June 09, 2011

US: SEC Adopts Whistleblower Rules

Fulbright Briefing
Jason Weeden and Harva R. Dockery

June 8, 2011


The Securities and Exchange Commission (the “SEC”) has adopted the final rules implementing the whistleblower program established by the Dodd-Frank Wall Street Reform and Consumer Protection Act under a new Section 21F of the Securities Exchange Act of 1934 (the “Exchange Act”). The final rules, which differ in many respects from the rules proposed by the SEC in late 2010, go into effect on August 12, 2011. Under the new rules, persons (whistleblowers) who provide information to the SEC about a violation of securities law may be eligible to receive between 10% and 30% of amounts that the SEC recovers through enforcement actions resulting in monetary sanctions of more than $1 million. The new rules are codified under a new Regulation 21F.

Who can have whistleblower claims made against them?

Any person or entity that can violate the United States federal securities laws could be the subject of whistleblower claims regarding its alleged violations. This includes not only public companies but also private companies subject to certain provisions of the federal securities laws (for example, the anti-bribery provisions of the Foreign Corrupt Practices Act).

Who can be eligible for a whistleblower award?

The whistleblower must be an individual and not a company or another entity.[1] The whistleblower cannot be, or have been at the time the whistleblower acquired the information, a member, officer or employee of (1) the SEC (or the family member of or someone living with a member or employee of the SEC), Department of Justice, certain regulatory agencies, a self-regulatory organization, the Public Company Accounting Oversight Board or any law enforcement organization or (2) a foreign government or any other foreign financial regulatory authority.[2]

The information must not have been obtained because the individual was: (1) an officer, director, trustee or partner of an entity and another person informed the individual of allegations of misconduct, or the individual learned the information in connection with the entity’s processes for identifying, reporting and addressing possible violations of law, (2) an employee whose principal duties involve compliance or internal audit responsibilities, or was employed by or otherwise associated with a firm retained to perform compliance or internal audit functions for an entity, (3) employed by or otherwise associated with a firm retained to conduct an inquiry or investigation into possible violations of law or (4) an employee of, or other person associated with, a public accounting firm, if the individual obtained the information through the performance of an engagement required of an independent public accountant under the federal securities laws, and that information related to a violation by the engagement client or the client’s directors, officers or other employees.[3] The following are exceptions to the limitations described in this paragraph: (A) the individual has a reasonable basis to believe that disclosure of the information to the SEC is necessary to prevent the relevant entity from engaging in conduct that is likely to cause substantial injury to the financial interest or property of the entity or investors; (B) the individual has a reasonable basis to believe that the relevant entity is engaging in conduct that will impede an investigation of the misconduct; or (C) at least 120 days have elapsed since the individual provided the information to the relevant entity’s audit committee, chief legal officer or chief compliance officer (or their equivalents) or the individual’s supervisor, or since the individual received the information, if the individual received it under circumstances indicating that the entity’s audit committee, chief legal officer or chief compliance officer (or their equivalents) or the individual’s supervisor was already aware of the information.[4]

The information must not have been obtained through an audit of a company’s financial statements, if making a whistleblower submission would be contrary to requirements of Section 10A of the Exchange Act (requiring certain procedures in connection with audits).[5] The information must not have been obtained through a communication that was subject to the attorney-client privilege (subject to limited exceptions) or in connection with the legal representation of a client on whose behalf the whistleblower or the whistleblower’s employer is providing services (subject to limited exceptions).[6]

The information must not have been obtained by a means or in a manner that is determined by a United States court to violate applicable federal or state criminal law.[7] The whistleblower must not knowingly and willfully make any false, fictitious or fraudulent statement or representation with intent to mislead or otherwise hinder the SEC or another authority.[8] The whistleblower must not be convicted of a criminal violation that is related to the action.[9] In addition, in determining whether the required $1 million threshold has been satisfied, the SEC will not take into account any monetary sanctions that the whistleblower is ordered to pay or that are ordered against any entity whose liability is based substantially on conduct that the whistleblower directed, planned or initiated.[10]

What kind of information must it be?

