SEC Adopts Final Rules Regarding Whistleblowers

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On May 25, 2011, the Securities and Exchange Commission (SEC) adopted final rules implementing Section 922 of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which adds Section 21F to the Securities Exchange Act of 1934. The new rules provide bounties and protections for whistleblowers reporting violations of securities laws to the SEC.1 The rules will pose numerous difficult challenges for companies trying to implement effective compliance programs and internal reporting systems. We have highlighted some of the key provisions of the final rules below.

Whistleblower Provision Basics

Under the final rules, the SEC will pay an award to a whistleblower who voluntarily reports to the SEC original information that leads to a successful enforcement action in which the SEC’s monetary sanctions exceed $1 million. The SEC will award whistleblowers 10 to 30 percent of the monetary sanctions. The SEC requires original information to be based on independent knowledge or analysis that is not already available or known to the SEC. In addition, a whistleblower is protected under the rules from employment retaliation if the whistleblower reasonably believes that the information reported to the SEC relates to a “possible securities law violation.” The SEC stated that it would be unlawful for companies to use confidentiality agreements as a way to prevent whistleblowers from reporting information to the SEC.

Internal Reporting Not Required

During the comments process, the most actively debated aspect of the proposed rules was that they did not require whistleblowers to report concerns through a company’s internal compliance program before reporting to the SEC. Many business and legal commentators argued that without a requirement that employees first report potential violations internally, employees would be discouraged from utilizing the corporate compliance programs that companies have spent significant expense and effort creating, particularly following the enactment of the Sarbanes-Oxley Act of 2002.

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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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