The Dodd-Frank Whistleblower Provisions: Considerations for Effectively Preparing for and Responding to Whistleblowers


As part of the Dodd-Frank Act (“Dodd-Frank” or the “Act”), Congress created powerful incentives to encourage persons to report (i) potential violations of the federal securities laws to the Securities and Exchange Commission (“SEC”) and (ii) potential violations of the Commodity Exchange Act (the “CEA”) to the Commodity Futures Trading Commission (the “CFTC”). While the Sarbanes-Oxley Act (“SOX”) encouraged upthe-ladder reporting by employees and allowed for self-policing and self-reporting by companies of potential violations, the Dodd-Frank Act’s whistleblower provisions will incentivize external reporting to the regulators that may hamper a company’s ability to self-police and self-report. The SEC’s rules to implement those provisions of the Act within the SEC’s authority, approved yesterday on May 25, 2011, raise serious challenges for public corporations, broker-dealers, investment advisers, hedge funds, credit rating agencies, and other companies that are subject to the federal securities laws.

Companies may expect an increase in the number of complaints that circumvent internal reporting mechanisms and instead go directly, or through plaintiffs’ lawyers, to the government. Indeed, “[t]he Commission estimates that it will receive approximately 30,000 tips, complaints and referrals submissions each year” pursuant to the Dodd- Frank whistleblower provisions. Put bluntly, there is now a material risk that individuals will disdain internal reporting in favor of a potential bounty from the government. Accordingly, affected companies are faced with increased regulatory and law enforcement scrutiny and a threat of more and more rapid derivative and private securities class actions as plaintiffs’ firms offer enticing promises to whistleblowers. Tellingly, typing in the phrase “whistleblower” into an internet search engine results in a number of law firms trying to recruit corporate employees to profit by becoming whistleblowers. An examination of these profit-oriented sites shows that they are in the business of selling to employees the notion of making money by becoming whistleblowers.

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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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