Specifically, Section 922 of the Act adds Section 21 F to the Exchange Act, entitled “Securities Whistleblower Incentives and Protection.” This program provides monetary rewards to those who voluntarily contribute original information that leads the SEC to recover monetary sanctions of $1,000,000 or more in criminal and civil proceedings in federal court or through administrative action. Whistleblowers would be eligible for amounts between 10% and 30% of the monetary sanctions that are collected, based on the original information provided by the whistleblower.
Some commentators have questioned whether the monetary incentives provided to whistleblowers would reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the federal securities laws. With this possible tension in mind, the SEC stated that they: “included provisions in the proposed rules intended not to discourage whistleblowers who work for companies that have robust compliance programs to first report the violation to appropriate company personnel, while at the same time preserving the whistleblower’s status as an original source of the information and eligibility for an award.” At the same time, according to the SEC, the proposed rules would not prohibit a whistleblower in a compliance function from reporting information to the Commission where the company did not provide the information to the Commission within a reasonable time or acted in bad faith.
In determining whether a company acted in bad faith, the SEC will, among other things, consider whether the entity or any personnel who were responsible for responding to allegations of misconduct took affirmative steps to hinder the preservation of evidence or a timely and appropriate investigation. For example, an effort by company officials to destroy documents or to interfere with witnesses would constitute bad faith conduct. Similarly, if a company engaged in a sham investigation of allegations, then the company’s response would constitute bad faith according to the SEC. The proposed rule does not set a fixed time frame for what is considered “reasonable”. Instead, the SEC states that a “reasonable time” in this context will necessarily be a flexible concept that will depend on all of the facts and circumstances of the particular case.
As discussed in an SEC fact sheet, the proposal includes provisions designed to encourage employees to avail themselves of their company’s internal compliance programs. For example, an employee who reports information through internal company channels would still be considered a whistleblower by the SEC, so long as the employee provides the same information to the agency within 90 days. The proposal also allows the SEC to consider higher percentage awards for whistleblowers who first report their information through effective company compliance programs. Accordingly, the SEC “does not expect our receipt of whistleblower complaints to minimize the importance of effective company processes for addressing allegations of wrongful conduct.”
The proposal includes additional definitions of phrases contained in the definition of “original information” so as to further describe when a whistleblower provides such information. Original information is that which is derived from the whistleblower’s independent knowledge or analysis; is not already known to the Commission, and is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. The proposed rule defines “independent knowledge” as factual information in the whistleblower’s possession that is not obtained from publicly available sources. According to the SEC, this proposed definition does not require that a whistleblower have direct, first-hand knowledge of potential violations. Thus, a whistleblower could have “independent knowledge” of information even if that knowledge derives from facts or other information that has been conveyed to the whistleblower by third parties.
In contrast, the SEC will not consider information to be derived from independent knowledge or independent analysis if the would-be whistleblower obtained the knowledge or information:
- Through a communication that was subject to the attorney-client privilege (unless disclosure of that information is otherwise permitted under SEC rules or state bar rules);
- As a result of the legal representation of a client on whose behalf the whistleblower’s services, or the services of the whistleblower’s employer or firm, have been retained, and the person seeks to make a whistleblower submission for his or her own benefit (unless disclosure of that information is otherwise permitted under SEC rules or state bar rules);
- Through the performance of an engagement required under the securities laws by an independent public accountant, if that information relates to a violation by the engagement client or the client’s directors, officers or other employees;
- Because the individual is a person with legal, compliance, audit, supervisory, or governance responsibilities for an entity, and the information was communicated to the individual with the reasonable expectation that they would take steps to cause the entity to respond appropriately to the violation, unless the entity did not disclose the information to the SEC within a reasonable time or proceeded in bad faith;
- Otherwise from or through an entity’s legal, compliance, audit or other similar functions or processes for identifying, reporting and addressing potential non-compliance with law, unless the entity did not disclose the information to the SEC within a reasonable time or proceeded in bad faith;
- By a means or in a manner that violates applicable federal or state criminal law; or
- From any of the individuals described above.
The SEC has attempted to maximize the submission of high-quality tips and to enhance the utility of the information reported to the SEC. Toward this end, the proposed rules would impose certain procedural requirements designed to deter false submissions, including a requirement that the information be submitted under penalty of perjury and requiring an anonymous whistleblower to be represented by counsel who must certify to the SEC that he or she has verified the whistleblower’s identity.
The proposed rule clarifies a number of definitions and program requirements, as well as describes the procedures for submitting information to the SEC and for making an award claim after an action is brought. For example, the proposal defines a whistleblower as “an individual who, alone or jointly with others, provides information to the Commission relating to a potential violation of the securities laws.” This definition differs from that set forth in the Act in that it includes the phrase “potential violation.”
One of the SEC’s rationales for including the word “potential” is that it clarifies that the whistleblower anti-retaliation protections set forth in Section 21F(h)(1) of the Exchange Act do not depend on an ultimate adjudication, finding or conclusion that conduct identified by the whistleblower constituted a violation of the securities laws. In other words, even if the whistleblower provides information to the SEC that is not ultimately found to constitute an SEC violation, that individual is still protected from any adverse employment actions as a result. The proposed rule further explains that an individual need not satisfy all of the procedures and conditions to qualify for an award under the Commission’s whistleblower program in order to be protected against retaliation. As stated in the preamble to the proposed rule, the SEC “believe[s] the statute extends the protections against employment retaliation in Section 21F(h)(1) to any individual who provides information to the Commission about potential violations of the securities laws regardless of whether the whistleblower fails to satisfy all of the requirements for award consideration set forth in the Commission’s rules.”
The proposed rule considers the provision of information “voluntary” if it is provided before receiving any formal or informal request, inquiry, or demand from the Commission, Congress, any other federal, state or local authority, any self-regulatory organization, or the Public Company Accounting Oversight Board about a matter to which the information in the whistleblower’s submission is relevant. According to the SEC, this is to encourage whistleblowers to provide information about possible SEC violations as soon as possible.
With respect to the investigation process, the Act permits the SEC to communicate directly with the whistleblower without first obtaining the consent of the company’s counsel. The proposed rule further clarifies that it is allowed to do so even if the whistleblower at issue is a director, officer, member, agent, or employee of the entity.
Although the SEC invites comment on any aspect of the proposed rule, the agency’s proposal lays out 43 separate areas of inquiry for public comment. For example, the SEC is seeking input on whether it should promulgate rules regarding the interpretation or implementation of the anti-retaliation provisions of the Exchange Act. If so, the agency asks, should these anti-retaliation provisions be applied broadly to any person who provides information to the Commission concerning a potential violation of the securities laws, or should they be limited by the various procedural or substantive prerequisites to consideration for a whistleblower award? In addition, the SEC asks whether it should consider promulgating a rule to exclude frivolous or bad faith whistleblower claims from the protections afforded by the anti-retaliation provisions. The SEC is also inviting comments on whether it should promulgate rules to ensure that the anti-retaliation provisions are not used to protect employees from otherwise appropriate employment actions (i.e., employment actions that are not based on reporting potential securities law violations).
Comments on the proposal must be submitted on or before December 17, 2010, and contain the File Number S7-33-10. Written comments should be sent in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Alternatively, comments may be submitted electronically through the SEC’s Internet comment form; the federal eRulemaking portal; or via email to: email@example.com. The file number: S7-3310 should be included in the subject line.
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