PART ONE: SEC and Employment Law Protect and Compensate Whistleblowers
In a 3 to 2 vote the SEC recently approved whistleblower compensation rules. With these new rules the SEC is hoping to prompt employees with enticing monetary incentives to report their employer’s misconduct. It is also hoped that this will encourage companies self-report violations to the SEC.
What is the whistleblower compensation plan?
In the past the SEC has been reluctant to use what little authority they had to compensate whistle blowers but with the Dodd-Frank Act Section 922 whistleblowers can now be rewarded for tipping off the SEC whereby the monetary sanction exceeds $1 million. Furthermore the compensation a whistleblower can now receive for helping the SEC has been raised from 10% to 30% of the monetary sanction. Next the SEC will provide congress with annual reports of whistleblower claims in an effort to compensate whistleblowers more often. It’s also important to note that section 924 of the Dodd-Frank requires the implementation of the whistleblower compensation system to be ran by a separate office also designed to process claims by whistleblowers. Lastly, protections for whistleblowers from retaliation are strengthened, should an employer retaliate against a whistleblower the employee could be reinstated or recover up to 2 times back pay. Protections for whistleblowers in the Sarbanes-Oxley Act are expanded to cover employees of subsidiaries of public companies. The rules that the SEC adopted to implement the whistleblower compensation provisions of Dodd-Frank will be effective in July 2011.
Eligibility for Whistleblower Compensation
In order for a whistleblower to receive compensation several conditions must be satisfied:
(i) the Whistleblower must voluntarily offer information and must do so prior being requested to do so by the government or a self-regulatory organization in an inspection or investigation;
(ii) the information must be given to a governmental or self-regulatory organization. A report to a company's internal compliance or corporate governance official can count as report to the government provided either the whistleblower or his or her company reports the information to the government within 120 days of the internal report;
(iii) the information must be original information, that is based upon the whistleblower's own knowledge or analysis and is not previously known to the entity to which it is reported and must "relate to a possible violation of the federal securities laws;"
(iv) the information must lead to a successful enforcement action, which means the SEC brings a successful enforcement action based in whole or in part on the conduct identified in the whistleblower's information;
(v) the successful enforcement action imposes monetary sanctions (fines, disgorgement, and interest) of more than $1 million.
Dodd-Frank and the whistleblower compensation rules also establish who is not eligible for reward:
(i) anyone who had a pre-existing legal or contractual duty to report the information to the governmental entity;
(ii) attorneys who report privileged information, unless such reports are permitted under SEC rules or state bar rules;
(iii) anyone who obtains the information through the commission of a crime;
(iv) foreign government officials;
(v) employees who learn the information through a firm's hotline;
(vi) compliance and internal audit personnel, with some exceptions; and
(vii) governmental employees and people who are criminally convicted in connection with the conduct they report.
How Compensation is determined
Just because the SEC can award a whistle blower 30% of the sanctioned amount doesn’t necessarily mean that it is guaranteed. The SEC may chose to award more money based on the significance of the information provided by the whistleblower, the assistance provided by the whistleblower, law enforcement interest in the matter, and the whistleblower's participation in internal compliance systems. Or the SEC may decrease the amount of a whistleblower's reward, based on the whistleblower's culpability, an unreasonable reporting delay, and the whistleblower's interference with internal compliance and reporting systems.
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