The Securities and Exchange Commission unanimously agreed to propose rules for establishing a broad whistleblower program less than a week after an SEC attorney said the agency has obtained numerous queries from muni market participants interested in reporting abuses for awards.
The five commissioners voted unanimously Wednesday to propose the rules after Mark Zehner, deputy director of the municipal and public pension fund enforcement unit, told bond lawyers meeting in San Antonio last Thursday that the SEC had obtained numerous queries from muni market participants about the whistleblower program.
At Wednesday’s meeting, chairman Mary Schapiro and other commissioners made a strong pitch for public comments on whether they have achieved the right balance between encouraging whistleblowers to come forward with high-quality tips and not undermining the internal compliance programs set up by firms. Comments are due by Dec. 17.
“Our goal is to create a reasonable, thoughtful and transparent program,” Schapiro said. “For this reason, we very much want to hear from the public, from the whistleblower community, and from those in the compliance field.”
The proposed rules would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that authorize the SEC to pay rewards to individuals who provide the commission with original information that leads to successful enforcement and related actions.
The bill authorizes the SEC to establish an Investor Protection Fund of up to $300 million to be used to compensate whistleblowers with between 10% and 30% of the amount of the sanctions in cases with more than $1 million of sanctions that succeed based upon their information. Prior to Dodd-Frank, the SEC program was limited to insider-trading cases and awards were capped at 10% of penalties collected.
To be considered for an award under the proposed rules, a whistleblower must voluntarily provide the SEC with information before the federal government, a self-regulatory agency or the Public Company Accounting Oversight Board asks for it. The information must be based on the whistleblower’s independent knowledge or analysis and not something that is already known to the SEC or derived from public sources. In addition, the information must either lead to, and contribute to the success of, a new investigation or enforcement action or be critical to the success of a probe that is already underway.
To avoid unintended consequences, individuals could not be whistleblowers under the proposed rules if they have pre-existing legal or contractual duties to report the information, are attorneys or accountants attempting to use information from client engagements or through engagements required by the securities laws, are foreign government officials, or learn about violations either through a firm’s internal compliance program or because they have positions of authority and are expected to take appropriate steps on the violations.
The Dodd-Frank law also excludes as whistleblowers employees of certain agencies and individuals who are criminally convicted in connection with the conduct.
To discourage employees from bypassing their company’s internal compliance programs, the proposed rules would treat an employee as a whistleblower as of the date he or she reported the information internally as long as they provided the same information to the SEC within 90 days. As a result, employees would be able to report their information internally first while preserving their place in line for a possible SEC reward. The rules also would permit the SEC to consider providing higher awards to whistleblowers who first reported their information through effective company-compliance programs.
In addition, whistleblowers would be protected from retaliation.
