January 13, 2011

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SEC Proposes Whistleblower Provisions of Dodd-Frank

The United States Securities and Exchange Commission has proposed rules to implement the whistleblower provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Those provisions - sometimes referred to as "bounty" provisions - generally require the SEC to pay a reward to whistleblowers who voluntarily provide the SEC with original information about a violation of the securities laws that leads to the successful enforcement of a federal court or administrative action brought by the SEC. While the SEC previously limited awards to no more than 10% of civil penalties collected in insider trading cases, Dodd-Frank provides for substantially larger awards ranging from 10% to 30% of collected monetary sanctions that exceed $1 million. The precise amount of the award in a given case would be left to the discretion of the SEC.

To qualify for an award under the proposed rules, a whistleblower must provide "original information" based upon the whistleblower's independent knowledge or analysis, and not derived from public sources or already known to the SEC. The information must be provided "voluntarily," before the government, a self-regulatory organization or the Public Company Accounting Oversight Board requests it. The information also must lead to the successful enforcement by the SEC of a federal court or administrative action resulting in more than $1 million in monetary sanctions. Certain individuals would not qualify for an award, such as "culpable" whistleblowers who are criminally convicted of a violation related to the underlying conduct (those who are not convicted would be limited in their recovery), and attorneys, auditors or others who have a pre-existing legal or contractual duty to report the information at issue.

Perhaps the most controversial aspect of the proposed rules is the absence of any requirement that employees comply with existing internal compliance and reporting systems, which many companies have developed and/or strengthened in the wake of the Sarbanes-Oxley Act of 2002. While the proposed rules permit an employee to be treated as a whistleblower as of the date the employee reports the information internally, provided the employee provides the same information to the SEC within 90 days, doing so is not required. In addition to potentially incentivizing employees to bypass internal compliance programs, commentators have expressed concern that the proposed rules may encourage employees to delay reporting misconduct in an effort to accumulate more evidence and/or to increase the amount of monetary sanctions upon which any award ultimately would be based.

Although the proposed rules do not expand significantly on Dodd-Frank's substantive protections, the statute does prohibit retaliation by employers against individuals who provide the SEC with information about potential securities violations. Among other provisions, Dodd-Frank creates a separate potential cause of action for employees in the financial services industry who claim to have suffered retaliation for disclosing information about fraudulent or unlawful conduct related to the offering or provision of consumer financial products or services. The retaliation protections afforded to whistleblowers apply irrespective of whether a whistleblower satisfies the procedures and conditions to qualify for a monetary award.

The SEC is currently considering comments on the proposed rules, and likely will issue final rules in early 2011. In the meantime, companies would be well-advised to review their internal compliance programs, educate employees about those programs and the value of internal reporting, maintain strong anti-retaliation policies and appropriate documentation concerning internal investigations, and seek legal counsel as appropriate.

If you have any questions about the SEC's proposed rules, please contact Andrea Lisenbee at (602) 440-4832, or any member of Ryley Carlock & Applewhite's Labor and Employment Practice Group.


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