On November 3rd, the SEC proposed a program under the Dodd-Frank Wall Street Reform and Consumer Protection Act that rewards whistleblowers who voluntarily provide original, high-quality information that leads to a successful enforcement action in which the SEC obtains sanctions in excess of $1 million. The Proposed Rule offers would-be whistleblowers an award of 10-30% of the amount collected in the SEC action and certain related actions that rely upon the same original information.
As Edward Wyatt of the New York Times pointed out in his recent article, “For Whistle-Blowers, Expanded Incentive,” the existing scheme for rewarding informants has been largely ineffectual, handing out less than $160,000 to all whistleblowers in the last 20 years. Wyatt explains that, under the proposed rule, someone who came forward with original information related to the SEC’s enforcement action against Goldman Sachs could have recovered $55 million to $165 million. That’s a very powerful incentive for someone with information about a possible violation of federal securities laws.
The incentive is so strong, in fact, that, as David Hilzenrath of the Washington Post reports, a New York lawyer recently purchased ad spots during movie previews in Manhattan cinemas informing viewers that they could take home 10-30% of SEC collections in enforcement actions. But not anyone with knowledge of a potential violation of securities laws can turn up at the SEC and collect a check. As Law360 reports, when it comes to the new whistleblower provisions, “the devil is in the details.” The rule, for example, presents fairly narrow definitions of “whistleblower” and “original information,” and carves out any information that does not derive from “independent knowledge” or “analysis.”
The so-called “lottery” or “jackpot” awards authorized by the rule have drawn a fair amount public criticism, and many argue that the rule undermines corporate regulatory compliance efforts and disincentivizes internal reporting. But the jury is still out on the proposed rule, and the SEC is seeking public comment. In particular, the SEC is interested in whether there is genuine fear that the rule will undermine internal compliance schemes, and whether a rule requiring a whistleblower to use a company’s internal reporting procedures before contacting the SEC would allay those fears.
The bottom line: Some version of this rule is likely to go into effect, and it will change the landscape for would-be whistleblowers. Take advantage of the opportunity to comment – the deadline for filing comments is December 17th – and stayed tuned to Subject to Inquiry for a report on the final rule.