SEC Adopts Final Rules Implementing Dodd-Frank Whistleblower Program — Explanation and Practical Implementation Considerations

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On May 25, 2011, the US Securities and Exchange Commission (the “SEC”), in a 3 to 2 vote along party lines, adopted rules implementing Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”), which requires the SEC to establish a program to pay awards to eligible whistleblowers reporting federal securities law violations. The rules were initially proposed by the SEC on November 3, 2010, and were subject to significant comment—the SEC received over 240 comment letters and approximately 1,300 form letters. Under the final rules, which will be administered by the newly created Office of the Whistleblower, persons who voluntarily provide original information to the SEC about potential violations of federal securities law that leads to successful enforcement actions in which monetary sanctions exceed US$1 million, are entitled to an award of between 10 and 30 percent of all such sanctions collected.

The final rules are largely consistent with those originally proposed. Most changes refine and clarify the original proposal. In an effort to keep the lure of an award from undermining companies’ compliance programs, the most significant changes to the final rules seek to encourage whistleblowers to report internally before turning to the SEC. In particular, the final rules (i) extend from 90 to 120 days the period whistleblowers have to submit information to the SEC in order to remain eligible for an award after having reported information internally, (ii) clarify that voluntary internal reporting can increase the amount of an award, and (iii) allow employees who report internally to receive awards if their company subsequently discloses to the SEC the information reported by the employee.

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