On December 3, 2010, the SEC announced that it is delaying plans to set up several offices created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including its much-anticipated whistleblower office. The announcement came amid a budget standoff in Congress that has left the SEC’s funding frozen at 2010 levels, along with the rest of the federal government. SEC officials expressed that without a budget increase, it will not be possible to implement Dodd-Frank and the roughly 100 new rules it requires the SEC to create. The extensive new law approved funding increases that would nearly double the SEC budget from $1.3 billion in 2011 to $2.25 billion in 2015, but requires a congressional appropriation to do so.
Dodd-Frank requires that the SEC establish a separate whistleblower office within the Division of Enforcement. The current delay in staffing it means that existing enforcement staff will be responsible for administration of whistleblower claims for the time being.
Dodd-Frank’s whistleblower provisions have garnered a great deal of attention in recent months, with corporations facing the prospect of a substantial uptick in whistleblower claims under its attractive bounty provisions. In anticipation of extensive payouts under those provisions, the SEC announced in late October that it has already established an Investor Protection Fund of over $450 million for use in paying out whistleblower awards.
For an idea of just how attractive whistleblower bounties have become, one can turn to the pharmaceutical industry’s recent experience with the False Claims Act and its qui tam provisions. Over the last several years this industry has been a target of increased whistleblower activity. A May 2010 study by the New England Journal of Medicine found whistleblower payouts in False Claims Act cases within the industry between 2001 and 2009 to have ranged from $100,000 to $42 million, with $3 million as the median recovery. The high end of that range has since been eclipsed by a recent $96 million whistleblower recovery by a single individual.
While the delay in establishing the whistleblower office is surely temporary, it provides companies additional time to digest the SEC’s recently-proposed Rule 21F for implementing Dodd-Frank’s bounty provisions. The proposed rule demonstrates that the SEC is aware of how attractive the bounty provisions will be for would-be whistleblowers, and how disruptive they may be for corporate operations. A key concern for corporations has been the potential for these provisions to undermine internal ethics and compliance programs by encouraging whistleblowers to take concerns directly to the government rather than report them internally. In response, Proposed Rule 21F-4(b)(7) offers the option of reporting issues internally without losing eligibility for whistleblower status. Whistleblowers must then report their concerns to the SEC within 90 days of the internal report. The proposed rule will encourage internal reporting by making the use of internal compliance procedures a factor that could increase the amount of a whistleblower award.
According to the SEC, the 90-day waiting period created by Proposed Rule 21F is intended to afford “a reasonable period of time to investigate and respond to potential securities laws violations (or at least begin an investigation) prior to reporting them to the Commission or an appropriate regulator.”
This and other aspects of the proposed rule offer some positive signs to corporations with concern over Dodd-Frank’s whistleblower provisions. More importantly, they, and the current delay in full Dodd-Frank implementation, offer incentives to review and bolster internal compliance programs now, before the bounty program gets fully under sail.