The SEC Proposes New Whistleblower Rules and Forms

The SEC Proposes New Whistleblower Rules and Forms

Today the Securities and Exchange Commission proposed a new set of rules and forms to implement Section 21F of the Exchange Act, which was added by Section 922 of the Dodd-Frank Act to address whistleblower incentives and protections.

To qualify for an award under the proposed rules a whistleblower must voluntarily come forward with original information concerning a securities law violation that leads to a successful enforcement action in which the Commission obtains monetary sanctions in excess of $1,000,000.

In an effort to avoid some of the unintended consequences that might crop up when offering monetary incentives to potential whistleblowers the proposed rules exclude certain categories of persons from qualifying as whistleblowers, specifically:

  • persons with a preexisting duty to report the information they’ve obtained;
  • attorneys who attempt to use information obtained from a client;
  • independent public accountants who obtain information through an engagement required under the securities laws;
  • foreign government officials; and
  • persons who learn of the information through a company compliance program or who are in a position of responsibility within a company, and the information is reported to them with the expectation that they will take appropriate action in response; however,  if a company does not itself disclose the information within a reasonable period or acts in bad faith persons otherwise covered by this exclusion may then become whistleblowers.

Finally the proposed rules include provisions intended to encourage would-be whistleblowers to first report information of any violations internally through company compliance programs.

Each of the components of what constitutes a whistleblower and the procedures for making a claim are fully elaborated on in the Commission proposal and any comments are due on or before December 17, 2010.

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