October 12, 2011
(Editor’s note: On July 21, 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law. Dodd-Frank represented the largest financial regulatory reforms since the Great Depression, and many are still trying to figure out exactly how they are impacted by the 850-page Act. Throughout the month of October, we’ll be looking at some of the major features of this complex law.)
For the first installment on the Consumer Financial Protection Bureau, click here.
Last week’s post discussed the Consumer Financial Protection Bureau (CFPB), a prominent creation of Dodd-Frank that has generated quite a bit of controversy since the bill was passed.
Another part of Dodd-Frank is also causing an uproar, but this provision was not particularly notable prior to the bill’s passage.
That piece, Section 922 of the Dodd-Frank Act, is widely known as the “whistleblower bounty” provision.
While there were myriad existing whistleblower laws when Dodd-Frank was passed, this one’s a tad different.
Other whistleblower protections, such as Sarbanes-Oxley’s Section 1107 that provides criminal sanctions for retaliation against whistleblowers, merely shield those who report illegal activity within a corporation.
Dodd-Frank takes a different approach.
Although Dodd-Frank also shields whistleblowers from retaliation (by creating a private civil action against retaliation), it does something else, too.
As its common moniker implies, the section offers a reward to employees (and others) to report a securities laws violation to the Securities and Exchange Commission (SEC).
There are a few provisos, though.
First, the information must be “original,” meaning that the SEC wasn’t itself already aware of it.
The purpose behind this condition should be obvious: it doesn’t make any sense to pay for information already held.
Next, any whistleblower making an anonymous claim must be represented by counsel.
The rationale here is, presumably, to deter illegitimate claims by forcing potential informants to either endure the scrutiny of publicly reporting a violation or consult with an attorney beforehand (who would theoretically inform the whistleblower whether the claim is valid).
Third, the information provided by the whistleblower must lead to a successful enforcement action with penalties of $1 million or more.
Since the bounties are paid from penalties assessed against securities laws violators, this last part just makes sense.
Speaking of bounties, just how much are we talking?
The whistleblower meeting the above criteria can expect a reward of between 10% and 30% (determined at the SEC’s discretion) of the monetary sanctions imposed.
Considering that SEC enforcement penalties can typically reach tens or hundreds of millions of dollars, getting such a bounty is like winning the lottery.
Though the provision seems to offer clear benefits to the prevention of securities fraud, it, as mentioned earlier, still has its vocal detractors.
Specifically, critics charge that the provision undermines the policies found at most corporations that stipulate employees are to first (and possibly only) report any securities violations internally.
This, claim the critics, deprives the company of its chance to remedy the violations itself and avoid monetary sanctions.
True enough. But would as many employees report violations internally as would report them to the SEC for a small fortune?
Moreover, the thought of a legion of employees salivating over the potential for a whistleblower bounty is surely enough to motivate any corporation to tighten up internal safeguards as much as possible to try and prevent any violations from occurring in the first place.
Nevertheless, the SEC responded to these criticisms by adding additional factors in determining the size of the award: voluntary participation in an internal compliance system can increase the award’s size, but interference with internal compliance can decrease it.
With the final rules adopted only on August 12, 2011, it may be too soon to tell exactly what effect they will have on the reporting of securities violations.
However, with as massive of a shift the provision represents, it’s unlikely that the impact will be anything but significant.