The Securities and Exchange Commission this week adopted a new set of rules that implement the controversial whistleblower provisions of the Dodd-Frank Financial Reform Act, rules which are designed to encourage the reporting of serious financial fraud within financial institutions and other corporations by offering substantial rewards or bounties to the whistleblowers.
Adopted by a 3-2 vote of the commission, the new rules, which can award a whistleblower a bounty of up to 30% of any recovery or monetary sanctions of over $1 million resulting from a whistleblower’s significant tip, are expected to lead to a marked step-up in enforcement actions by the financial regulatory agency.
Prior to the Dodd-Frank Act, whistleblower bounties were limited to 10%, were rarely awarded, and only applied to insider trading cases. The new bounty system applies to a wide range of financial frauds that violate SEC rules.
The newly adopted whistleblowing regulations, which will take effect 60 days after publication in the Federal Register, go even further than the enabling legislation to encourage whistleblowing by employees in financial institutions, adding rules that protect against retaliation by employers.
For example, under the new SEC rules, whistleblowers are protected from employment retaliation if they have a reasonable belief that the information provided relates to a possible SEC law violation that has occurred, is occurring or is about to occur. They are also protected from threats by employers to enforce a prior confidentiality agreement.
The rules encourage potential whistleblowers to make use of internal systems for reporting frauds and violations of SEC laws. For example, if an employee reports a fraud through corporate channels to superiors, and then the company brings the matter to the SEC, the employee is still considered a whistleblower by the SEC, and is both protected by anti-retaliation rules and is still eligible for a bounty.
Employees are not required to first report problems through internal channels before approaching the SEC.
“For an agency with limited resources like the SEC, it is critical to be able to leverage the resources of people who may have first-hand information about violations of the securities laws,” said SEC Chairman Mary L. Schapiro, in a statement made following adoption of the new rules.
Schapiro said the quality of tips received by the agency has already improved since the adoption of Dodd-Frank, adding that, "we expect this trend to continue, and these final rules map out simplified and transparent procedures for whistleblowers to provide us critical information."