Dodd-Frank Whistleblower Program: 12 Facts You May Not Know

William H. ShawnCo-Managing Partner, ShawnCoulson

The Dodd-Frank Act, which was signed into law in 2010, provides substantial rewards to individuals who report corporate fraud to the Securities and Exchange Commission (SEC). Employees and others have strong incentives to blow the whistle on companies they suspect of violating federal securities laws.

Despite the fact the law has been in existence for several years, the whistleblower program is still not fully understood by companies, employees and others. Here are 12 interesting facts to help clarify how it works.

1. A whistleblower must submit “original information” that relates “to a violation of the federal securities laws, or a rule or regulation promulgated by the Commission.” Information relating only to a state law or foreign law violation does not qualify.

2. If a tip a whistleblower gives to the SEC leads to an enforcement action and penalties imposed on the company of more than $1 million, the whistleblower can receive a payment of between 10 to 30 percent of the penalties imposed. SEC staff members recommend whether an award should be given.

3. How does the SEC determine the percentage amount of a whistleblower award from 10 to 30 percent? The Commission has a methodology based on factors that can increase or decrease an award. For example, an award might be more if the information is significant, if the whistleblower provides assistance in an investigation. It might be decreased if the whistleblower was found to have some culpability in the violation or unreasonably delayed reporting it.

4. In order to receive an award, a whistleblower must submit “original information.” This is defined as information that is:

  • Derived from the independent knowledge or analysis of the whistleblower;
  • Not already known to the SEC from any other source;
  • 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; and
  • Provided to the SEC for the first time after July 21, 2010 (the Dodd-Frank Act enactment date).

In other words, information should come from a person’s own experiences, observations or communications, and not from a newspaper article, website page or court filing.

5. Dodd-Frank prohibits retaliation by employers against individuals who provide the SEC with information about possible securities violations. Retaliation protection is available regardless of whether or not the employee actually collects a cash award.

6. An individual meets the definition of whistleblower if he or she provides information about a “possible violation” that “is about to occur,” according to the SEC. It is not necessary that it already occurred.

7. A whistleblower is defined as “an individual who, alone or jointly with others, provides information to the Commission relating to a potential violation of the securities laws.” A company or other entity cannot qualify as a whistleblower.

8. Whistleblowers are eligible for awards only when they “voluntarily” provide original information about securities violations to the SEC. A submission of information is deemed to be voluntary if the whistleblower makes it before a SEC or other request, inquiry, or demand that relates to the subject matter of the submission is directed to the whistleblower or anyone representing him or her (such as an attorney).

9. A whistleblower is not eligible for an award if he or she obtains information “by a means or in a manner that is determined by a domestic court to violate applicable federal or state criminal law.”

10. Certain people are generally excluded from receiving cash awards. For example:

  • An attorney or an attorney’s employees cannot submit information subject to the attorney-client privilege.
  • An employee of an accounting firm cannot submit information derived though an engagement with an accountant.
  • An employee, who only learns about possible violations because he or she is interviewed in the course of a company internal investigation, cannot file a whistleblower submission claiming the information as his or her “independent knowledge” or “independent analysis.”
  • An assistant of a senior company officer, who is given information about a report concerning possible securities violations, cannot seek an award based on the information as long as the officer is barred from doing so.

11. If a whistleblower reports original information to other authorities or personnel involved in compliance and then submits the same information to the SEC within 120 days, the Commission would consider that the individual provided the information as of the date of his or her original disclosure. The purpose of this rule, according to the SEC, is to “protect the ability of the whistleblower to pursue internal or other channels to quickly address the violation while ensuring that the Commission receives this critical information in a timely fashion.”

12. The SEC treats all information submitted by Dodd-Frank whistleblowers as confidential and non-public. However, while anonymous submissions may be permitted in certain circumstances, information may be disclosed that could reasonably be expected to reveal the identity of a whistleblower. An example cited by the SEC: Disclosure of a whistleblower’s identity may be required in a related action brought as a criminal prosecution by the Department of Justice. This would be done “in light of the requirement of the Sixth Amendment of the Constitution that a criminal defendant (has) the right to be confronted with witnesses against him.”

For more information about complying with the Dodd-Frank Act, or if you have questions about the whistleblower program, contact your attorney.