The information must relate to a possible violation of the federal securities laws (including any rules or regulations thereunder) that has occurred, is ongoing or is about to occur.[11] The information must be “original” information, which primarily means that the information was derived from the whistleblower’s independent knowledge or analysis and was not publicly available or already known to the SEC.[12]

How must the information be provided?

The information must be provided voluntarily, which primarily means that the information was provided before a request was directed to the whistleblower by the SEC or certain other authorities.[13]

The information must be provided to the SEC following the procedures described in the rules, unless the SEC waives these procedures based on a showing of extraordinary circumstances.[14] The information must be provided by the whistleblower (or anonymously through an attorney) either through the SEC’s website or by mailing or faxing a Form TCR.[15]

The SEC may also require that the whistleblower provide certain additional information, which might include explanations, additional information in the whistleblower’s possession and other assistance.[16]

What must be the outcome of providing the information?

The information must lead to the successful enforcement by the SEC of a federal court or administrative action (or by certain other authorities of certain related judicial or administrative actions) that results in the SEC obtaining monetary sanctions totaling more than $1 million.[17] The rules provide additional detail on when a whistleblower’s information will be considered to have led to successful enforcement, what an “action” consists of and how to determine whether the $1 million threshold has been satisfied.[18]

How is the amount of the whistleblower’s award determined?

The determination of the amount of an award is in the discretion of the SEC.[19] If all of the conditions are met, the SEC will decide the percentage amount, which will be at least 10 percent and no more than 30 percent of the collected monetary sanctions.[20] If the SEC makes awards to more than one whistleblower in connection with the same action, the SEC will determine an individual percentage award for each whistleblower, and the total amount awarded in the aggregate will be between 10 and 30 percent.[21]

The rules list a number of factors the SEC may consider in increasing or decreasing the award. The factors that may increase the award include (1) the significance of the information to the success of the action, (2) assistance provided by the whistleblower, (3) the SEC’s programmatic interest in deterring violations of the securities laws and (4) the whistleblower’s participation in internal compliance systems.[22] The factors that may decrease the award include (1) the culpability or involvement of the whistleblower in matters associated with the action, (2) whether the whistleblower unreasonably delayed reporting the securities violations and (3) whether the whistleblower undermined the integrity of his or her entity’s internal compliance or reporting system.[23]

When do whistleblowers receive anti-retaliation protection?

A whistleblower does not need to meet the criteria for an award in order to receive anti-retaliation protection under the rules. Instead, an individual falls under the anti-retaliation provision when the individual possesses a reasonable belief that the information provided to the SEC relates to a possible securities law violation that has occurred, is ongoing or is about to occur.[24]

For additional information

The final rules can be found at: http://www.sec.gov/rules/final/2011/34-64545.pdf. The SEC’s press release accompanying the final rules can be found at:http://www.sec.gov/news/press/2011/2011-116.htm.

This article was prepared by Jason Weeden (jweeden@fulbright.com or 202 662 4583) and Harva R. Dockery (hdockery@fulbright.com or 214 855 8369) from Fulbright’sSecurities Practice Group. If you have any questions about this Fulbright Briefing, please do not hesitate to contact the authors.

[1] Rule 21F-2(a)(1).

[2] Rule 21F-8(c).

[3] Rule 21F-4(b).

[4] Rule 21F-4(b).

[5] Rule 21F-8(c).

[6] Rule 21F-4(b).

[7] Rule 21F-4(b).

[8] Rule 21F-8(c).

[9] Rule 21F-8(c).

[10] Rule 21F-16.

[11] Rule 21F-2(a)(1).

[12] Rule 21F-3(a)(2); Rule 21F-4(b).

[13] Rule 21F-3(a)(1); Rule 21F-4(a).

[14] Rule 21F-2(a)(2); Rule 21F-8(a).

[15] Rule 21F-9.

[16] Rule 21F-8(b).

[17] Rule 21F-3.

[18] Rule 21F-4.

[19] Rule 21F-5(a).

[20] Rule 21F-5(b).

[21] Rule 21F-5(c).

[22] Rule 21F-6(a).

[23] Rule 21F-6(b).

[24] Rule 21F-2(b)(1).

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