New Whistleblower Incentives & Protections in Effect for FCPA, Etc.
On August 12, 2011, the Securities and Exchange Commission's June 2011 final rule creating a whistleblower incentives and protection program will take effect. The whistleblower program gives a minimum award of $100,000 to individuals who provide the SEC with high-quality tips that lead to successful enforcement actions that result in more than $1 million in sanctions. The SEC expects to receive 30,000 whistleblower tips annually.
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(The SEC is established pursuant to the Securities and Exchange Act of 1934. The Foreign Corrupt Practices Act (1977) amended the Exchange Act in two ways: (1) it made illegal the payment of bribes to foreign officials for the purpose of obtaining or retaining business (anti-bribery provisions); and (2) created the books-and-records and internal-controls provisions of the federal securities laws (accounting provisions). The Justice Department and the SEC jointly enforce the FCPA, generally with the Justice Department investigating and prosecuting the FCPA's anti-bribery violations and the SEC enforcing the accounting provisions.
See ITT's Online Archives or 05/10/11 and 07/01/11 news, 11051032 and 11070109, for BP summaries of the "facilitation payment" exception to the FCPA and FCPA liability regarding illegal payments made via intermediaries and successor firms.)
The following are highlights of the final rule (See final rule and SEC press release for additional details):
Whistleblower and Award Eligibility Requirements
Whistleblowers Are Those Who Provide Info on Possible Violations of SEC Laws
The final rule defines a whistleblower as a person, alone or jointly with others, who provides the SEC with information pursuant to specified procedures (17 CFR 240.21F-9(a)), that relates to a possible violation of the Federal securities laws (including any rules or regulations thereunder) that has occurred, is ongoing or is about to occur. A whistleblower must be an individual. A company or another entity is not eligible to be a whistleblower.
For Award, Info Must Lead to More than $1M in Sanctions, Etc.
To be eligible for an award, the final rule requires that a whistleblower must voluntarily provide the SEC with 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, outlined as follows:
Voluntarily provide information. A whistleblower is deemed to have provided information voluntarily if it is submitted before a request, inquiry, or demand that relates to the subject matter of the submission is directed by the government to the whistleblower or anyone representing the whistleblower (such as an attorney).
Provide original information. In order for a whistleblower submission to be considered original information, it must: (i) be derived from independent knowledge1 or analysis; (ii) not already known to the SEC from any other source; (iii) not exclusively derived from an allegation made in a judicial or administrative hearing, governmental report, etc.; and (iv) provided to the SEC for the first time after July 21, 2010 (the date the Dodd-Frank Act was enacted2).
Info led to successful SEC enforcement. The SEC will consider that a whistleblower provided original information that led to the successful enforcement of a judicial or administrative action if:
(i) the original information was sufficiently specific, credible, and timely to cause the SEC to commence an examination, open an investigation, reopen an investigation that the SEC had closed, or to inquire concerning different conduct as part of a current examination or investigation, etc.
(ii) the original information about conduct was already under examination or investigation by the SEC, Congress, or any other U.S. government authority, etc.
(iii) the original information was reported through an entity's internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law before or at the same time it was reported to the SEC; and the entity provided the information to the SEC, satisfying (i) and (ii) above; and the same information was submitted to the SEC within 120 days of providing it to the entity3.
SEC obtains sanctions over $1 million. The SEC must obtain monetary sanctions totaling more than $1 million. For purposes of making an award, the final rule permits the SEC to aggregate the monetary sanctions from two or more closely associated judicial or administrative proceedings to reach the $1 million threshold. The SEC states that this will make whistleblower awards available in more cases.
SEC Says Certain People Generally Will Not be Considered for Awards
According to an SEC press release, certain people generally will not be considered for whistleblower awards under the final rule. These include: (i) people who have a pre-existing legal or contractual duty to report their information to the SEC; (ii) attorneys (including in-house) who attempt to use information obtained from client engagements to make whistleblower claims for themselves; (iii) foreign government officials; (iv) officers, directors, trustees or partners of an entity who are informed by another person (e.g. an employee) of allegations of misconduct, or who learn the information in connection with the entity's processes for identifying, reporting, and addressing possible violations of law (such as a company hotline); (v) compliance and internal audit personnel; and others.
(The SEC notes that in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers. Additionally, certain other people, such as employees of certain agencies and people who are criminally convicted in connection with the conduct, are already excluded by the Dodd-Frank Act. See final rule for details.)
Awards & Factors Influencing Award Amount (Internal Reporting)
Awards Will be Paid Out of $450M Fund, Minimum Award is $100,000
Awards will be paid out of a statutorily-created Investor Protection Fund, which currently has a balance in excess of $450 million. The determination of the amount of an award is in the discretion of the SEC. If all conditions are met for a whistleblower award, the SEC will determine the percentage amount of the award according to certain criteria. The amount will be at least 10% and no more than 30% of the monetary sanctions that the SEC and other authorities are able to collect.4 As there is a monetary sanctions threshold of $1 million for award eligibility, the 10% minimum award is $100,000.
