SEC Proposes Whistleblower Rules

by Covington & Burling LLP, November 8th, 2010.

Last week, the Securities and Exchange Commission (SEC) proposed much-anticipated rules relatingto its new whistleblower program mandated by the Dodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank). In proposing the rules, the SEC indicated that it intends to create aroadmap for potential whistleblowers to provide the agency with high-quality tips, while at the sametime minimizing the incentives for whistleblowers to bypass functioning internal complianceprocesses or violate their professional obligations.

There will be debate, however, as to whether theagency has sufficiently resolved this tension, as the proposed rules offer less than the agency’srhetoric on this key point. Furthermore, the proposed rules place significant additional pressure oncompanies to self-report potential violations of the federal securities laws.


The SEC’s proposal implements the whistleblower bounty provisions in Section 922 of Dodd-Frank2under which it is required to pay awards to individuals who “voluntarily” provide “originalinformation” about a potential violation of the federal securities laws that leads to a successful SEC enforcement action resulting in monetary sanctions exceeding $1,000,000. This new mandate substantially expands the SEC’s authority to compensate whistleblowers.

Prior to Dodd-Frank, theSEC’s authority to pay whistleblowers had been limited to insider trading cases, was discretionary,and was capped at 10 percent of penalties collected. Subject to various conditions, the SEC mustnow provide cash bounties to whistleblowers of 10 to 30 percent (determined at the SEC’sdiscretion) of monetary recoveries in connection with any violation of the federal securities laws,which include the Foreign Corrupt Practices Act (FCPA). Given the size of recent FCPA resolutionswith the SEC and the U.S. Department of Justice, the potential amounts of whistleblower awards inconnection with this new program are quite significant. (continue reading… )


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