additional relevant factors as the Commission may establish by rule or regulation.

15 U.S.C. § 78u-6(c)(1)(B)(i). However, there are several categorical exclusions.[3]

B. Anti-Retaliation Provision

Dodd-Frank proscribes retaliation against whistleblowers:

“No 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—

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission”.

15 U.S.C. § 78u-6(h)(1)(A).

To qualify as a covered or protected whistleblower, the individual must have reported a potential securities violation to the SEC.  Once the individual qualifies as a whistleblower, internal disclosures to the employer are also protected.

Click here to learn more about anti-retaliation protections for SEC whistleblowers under the Dodd-Frank Act and Sarbanes-Oxley Act.

C. Confidentiality

Generally, the SEC is prohibited from disclosing “any information, including information provided by a whistleblower to the Commission, which could reasonably be expected to reveal the identity of a whistleblower.” 15 U.S.C. § 78u-6(h)(2)(A). Under exceptional circumstances, however, the SEC may disclose this information.[6] Furthermore, with an attorney, whistleblowers can file anonymous reports and remain anonymous, even to the SEC, until an award is to be paid. 17 C.F.R. § 240.21F-7(b).

Impact of SEC Whistleblower Program on SEC Enforcement

On May 13, 2016, the SEC announced a $3.5 million whistleblower award for a tip that “bolstered an ongoing investigation.” Andrew Ceresney, director of the SEC’s Division of Enforcement, was quoted as saying, “Whistleblowers can receive an award not only when their tip initiates an investigation, but also when they provide new information or documentation that advances an existing inquiry.” Mr. Ceresney added that the award-winning tip “increased [the SEC’s] leverage during settlement negotiations.”

As noted above, the plain text of Dodd-Frank Section 922 specifies that, for a whistleblower to be eligible for an award, the information furnished must have “led to the successful enforcement” of an action. 15 U.S.C. § 78u-6(b)(1). Also as noted above, however, the SEC interpreted this requirement as being met where a whistleblower’s tip “significantly contributed” to the success of an ongoing action. Therefore, the SEC appears to have complied with its own guidance in making this award.

Based on Mr. Ceresney’s statement, it seems that the enforcement had already reached settlement negotiations by the time the award-winning tip arrived. So, the question left open is to what degree a tip must increase the leverage of the SEC in settlement negotiations in order for that tip to be said to have “significantly contributed” to the success of the enforcement action.

SEC Whistleblower Attorneys

If you have information that you would like to report to the SEC Whistleblower Office, contact an experienced SEC whistleblower attorney at Zuckerman Law for a free, confidential consultation.  Click here or call us today at 202-262-8959.

For more information about the SEC Whistleblower Program, the whistleblower attorneys at Zuckerman Law have authored several articles detailing SEC whistleblower incentives and protections, including:

Footnotes

[1] The Commodity Futures Trading Commission and Internal Revenue Service also have whistleblower programs. See U.S. Commodity Futures Trading Commission Whistleblower Program, https://www.whistleblower.gov; IRS Whistleblower – Informant Award, https://www.irs.gov/uac/whistleblower-informant-award.

 

[2] Dodd-Frank Section 922, passed in 2010, added the modern whistleblower program to the Securities Exchange Act of 1934. 15 U.S.C. § 78u-6. The SEC implemented the program in 2011 with the issuance of final rules. 17 C.F.R. §§ 240.21F-1 et seq.

 

[3] Awards are not made—

(A) to any whistleblower who is, or was at the time the whistleblower acquired the original information submitted to the commission, a member, officer, or employee of—

(i) an appropriate regulatory agency;

(ii) the Department of Justice;

(iii) a self-regulatory organization;

(iv) the Public Company Accounting Oversight Board; or

(v) a law enforcement organization;

(B) to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section;

(C) to any whistleblower who gains the information through the performance of an audit of financial statements required under the securities laws and for whom such submission would be contrary to the requirements of section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1); or

(D) to any whistleblower who fails to submit information to the Commission in such form as the Commission may, by rule, require.

15 U.S.C. § 78u-6(c)(2).

 

[4] Rule 21F-9(a) states the following:

To be considered a whistleblower under Section 21F of the Exchange Act (15 U.S.C. 78u-6(h)), you must submit your information about a possible securities law violation by either of these methods:

(1) Online, through the Commission’s Web site located at http://www.sec.gov; or

(2) By mailing or faxing a Form TCR (Tip, Complaint or Referral) (referenced in § 249.1800 of this chapter) to the SEC Office of the Whistleblower, 100 F Street NE., Washington, DC 20549-5631, Fax (703) 813-9322.

17 C.F.R. § 240.21F-9(a).

 

[5] Rule 21F-2(b)(1) states the following:

For purposes of the anti-retaliation protections afforded by Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u–6(h)(1)), you are a whistleblower if:

(i) You possess a reasonable belief that the information you are providing relates to a possible securities law violation (or, where applicable, to a possible violation of the provisions set forth in 18 U.S.C. 1514A(a)) that has occurred, is ongoing, or is about to occur, and;

(ii) You provide that information in a manner described in Section 21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u–6(h)(1)(A)).

(iii) The anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.

17 C.F.R. § 240.21F-2(b)(1).

 

[6] The SEC may disclose information that reasonably likely would reveal the whistleblower’s identity only under these circumstances:

(1) When disclosure is required to a defendant or respondent in connection with a Federal court or administrative action that the Commission files or in another public action or proceeding that is filed by an authority to which we provide the information, as described below;

(2) When the Commission determines that it is necessary to accomplish the purposes of the Exchange Act (15 U.S.C. 78a) and to protect investors, it may provide your information to the Department of Justice, an appropriate regulatory authority, a self regulatory organization, a state attorney general in connection with a criminal investigation, any appropriate state regulatory authority, the Public Company Accounting Oversight Board, or foreign securities and law enforcement authorities. Each of these entities other than foreign securities and law enforcement authorities is subject to the confidentiality requirements set forth in Section 21F(h) of the Exchange Act (15 U.S.C. 78u-6(h)). The Commission will determine what assurances of confidentiality it deems appropriate in providing such information to foreign securities and law enforcement authorities.

(3) The Commission may make disclosures in accordance with the Privacy Act of 1974 (5 U.S.C. 552a).

17 C.F.R. § 240.21F-7(a).

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