White Collar Update

Dodd-Frank Whistleblower Bounties Present Compliance Challenges

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”). The Reform Act includes a provision designed to encourage whistleblowers to report securities law violations to the U.S. Securities and Exchange Commission (“SEC”) by providing bounties of 10% to 30% of the monetary sanction resulting from a “successful enforcement” action where the total sanction exceeds $1 million. The bounty is available for sanctions collected in an SEC action, as well as in actions brought by the Attorney General of the United States, a regulatory authority, a self-regulatory authority or a state attorney general in a criminal proceeding.

Significantly, bounty eligibility is limited to whistleblowers who provide information “derived from the independent knowledge or analysis” of the whistleblower, that is “not already known to the [SEC] from any other source,” and that is not “exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, hearing, audit, or investigation, or from news media, unless the whistleblower is the source of the information.”

The SEC has full discretion to determine the reward percentage the whistleblower should receive, and it will consider factors such as the significance of the information disclosed, the degree of assistance provided, and the SEC’s interest in deterring violations through the whistleblower reward. The SEC will pay the reward out of its newly-established Investor Protection Fund, which is financed through the monetary sanctions collected by the SEC.

It would be surprising if the bounties do not lead to an uptick in whistleblower reports, as a whistleblower is more likely to act where there is a prospect for a large monetary reward. Given the size of recent penalties in the Foreign Corrupt Practices Act area alone—upwards of $300 million or more—the potential for multi-million dollar bounties is real and apparent.

Most important for corporate compliance programs, the Reform Act’s whistleblower provision sets up a potential race to disclose between companies and whistleblowers that encourages the whistleblower to bypass traditional internal mechanisms for reporting compliance issues. Because a whistleblower can receive a reward under the Reform Act only if she provides the SEC with original information, she may not be willing to run the risk that by notifying the company of misconduct, the company will self-report to the SEC before the whistleblower can stake her claim.

The SEC is already planning for a deluge of new cases under the Reform Act. The Chairman of the SEC recently testified that the SEC will need 800 new staffers to deal with the effects of the Reform Bill, and the White House has proposed boosting the SEC’s budget by 12% next year.

Companies will need to be creative in developing a compliance culture that encourages would-be whistleblowers to report potential violations to the company first. In particular, companies must reassess their compliance programs, consider retraining employees and provide real incentives for the use of internal whistleblower hotlines and other reporting mechanisms.

A link to the complete text of the Reform Act can be found here.