SEC Waives Whistleblower Eligibility Requirements to Issue $400,000 Award

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On July 31, the U.S. Securities and Exchange Commission (SEC or Commission) issued a $400,000 whistleblower award to an individual who provided information leading to a successful SEC enforcement action.1 The SEC’s whistleblower program was created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act,2 which authorizes monetary awards to persons who voluntarily provide original information related to violations of securities laws if the information leads to an enforcement action resulting in more than $1 million in monetary sanctions.3

The SEC’s preliminary determination recommended that the individual’s claim be denied because the information did not appear to be given “voluntarily” as provided by Rule 21-F(4)(a)(ii).4 An inquiry into the allegations made by the claimant had previously been conducted by a self-regulatory organization (SRO), which, according to the SEC Claims Review Staff, made the claimant ineligible for a whistleblower award.

The Commission, however, considered a detailed chronology of the events and found “materially significant extenuating circumstances” that justified waiving the “voluntary” requirement. Specifically, the Commission found that the claimant aggressively made internal reports of securities law violations and actively participated in the SRO investigation. The company failed to address the issue internally, despite the repeated efforts by the claimant to report misconduct. Once it became clear that the SRO inquiry was closed and the company was not going remedy the securities law violations, the claimant persistently submitted reports of the company’s securities law violations to the Commission.5 Given the public interest and the whistleblower program’s purpose of protecting investors, the Commission invoked its general exemptive authority under Section 36 of the Exchange Act of 19346 to waive the “voluntary” requirement “on the unique facts of this award claim.”7

Under the whistleblower program, the Commission is authorized to award whistleblowers between 10% and 30% of the total monetary sanctions collected as a result of a successful enforcement action.8 The SEC did not disclose in its order what percentage of the total sanctions was awarded to the claimant or the total amount of the award. But in a press release, the SEC announced that this award would total more than $400,000 and “recognizes the significance of the information that the whistleblower provided . . . and the balanced efforts made by the whistleblower to protect investors and report the violation internally.”9

Whether this award signals the Commission’s willingness to depart from the technical rules of the whistleblower program in other circumstances remains to be seen. Future waivers of the “voluntary” requirement could open the door to whistleblower awards based on information provided even after the underlying securities violation has been investigated by the Commission, the Public Company Accounting Oversight Board, an SRO, Congress, federal authorities, or a state securities regulatory authority.

1 A copy of the order may be found at http://www.sec.gov/rules/other/2014/34-72727.pdf (hereinafter Whistleblower Order).

2 Pub. L. No. 111-203, 124 Stat. 1376 (2010).

3 15 U.S.C. § 78u-6(b).

4 17 C.F.R. § 240.21F-(4)(a)(ii) (defining voluntary as providing information to the SEC “before a request, inquiry, or demand . . . is directed to you . . . in connection with an investigation, inspection, or examination by the Public Company Accounting Oversight Board, or any self-regulatory organization . . .”). 

5 Whistleblower Order, supra note 1, at 1.

6 See generally 15 U.S.C. § 78mm

7 Whistleblower Order, supra note 1, at 1-2.

8 15 U.S.C. § 78u-6(b)(1).

9 SEC Press Release, July 31, 2014, available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542578457#.U-IWmvldWiD.

 

Topics:  Dodd-Frank, Enforcement, Enforcement Actions, SEC, Whistleblower Awards, Whistleblowers

Published In: Civil Procedure Updates, Civil Remedies Updates, Finance & Banking Updates, Labor & Employment Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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