Securities/Corporate Compliance & Internal Investigations Alert: SEC Adopts Final Whistleblower Bounty Rules under Dodd-Frank
6/16/2011
By: Megan Gates, Pamela Greene, Benjamin Tymann, Adam Sisitsky and Kathleen Tam
On May 25, 2011, the Securities and Exchange Commission (SEC) adopted final rules implementing the whistleblower provisions of new Section 21F of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which was added to the Exchange Act by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The SEC proposed these rules on November 3, 2010 and adopted the rules with certain modifications and clarifications. Section 21F of the Exchange Act directs the SEC to pay awards, subject to certain limitations and conditions, to eligible whistleblowers who voluntarily provide the SEC with original information about a possible violation of the federal securities laws that leads to the successful enforcement of an action brought by the SEC resulting in monetary sanctions exceeding $1 million.
These rules are among the most controversial of the SEC’s rulemaking to date under the Dodd-Frank Act, in part because many in the business community anticipated that the rules will prompt would-be whistleblowers to circumvent companies’ internal whistleblowing procedures and send reports of potential violations directly to the SEC in the hopes of obtaining a “bounty.” In response to these concerns, the SEC made a few adjustments in the final rules, as described in this Alert, that are designed to encourage whistleblowers to report their concerns through internal company procedures first. The SEC was limited in its ability to make any fundamental changes to the proposed rules as part of the rulemaking process, given the requirements of Section 922 of the Dodd-Frank Act, which did not give the SEC discretion to eliminate the fundamental concept that payments will be made to whistleblowers in exchange for providing information to the SEC, if the requirements of the section are satisfied.
The whistleblower program will be administered by the SEC’s Office of the Whistleblower, and the final rules will become effective on August 12, 2011. A summary of the final rules is provided in this Alert.
