In mid-August the SEC’s new whistleblower rules will take effect (click here for the Final Rule). The new rules explain and further define the requirements of a whistleblower program that has been in place since the Dodd-Frank Act took effect on July 21, 2010. In general, anyone who provides information to the SEC relating to a possible violation of the securities laws is entitled to an award if the following requirements are met:
- The information must be provided voluntarily, before the SEC asks for it;
- The information must be based on the whistleblower’s independent knowledge and not already known to the SEC or derived from public filings;
- Providing the information must lead to successful enforcement by the SEC or a federal court or administrative action; and
- The SEC must obtain monetary sanctions above $1 million.
Successful whistleblowers can receive an award of between 10 and 30% of the total monetary sanctions collected. The whistleblower program is a significant expansion of previous SEC whistleblower rules that only applied to insider-trading cases and were capped at 10% of the penalties collected (click here for the SEC press release).
The whistleblower rules do not require the whistleblower to comply with the company’s internal compliance program, but do encourage such internal compliance. For example, a whistleblower who reports through the company’s internal compliance program is still eligible for an award if the company reports the information to the SEC, and the whistleblower receives credit for all information proved by the company, even information not initially reported by the whistleblower to the company.
Despite the expansive new rules, awards are not available for, among others, whistleblowers with a pre-existing contractual duty to report the violation, a person who obtains the information illegally, or an officer or director who gains the information through the company’s internal process for identifying violations.