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SEC Issues Proposed Rules Implementing Securities Whistleblower Bounty Program Of Dodd-Frank Act

  • By: David Rich
  • Published: November 29, 2010

On November 3, 2010, the Securities and Exchange Commission (the “SEC”) issued proposed regulations implementing the SEC’s securities whistleblower bounty program. That bounty program was established by section 922 of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”), H.R. 4173.

The proposed regulations will be set forth in Parts 240 and 249 of Title 17 of the Code of Federal Regulations (the “C.F.R.”).

The Dodd-Frank Act’s Securities Whistleblower Bounty Program

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act amends the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., by creating a securities whistleblower bounty program. More particularly, under section 922 of Dodd-Frank, persons who voluntarily provide “original information” about a securities law violation which results in a successful SEC judicial or administrative action with monetary sanctions of more than $1,000,000 will be financially rewarded in an amount from 10 percent to 30 percent of the funds collected in the action or related actions.

Further, section 922 of the Dodd-Frank Act prohibits any employer from discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against a whistleblower in the terms and conditions of employment because the whistleblower “provid[ed] . . . information to [the SEC]” in accordance with section 922.

Unlike section 806 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A, a whistleblower provision which applies only to public companies and its subsidiaries and affiliates, section 922 of the Sarbanes-Oxley Act applies to all securities law violations. So the SEC’s securities whistleblower bounty program applies, for instance, to violations of securities law committed by registered broker-dealers or investment advisers, whether or not those broker-dealers or advisers are public companies or subsidiaries or affiliates of such companies.

How The SEC’s Proposed Rules Put Into Practice The SEC’s Bounty Program

Some of the highlights of the SEC’s proposed rules implementing section 922 of the Dodd-Frank Act are as follows:

  • A whistleblower is defined as any individual who provides the SEC with information relating to a potential violation of the securities laws. The whistleblower need not be an employee of the company accused of the securities law violation.
  • To be protected against retaliation by section 922 of the Dodd-Frank Act, an individual need not provide information to the SEC regarding an actual violation of the securities laws; rather, he or she need only report to the SEC a “potential” violation of the securities laws. So no company can fire an employee for reporting to the SEC what he or she believed to be a securities law violation, even if the employee’s belief turns out to be mistaken.
  • Among persons noteligible to receive a whistleblower bounty for providing, to the SEC, original information about a securities law violation are: (i) persons who are convicted of a crime relating to the information which they report; attorneys who learn the information by representing the wrongdoer, unless disclosure of the information is allowed by SEC rules or state attorney ethics rules; (ii) independent public accountants who discover the information by performing an engagement for the wrongdoer which is required under the securities laws; and (iii) compliance officers employed by the entity violating the securities laws to whom the information is conveyed with the reasonable expectation that the officers will take steps to cause the entity to respond appropriately to the violation.

Comments on the SEC’s proposed regulations must be submitted to the SEC by December 17, 2010.

How Employers Ought To Respond

Given that the SEC’s whistleblower bounty program applies to all securities law violations, every company or firm regulated by the SEC, whether public or private, should enable and encourage its employees to report possible securities law violations internally — that is, to report potential securities violations to the company itself, so that the company may remedy any violations.

Further, because any entity regulated by the SEC may be held liable for retaliating against certain whistleblowing employees, each such entity must make certain that managers and supervisors are trained to be receptive to, to promptly and thoroughly investigate, and to take appropriate action based on, good-faith complaints from employees of asserted violations of securities laws.

To these ends, public and private companies and firms in the securities industry should:

  • Have an updated compliance and ethics policy that has been reviewed by counsel. Periodically distribute the policy to all employees.
  • Train employees to recognize the warning signs of possible securities law violations. Make certain that employees know how to go about making complaints within the company or firm.
  • Consider setting up a telephone hotline for possible securities law violations.
  • Consider offering monetary rewards to employees for internally reporting potential securities law violations.

If your company needs assistance or guidance on a labor or employment law issue and your company is located in the Manhattan, NYC area, call Attorney David S. Rich at (347) 603-1143.

David Rich, Esq.

David Rich David S. Rich is the founding member of the Law Offices of David S. Rich, LLC,
a Manhattan Employment and Business Litigation Law Firm, in New
York City and in Englewood Cliffs, New Jersey...View Profile