Funds & Advisers
Operating pursuant to a directive in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), the SEC proposed a whistleblower program to encourage individuals to report violations of the federal securities laws by providing incentive to such individuals for high-quality tips that lead to successful enforcement actions. Prior to this new program, the SEC had only been authorized to provide awards to whistleblowers in insider trading schemes. Under the Act, the SEC is required to award a qualifying whistleblower no less than 10% and no greater than 30% of any sanction imposed by the SEC.
The impact of this proposed whistleblower program has the potential to radically change the way violations are reported and addressed within advisers and fund complexes. We will continue to monitor this proposal and update you appropriately.
Definition of "Whistleblower"
As proposed, the SEC defines a whistleblower as "an individual who, alone or jointly with others, provides information to the Commission relating to a potential violation of the securities laws." The definition clarifies that a whistleblower is an individual; entities are not eligible to receive awards.
To be eligible for an award, a whistleblower must voluntarily provide the SEC original information that leads to successful enforcement in which the SEC obtains monetary sanctions totaling more than $1 million.
These individuals are not eligible to be considered for an award:
- A tip is voluntary if provided to the SEC prior to any request or demand for such information from a government entity or agency.
- If an individual is under a pre-existing obligation to report the violation, that individual is not eligible for an award as that would not be a voluntary tip.
- Information is original only if it is derived from the whistleblower’s independent knowledge or independent analysis and not already known to the SEC.
- The SEC will not consider the following information to be derived from a whistleblower’s independent knowledge or analysis:
- Information obtained by an attorney or through a communication subject to the attorney-client privilege or otherwise obtained as a result of a legal representation.
- Information obtained by an independent public accountant through the performance of an engagement required under the federal securities laws.
- Information communicated to an individual within the company with supervisory or compliance responsibilities, with the reasonable expectation that the individual would use it to respond appropriately to the violation.
An employee or member of the Department of Justice, a regulatory agency, an SRO, the PCAOB, or any law enforcement organization.
An employee or member of a foreign government or agency.
An individual who was convicted of a criminal violation related to the action for which the individual could receive an award.
An individual who obtained the information through an audit of a company’s financial statements, if making the tip is contrary to the audit requirements set out in §10A of the Securities and Exchange Act of 1934.
An individual who received the information from any of the individuals listed above.
An individual who is related to an SEC employee.
An individual who made false or fraudulent statements in the whistleblower submission.
- The Act includes protections to whistleblowers against retaliation, regardless of whether the whistleblower is compliant with the procedures and conditions set out in the rule, as long as the tip is in relation to a violation of the federal securities laws.
- Whistleblowers may submit tips anonymously. However, if they do, they must be represented by an attorney. Additionally, they will be required to disclose their identity prior to the SEC paying out the award. Only in this manner can the SEC verify the whistleblower’s identity, and therefore his eligibility.
- The proposed rule appears to encourage employees to report violations internally first by allowing the SEC to consider higher awards for those who report a suspected violation through the company’s compliance program before reporting to the SEC.
- The new program would not provide amnesty to whistleblowers whose conduct has contributed to the violation they reported.
The SEC is accepting public comments on the proposed program through December 17, 2010.