SEC Releases New Rules for Whistleblowers

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The recently enacted financial reform bill has a provision that changes the landscape for bank and investment-firm whistleblowers. Now, the Securities and Exchange Commission has finally clarified those rules, and there are 452 million reasons potential whistleblowers should get to know them.

The new rules arrived Nov. 3; they center on what actually constitutes a whistleblower and how a whistleblower should be compensated if his or her information leads to legal action or penalties enforced by the government.

According to the SEC, section 922 of the financial reform bill directly authorizes the SEC to offer cash rewards to individuals who point out any violations of federal securities laws. The bill also increases the amount of cash a whistleblower can earn from his or her testimony, which used to be capped at 10% of any fees or penalties collected by the SEC in a whistleblower case. The provision in the Dodd-Frank bill also expands the SEC’s jurisdiction beyond insider trading cases, which are the most common form of whistleblower cases.

“We get thousands of tips every year, yet very few of these tips come from those closest to an ongoing fraud,” said SEC Chairman Mary L. Schapiro. “Whistleblowers can be a source of valuable firsthand information that may otherwise not come to light. These high-quality leads can be crucial to protecting investors and recovering ill-gotten gains from wrongdoers.”

By and large, a whistleblower can earn compensation if the information he or she provides to the SEC of any federal securities violations lead to a judgment, fee or sanction of more than $1 million.

Here’s how the SEC defines when and how a whistleblower can collect on a securities violation case:

  • In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it.
  • Original information must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission, and not derived exclusively from certain public sources.
  • A whistleblower’s information can be deemed to have led to successful enforcement in two circumstances: (1) if the information results in a new examination or investigation being opened and significantly contributes to the success of a resulting enforcement action, or (2) if the conduct was already under investigation when the information was submitted, but the information is essential to the success of the action and would not have otherwise been obtained.

The SEC says the new whistleblower rules do not apply to the following people:

  • Those who have a pre-existing legal or contractual duty to report their information.
  • Attorneys who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules).
  • Independent public accountants who obtain information through an engagement required under the securities laws.
  • Foreign government officials who act as whistleblowers.
  • Other people such as employees of certain agencies and people who are criminally convicted in connection with the conduct are excluded by Dodd-Frank.

The SEC wants whistleblowers to work with their internal compliance departments, but will reserve their place in line as long as they report the exact same information to the SEC within 90 days of contacting compliance officials at their own companies.

As far as cash rewards go, the SEC says it has $452 million set aside for whistleblower compensation. That’s an attractive carrot dangling in front of potential whistleblowers, who now have formalized guidelines and more opportunities to turn criminal activity into cold, hard cash.

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