SEC ADOPTS FINAL RULES REGARDING WHISTLEBLOWERS
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.
The SEC declined to require that
whistleblowers report potential violations
through a company’s internal compliance
program in order to be eligible for a bounty.
The final rules do, however, include
provisions that are intended to encourage
whistleblowers to utilize internal compliance
programs, including making internal reporting
a factor for the SEC to consider when
determining the amount of an award2;
decreasing awards for whistleblowers who
interfere with internal compliance programs3;
providing rewards for information reported to
the SEC by a company if the source of the
information was the whistleblower4; and
lengthening the period of time—from 90 to
120 days—during which a whistleblower can
wait to approach the SEC after reporting
internally and still receive a bounty.5
While these changes improve upon the
proposed rules, they likely still create
incentives to report directly to the SEC and
bypass internal reporting. For example, a
whistleblower seeking to maximize his or her
bounty may believe that reporting internally
first will give a company the opportunity to
investigate, remediate, and self-report to the
SEC, thus earning the company cooperation
credit—which ordinarily means that the SEC
is less likely to impose a substantial penalty
on the company. Such a credit could minimize
or perhaps even eliminate any monetary
sanction—and with it, any potential bounty.
Ineligible Whistleblowers
As with the proposed rules, the final rules
also provide that certain people generally will
not be considered for bounties because of the
nature of their positions. Thus, attorneys
(including in-house counsel) who use
information obtained in the course of client
engagements may not make whistleblower
claims for themselves. Similarly, compliance
and internal audit personnel and officers and
directors who learn of allegations of
misconduct from another person (such as an
employee) or through the company’s internal
reporting mechanisms are not eligible to
receive a bounty.
The final rules provide exceptions that likely
will create uncertainty as to whether
compliance or internal audit personnel can
collect bounties, however. Such personnel
may collect bounties if they “reasonably
SEC Adopts Final Rules . . .
Continued from page 1...
believe” that reporting information to the SEC “is necessary to prevent the relevant entity
from engaging in conduct that is likely to cause substantial injury to the financial interest
or property of the entity or investors,” or that the company “is engaging in conduct that
will impede an investigation of the misconduct.”6
Conclusion
The summary above highlights just a few of the key provisions of the SEC’s release on the
final whistleblower rules, which is comprised of over 300 pages. The new whistleblower
rules also underscore the importance of companies examining their internal reporting
policies and procedures to determine whether they can be enhanced. Indeed, developing
and promoting robust internal reporting policies and procedures is now more important
than ever.
Finally, although the final rules have yet to take effect, the SEC has told Congress that it
already has seen an increase in the quality of tips received since the passage of the
Dodd-Frank Act.7 The full effects of the new whistleblower rules remain to be seen, but
companies should brace themselves for an increase in claims and the corresponding
litigation that is sure to follow.
For any questions or for more information on these or any related matters, please contact
a member of Wilson Sonsini Goodrich & Rosati’s corporate securities or securities
litigation practices.
6 See final rules, 17 C.F.R. § 240.21F-4(b)(4)(v), supra note 1, at 249.
7 SEC Chairman Mary L. Schapiro, Opening Statement at SEC Open Meeting: Item 2 – Whistleblower Program
(May 24, 2011), available at http://www.sec.gov/news/speech/2011/spch052511mls-item2.htm.
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1 The final rules are available at http://www.sec.gov/rules/final/2011/34-64545.pdf
2 See final rules, 17 C.F.R. § 240.21F-6(a)(4)(2)(ii), supra note 1, at 255, 257-58.
3 See final rules, 17 C.F.R. § 240.21F-6(b)(3), supra note 1, at 259-60.
4 See final rules, 17 C.F.R. § 240.21F-4(b)(5), supra note 1, at 250-51.
5 See final rules, 17 C.F.R. § 240.21F-4(b)(7), supra note 1, at 251-52. Continued on page 2...
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