The New SEC Whistleblower Rules

The New SEC Whistleblower Rules

On May 25, 2011, the SEC, in following the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), adopted new rules which provide for significant monetary incentives to whistleblowers who disclose securities law violations leading to an SEC enforcement action and collection of more than $1 million in sanctions.  Under the new rules, a whistleblower could be entitled to a bounty from 10% to 30% of the amount of the sanctions.  To qualify, a whistleblower must "voluntarily" provide the SEC with "original information" that "leads to" a successful SEC enforcement action.

The rules do not require a whistleblower to go through an internal reporting system, which many corporations had pushed for.  The whistleblower, however, is still eligible for the monetary reward if he or she makes an internal report, and the company then reports to the SEC.  A whistleblower could achieve a higher reward if he or she reports internally, but the whistleblower would only be protected from retaliation if he or she also makes a report to the SEC.  The definition of a whistleblower under the rules is very broad, as it includes "an individual who, alone, or jointly with others, provides information to the [SEC] relating to a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur."  The commentary to the rules notes that a possible violation need not be "material," "probable," or even likely.  In order to receive protection from the anti-retaliation provision of the rules, a whistleblower must possess at least a "reasonable belief" that the information reported relates to a securities law violation.