SEC Whistleblower Program

Since 2010, whistleblowers who report violations of the federal securities laws can receive significant financial rewards, effective July 21, 2010. SEC whistleblower rewards also can be paid to persons reporting bribery of foreign government officials and other violations of the Foreign Corrupt Practices Act (FCPA).

The 2008 financial crisis and scandals such as Madoff prompted Congress to create the first meaningful SEC Whistleblower Program, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank). This Act also established a similar whistleblower program for the Commodity Futures Trading Commission (CFTC).

U.S. Senate staff contacted and consulted our firm about problems we had found with the House version of the proposed law to create the new SEC and CFTC Whistleblower rewards. Based on our experience in representing whistleblowers, we pointed out how essential elements of any effective whistleblower rewards were missing from the House bill, which created no “right” to any reward.

We advocated important changes so that the final version of the law would provide whistleblowers an enforceable right to a reward, and a meaningful percentage of the monetary penalties imposed. The final Dodd-Frank law incorporated the changes we urged.

SEC whistleblowers now have a right to 10-30% of monetary sanctions collected as a result of original information from the whistleblower that leads to a successful enforcement action or related action with at least $1 million in sanctions. The new law also has protections for whistleblowers against retaliation.

In 2011, as the SEC was lobbied by potential defendants to weaken the draft whistleblower rules, we were part of a small group of whistleblower attorneys who met with senior SEC enforcement officials and staff to discuss how to make the proposed SEC rules most effective. We also met with SEC Chairman Mary Schapiro and separately with each of the other SEC Commissioners.

We argued that more categories of whistleblowers be eligible for rewards. We also urged the SEC Commissioners to resist pressure to require employees to risk career suicide through “mandatory internal reporting” within a company before approaching the SEC. The final SEC rules expanded the possible categories of whistleblowers, and they reward—but do not require–internal reporting by whistleblowers.

Based on our discussions with the SEC’s “Office of the Whistleblower,” the Commission is enthusiastic about receiving submissions (“tips”) from whistleblowers that allows it to build significant cases. After some initial uncertainty, the SEC now appears to understand that attracting and rewarding whistleblowers is essential to protecting investors and the integrity of capital markets, and to stopping frauds.

The new SEC Whistleblower rules took effect on August 12, 2011. The rules specify many aspects of how the new program works, including:

• Who is eligible for a reward
• What information qualifies as “original information”
• How whistleblowers may submit information anonymously through counsel
• Confidentiality of whistleblowers’ identities and information
• Procedures for applying for an award
• Factors that may increase or decrease the size an award
• When the SEC’s decisions may be appealed
• Special rules for persons with legal, compliance, audit, supervisory or governance responsibilities.