In a 3-to-2 vote, the Commission yesterday adopted rules and forms
to implement the whistleblower program under which it will pay
eligible individuals for providing evidence of securities law
violations that leads to a successful enforcement action. SEC Chair
Mary Schapiro noted that the staff had to address a number of tough
policy issues in developing the program, but she believes the final
rules successfully balance the need to incentivize people to come
forward with the risk of unintended consequences. In a separate
3-to-2 vote, the Commission also approved the issuance of proposed
amendments to 1933 Act Regulation D to disqualify offerings
involving "felons and other bad actors"from
using the Rule 506 exemption from registration.
The whistleblower rules state that, in order to be
considered for an award, a whistleblower must voluntarily provide
original information that leads to the successful enforcement by the
SEC of a federal court or administrative action in which the SEC
obtains monetary sanctions totaling more than $1 million. The
information must be specific, credible and timely, and can apply to
a matter that was already under investigation when the information
was submitted. The rules provide that whistleblowers can qualify if
they report the information to their internal compliance programs
before or at the same time they report to the SEC, and their
employer then provides the information to the Commission.
Schapiro said that the role of internal corporate
compliance programs was the issue that received the most attention
in the comment letters the SEC received on the whistleblower rules.
Many commenters argued that compliance programs would only survive
if the Commission required individuals to report internally before
coming to the SEC. If it were not a requirement, they suggested,
then whistleblowers would skip over their internal programs to seek
an award from the SEC. Other commenters felt that if internal
reporting were mandated, then whistleblowers would be dissuaded from
coming forward at all.
SEC Enforcement Director Rob Khuzami said that the
staff recognizes the value of internal compliance programs, but felt
that requiring individuals to report to the company first would be
detrimental to the Commission’s enforcement efforts. Requiring
internal reporting would place an undue burden on the whistleblower,
he said, and would be a deterrent to coming forward. As a result,
the final rules do not mandate internal reporting, but provide
incentives for individuals to go to the company first.
Khuzami said that the staff had no evidence to prove
that not requiring internal reporting first would undermine
compliance programs. In addition, the staff noted that there is
nothing in the Dodd-Frank Act that requires internal reporting as a
condition to qualifying for a reward. In the end, the staff wanted
to incentivize people and protect them from retaliation because the
information would help the staff bring more cases, move more quickly
on them, and generally improve the SEC’s enforcement program, he
said.
The expanded incentives include lengthening the period
of time from 90 days to 120 days that a whistleblower can wait
before coming to the SEC after reporting internally. Whistleblowers
will get credit for the original date they reported to the company
as long as they notify the Commission within 120 days. The final
rules also provide that, when determining the amount of an award,
the Commission will consider how much an individual has participated
in or interfered with the internal compliance process.
The rules give credit to a whistleblower whose company
passes the information along to the SEC, even if the whistleblower
does not. Khuzami noted that a whistleblower will get credit for all
of the information the company provides to the Commission, even if
it is more than the whistleblower originally reported to the
company. This means that reporting internally may help a
whistleblower qualify for an award where they otherwise would not,
he said.
The rules provide that certain people will not be
considered for whistleblower awards, including individuals who have
a pre-existing legal or contractual duty to report their information
to the Commission, and people who obtain the information by means
that is determined by a U.S. court to violate federal or state
criminal law. Attorneys, including in-house counsel, who attempt to
use information obtained from client engagements to make
whistleblower claims for themselves also are not eligible, unless
the disclosure of information is permitted under SEC rules or state
bar rules.
Another controversial issue was the proposal to
provide awards to culpable whistleblowers. Khuzami said the staff
considered all of the comments on the issue and decided to leave
this piece of the rules unchanged. The truth is that it is often
only those involved that have the key information needed to enable
the Commission to get the leaders of the fraudulent scheme, he said.
Culpable whistleblowers are eligible for awards, but the final rules
provide that the Commission will not pay awards that are based on
the monetary sanctions that the culpable individuals themselves pay
in the resulting SEC action, or monetary sanctions paid by entities
whose liability is based substantially on conduct that the
whistleblower directed, planned or initiated.
Commissioner Kathleen Casey voted against adoption of
the rules, saying the whistleblower program as designed suffers in
two key respects—it underestimates the impact on internal compliance
programs and overestimates the staff’s ability to manage the volume
of complaints that will come in. Commissioner Troy Paredes echoed
her concerns, expressing his fear that the agency, which already has
limited resources, will be inundated with allegations that will
command the staff’s attention.
Khuzami said that since the enactment of the
Dodd-Frank Act, the Commission has seen an uptick, but not a flood,
in tips. He said the staff has also seen an increase in the quality
of the tips, with people providing more detailed allegations and
better documentation. Stephen Cohen of the Enforcement Division
cited a recent instance where the staff spent two days with a
whistleblower and received information that saved the staff 6 to 12
months of investigative work. Schapiro noted that the quality of the
tips under the program can, in some cases, actually ease the burden
on the staff.