(Prior to the Dodd-Frank Act, the SEC's program was limited to insider trading cases and the amount of an award was capped at 10% of the penalties collected in the action.)
SEC Will Consider Factors That Could Increase or Decrease Award Amount
Factors that may increase the amount of a whistleblower's award include the significance of the information provided to the success of the SEC action or related action and the degree of assistance provided by the whistleblower and any of its legal representation. The SEC will also assess whether the information led to the successful enforcement of securities laws and whether, and the extent to which, the whistleblower participated in internal compliance systems.
Factors that may decrease the amount of a whistleblower's award include whether the whistleblower is culpable or involved with matters associated with the SEC's action or related actions and whether the whistleblower unreasonably delayed reporting the securities violations. In cases where the whistleblower participated in his/her entity's internal compliance or reporting system, the SEC will assess whether the whistleblower undermined the integrity of the entity's system.
Provides Incentives for Employee Whistleblowers to Report Internally
The final rule does not require that employee whistleblowers report violations through internal compliance processes as a prerequisite to eligibility for an award. However, it does add incentives intended to encourage employees to utilize their companies' internal compliance programs and reporting systems when appropriate to do so.
For instance, a whistleblower can receive an award for reporting original information to a company's internal compliance and reporting systems, if the company reports information to the SEC that leads to a successful SEC enforcement action. All the information provided by the company to the SEC will be attributed to the whistleblower, which means that the whistleblower will get credit, and potentially a greater award, for any additional information generated by the company in its investigation. Additionally, a whistleblower’s voluntary participation or interference with a company’s internal compliance and reporting systems is a factor that can increase or decrease the amount of an award, as explained above.
Procedures to Submit Info & Award Claims
The final rule describes the procedures for submitting information to the SEC and for making a claim for an award after an action is brought.
Info May be Provided to SEC Electronically or by Using Form TCR
A whistleblower may submit information to the SEC electronically through the SEC's Electronic Data Collection System or by completing and submitting Form TCR- Tip, Compliant, or Referral.
The SEC estimates that it will receive approximately 30,000 tips, complaints and referrals submissions each year. Of those 30,000 submissions, the SEC estimates that it will receive approximately 3,000 Forms TCR each year.
SEC Will Post Notice of Covered Action, After Which Can Make a Claim for Award
The SEC will publish a "Notice of Covered Action" on its website subsequent to the entry of a final judgment or order in the action that, by itself, or collectively with other judgments or orders, exceeds the $1 million threshold. Within 90 days of the date of the Notice of Covered Action to which the claim relates, a whistle blower may make a claim for a whistleblower award either electronically or by using Form WB-APP.
Rules on Culpability, Employment Anti-Retaliation
No Amnesty is Provided for Whistleblowers' Conduct with Violations
The final rule does not provide amnesty to individuals who provide information to the SEC. If an individual becomes a whistleblower and assists in SEC investigations and enforcement actions, this does not preclude the SEC from bringing an action against the whistleblower based upon their own conduct in connection with violations of securities laws. If the SEC does take such an action, the SEC will take the whistleblower's cooperation into consideration.
The SEC will not pay culpable whistleblowers awards that are based upon either the monetary sanctions that such culpable individuals themselves pay in the resulting SEC action, or the monetary sanctions paid by entities whose liability is based substantially on conduct that the whistleblower directed, planned or initiated. SEC states that the purpose of this provision is to prevent wrongdoers from benefiting by, in effect, blowing the whistle on themselves.
Employee Whistleblowers Are Protected from Employment Retaliation
A whistleblower who provides information to the SEC is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. In addition, the rule makes it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the SEC, including threatening to enforce a confidentiality agreement.
1Independent knowledge means factual information not derived from publicly available sources. Independent knowledge may be gained from experiences, communications, and observations in business or social interactions.
2The Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the SEC to pay rewards to individuals who provide it with original information that leads to successful enforcement actions and certain related actions. In passing the Dodd-Frank Act, Congress substantially expanded the SEC's authority to compensate individuals who provide it with information about violations of the federal securities laws. The SEC's Office of the Whistleblower administers the whistleblower program.)
3The final rule extends the time for whistleblowers to report to the SEC after first reporting internally and still be treated as if they had reported to the SEC at the earlier reporting date. In its proposed rule, the SEC proposed a 90 day "lookback period" after the whistleblowers' internal report, but in response to comments, the SEC has extended this period to 120 days.
4If the SEC makes award to more than one whistleblower in connection with the same or related action, the SEC will determine an individual percentage award for each whistleblower, but the total amount awarded to all whistleblowers will in no event be less than 10% or greater than 30% of the amount of the sanctions collected.
(See ITT's Online Archives or 11/04/10 and 01/10/11 news, 10110411 and 11011023, for BP summaries of the SEC's proposed rule and the comments it received.)
SEC Contact -- Sean McKessy (202) 551-4790
New SEC webpage to report violations and to apply for award is available here.
SEC press release on the final rule is available here.
SEC final rule is available here.