New rules give incentives to whistleblowers.

• Author: McGrath, Dorn C.
• Position: Ethics Corner - Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

On May 25, by a divided 3-2 vote, the Securities and Exchange Commission adopted a final rule to implement the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The whistleblower law applies to information submitted to the SEC since July 21, 2010, the date that Dodd-Frank was enacted. After Aug. 12, individuals seeking an award under this bounty program can submit information to the SEC online.

Under the final rule, whistleblowers are eligible to receive an award of 10 to 30 percent of the amount of penalties or recoveries of $ 1 million or more arising from violations of the federal securities laws. The final rule relaxes many proposed rule requirements, making a greater number of individuals eligible for awards.

Most importantly, the final rule does not require whistleblowers to report through internal corporate channels before providing information to the SEC. Corporate compliance officers are justifiably concerned that this will undermine internal ethics and compliance programs because there is no requirement that a whistleblower work with a supervisor or manager to resolve problems, or even call a company hotline.

The final rule defines a whistle-blower as a person who provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing, or is about to occur. To qualify for an award, the whistleblower must "voluntarily" provide "original" information based on "independent" knowledge or analysis that leads to "a successful enforcement action" and "monetary sanctions" exceeding $1 million.

The SEC issued the proposed rule implementing Dodd-Frank for comment in November 2010. In an attempt to encourage internal reporting, for the final rule the SEC added the incentive of a higher potential award for employees who first contact or simultaneously contact their companies before filing information with the commission.

Also, an employee can make an internal report to a company compliance program for up to 120 days prior to submitting that information to the SEC and still qualify for a whistleblower award. But the SEC stopped short of imposing a precondition that a whistleblower use an internal company compliance process.

The final rule broadened the definition of a whistleblower. Under the proposed rule, whistleblowers could submit information regarding a "potential" violation of the securities laws. The final rule adopted a definition that...