The SEC’s New Whistleblower Compensation Rules

by Ropes & Gray LLP
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On May 25, 2011, by a vote of 3 to 2, the SEC approved its whistleblower compensation rules substantially as proposed. These rules and the SEC’s new Cooperation Initiative create strong monetary incentives for employees to race to the SEC to assert misconduct, which in turn will create greater pressure for companies to investigate alleged misconduct quickly and potentially to self-report violations to the SEC.

Summary of Key Components

Although the SEC has had limited authority for decades to compensate whistleblowers, it has historically been reluctant to do so.1

Who Is Eligible for Whistleblower Compensation? Section 922 of Dodd-Frank materially changed the SEC’s whistleblower program by providing substantial incentives for whistleblowers to come forward. First, whistleblowers can now be compensated for tips that lead to any type of SEC enforcement action, where the amount of monetary sanction (penalties plus disgorgement and interest) exceeds $1 million. Second, the maximum amount a whistleblower can receive has been raised to 30 percent of the monetary compensation from the previous cap of 10 percent and seems to contemplate a minimum award that a whistleblower would receive – 10 percent of the monetary sanction obtained in an SEC action. Third, the SEC is to provide annual reports to Congress concerning whistleblower claims, apparently in an effort to encourage the SEC to reward whistleblowers more frequently. Section 924 of Dodd-Frank also requires the SEC to create a separate office to process claims by whistleblowers and to adopt rules to implement the whistleblower compensation system. Finally, protections for whistleblowers from retaliation are strengthened. Whistleblowers now have an express private right of action against employers who retaliate against them, with remedies including reinstatement and two times back pay. Protections for whistleblowers in the Sarbanes-Oxley Act are expanded to cover employees of subsidiaries of public companies. The rules that the SEC adopted to implement the whistleblower compensation provisions of Dodd-Frank will be effective in July 2011.

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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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