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SEC Issues Final Rules on Whistleblower Provisions

Published on: 26 May 2011

After a 3–2 vote, the SEC issued final rules yesterday on whistleblower provisions to implement the requirements of Section 21F of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 21F was added by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and requires the SEC to pay whistleblowers an award if they provide “original information” leading to successful enforcement of a “covered judicial or administrative action, or related action.”

The SEC received over 240 comment letters and 1300 form letters in response to its initial proposal on the rules. As a result, it made certain changes, the more significant of which are detailed below.

The proposal did not require whistleblowers to report through their internal compliance processes before contacting the SEC as a prerequisite for award eligibility. The comments received were divided on this topic, and certain respondents noted that the provision could create conflict between the new whistleblower enhancements and existing corporate compliance programs (i.e., it could encourage employees to report a matter directly to the SEC instead of first reporting it internally).

Ultimately, the SEC chose to retain this provision rather than require whistleblowers to first report claims internally; however, the final rules incorporate changes that create incentives for whistleblowers to use their internal compliance processes. These incentives include:

  • An award eligibility amount that may be increased by a whistleblower’s voluntary participation in an entity’s internal compliance program or decreased on the basis of the level of “interference with internal compliance and reporting.”
  • Preservation of the whistleblower’s “place in line” at the SEC and receipt of “credit” for the original information for situations in which the whistleblower first provides original information internally and then either (1) reports it to the SEC or (2) the entity reports it to the SEC, as long as the same original information is provided both internally and to the SEC within 120 days.
  • A “look-back period” of 120 days (this was extended from 90 days to address concerns that the proposed period was insufficient for internal compliance systems to investigate whistleblower claims).

In addition, the original proposal included a two-step process for submission of information. To streamline the process, the SEC created one form for submission of information. The form “would be submitted by a whistleblower under penalty of perjury.”

The final rules also include a provision that whistleblowers will be eligible to receive an award if “two or more smaller actions that arise from the same nucleus of operative facts” are greater than $1 million combined.

In addition, the final rules clarify the proposal’s exclusions from eligibility. Specifically, the scope exclusions apply to senior officials, individuals with “pre-existing legal or contractual” duties, attorneys, compliance and internal audit personnel, and public accountants working on SEC engagements. The final rules also clarify when internal audit personnel, internal compliance personnel, and public accountants could become whistleblowers.

The rules are effective 60 days after their publication in the Federal Register.

For additional information about the final rules, refer to the press release on the SEC’s Web site.

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