On August 12, 2011, the Securities and Exchange Commission’s (“SEC”) final rules implementing the sweeping whistleblower program in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) became effective. Like all entities within the SEC’s jurisdiction, publicly-traded banks and their compliance officials should take the time now to understand the whistleblower provisions and the new challenges they pose.
The Dodd-Frank Whistleblower Provisions
The Dodd-Frank whistleblower provisions are quite broad. They extend to people who share information with the SEC or the Commodity Futures Trading Commission (“CFTC”) concerning misconduct that falls within the jurisdiction of these agencies — including accounting fraud, insider trading, stock manipulation, and violations of the Foreign Corrupt Practices Act.
The whistleblower provisions authorize cash rewards to whistleblowers for original information leading to a recovery exceeding $1 million. A key condition is that the tip is “derived from the independent knowledge or analysis of the whistleblower.” The SEC and CFTC have discretion to decide the exact amount of the award based on the “significance” of the information and the level of assistance provided by the whistleblower, as long as the award is between 10 and 30 percent of total recovery.
The Final Rules
The SEC’s final rules exclude certain individuals from receiving awards, including:
- officers, directors, trustees, or partners of an entity who learn information about misconduct from another person or in connection with the company’s processes for identifying misconduct;
- employees whose main duties involve compliance or internal audit, or persons associated with a firm hired to perform similar functions; and
- employees of public accounting firms performing an engagement required by the securities laws, when the information relates to a violation by the client or its officers, directors or employees.
However, these individuals are still eligible for a reward under Dodd-Frank if:
- they have a reasonable belief that (a) disclosure to the SEC is necessary to prevent the company from engaging in conduct that could cause substantial injury to investors, or (b) the company is acting in a way that would interfere with an investigation of the misconduct; or
- one hundred twenty days have passed since they escalated the information to their company’s audit committee, legal/compliance officer, or supervisor, or since they received the information and the circumstances indicate that the audit committee, legal/compliance officer, or supervisor was aware of the information.
The Dodd-Frank whistleblower provisions do not impact the obligation of publicly-traded banks under certain circumstances to report suspected wrongdoing, such as in connection with suspicious activity reports or when the bank is notified by its outside auditors under Section 10A of the Exchange Act of a suspected illegal act that has not been adequately remediated.
Although the final rules do not require that employees report suspected wrongdoing through internal corporate compliance channels before disclosing information to the SEC in return for a bounty, the rules do try to encourage internal reporting:
- A whistleblower who reports wrongdoing to the SEC within 120 days of lodging a complaint internally will be deemed to have reported to the SEC as of the date of the internal disclosure.
- If a whistleblower reported original information internally before or at the same time that the whistleblower reported it to the SEC, and the company discloses the whistleblower’s information or the results of an investigation initiated by the whistleblower’s information to the SEC leading to a successful enforcement action, the whistleblower will receive credit for the information provided by the company and will be eligible for an award.
- When deciding whether to increase the amount of a whistleblower’s award, the SEC will consider whether the tipster reported through internal channels and assisted with any internal investigation.
Dodd-Frank prohibits retaliation not only against whistleblowers who provide information under the award program but also against employees engaged in offering consumer financial products who provide information about what they reasonably believe to be a violation of federal consumer protection laws, even if these employees are not pursuing a Dodd-Frank whistleblower award.
Beyond enhancing existing internal compliance measures designed to identify potential misconduct (such as employee ethics hotlines), the Dodd-Frank whistleblower rules make it more important than ever for publicly traded banks to promptly review all claims of wrongdoing. Doing so will increase the opportunity to remediate any problems and self-report the conduct to bank regulators and other authorities before a whistleblower contacts the SEC first.