Divided SEC Adopts Rules Implementing Dodd-Frank Whistleblower Award Provisions

Transcription

1 June 3, 2011 Divided SEC Adpts Rules Implementing Ddd-Frank Whistleblwer Award Prvisins On May 25, 2011, the Securities and Exchange Cmmissin ( SEC r the Cmmissin ) adpted the final rules (the Rules ) 1 implementing Sectin 21F f the Securities Exchange Act f 1934 ( Exchange Act ), Securities Whistleblwer Incentives and Prtectin. Adptin f the Rules was by a 3-2 vte. Sectin 21F was added t the Exchange Act by the Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act ( Ddd- Frank ) 2 and requires that the SEC shall pay an award t ne r mre whistleblwers wh have vluntarily prvided riginal infrmatin t the Cmmissin that led t the successful enfrcement f the cvered judicial r administrative actin, r related actin. A cvered judicial r administrative actin is an actin brught by the SEC under the Federal securities laws thse results in mnetary sanctins exceeding $1,000, This memrandum prvides an verview f the Rules issued by the SEC in a 305-page release. I. Definitins A. Whistleblwer The Rules define the term whistleblwer as smene wh prvides infrmatin t the SEC, pursuant t prcedures set frth in the Rules, relating t a pssible vilatin f the Federal securities laws. 4 T be eligible fr an award, a whistleblwer must vluntarily submit riginal infrmatin in accrdance with the prvisins stipulated in the Rules 5. Hwever, even if ne is nt eligible fr an award, whistleblwers will be entitled t the anti-retaliatin prtectin under the Exchange Act 6 if they pssess a reasnable belief that the infrmatin... relates t a pssible securities law vilatin... that has ccurred, is nging, r is abut t ccur Implementatin f the Whistleblwer Prvisins f Sectin 21F f the Securities Exchange Act f 1934, 17 CFR Parts 240 and 249, Release N (May 25, 2011) (the Adpting Release ) available at Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act, H.R. 4173, 111th Cng. (2010). Exchange Act Sectin 21F(b)(1) and Sectin 21F(a)(1). Rule 21F-2(a)(1). The final rule mdified the rule as prpsed, which referred t infrmatin relating t a ptential vilatin, t a pssible vilatin... that has ccurred, is nging, r is abut t ccur. The change was meant t prvide greater clarity as t wh is eligible fr whistleblwer prtectin, regardless f the utcme f the investigatin. The SEC interprets pssible vilatin as requiring a facially plausible relatinship t sme securities law vilatin, thereby weeding ut frivlus submissins. SEC Cmmissiner Try A. Paredes expressed cncern at the SEC pen meeting n May 25, 2011 that this phrasing wuld result in the SEC being inundated with allegatins, nt all f which will be fruitful fr [the SEC] t pursue. Hwever the majrity f the Cmmissiners felt that Rule 21F-2(b)(1) prtects against this eventuality by creating a reasnable belief standard which requires a subjectively genuine belief that infrmatin demnstrates a pssible vilatin, and that this belief is ne that a similarly situated emplyee might reasnably pssess. Set frth in Rules 21F-4, 21F-8 and 21F-9. Sectin 21F(h)(1)(A) f the Exchange Act prvides: N emplyer may discharge, demte, suspend, threaten, harass, directly r indirectly, r in any ther manner discriminate against, a whistleblwer in the terms and cnditins f emplyment because f any lawful act dne by the whistleblwer[.] Rule 21F-2(b)(1)(i). 1

2 1. Vluntarily The Rules deem a submissin t be made vluntarily s lng as it is made befre any request, inquiry, r demand that relates t [the] subject matter f the submissin is directed t [the whistleblwer] r anyne representing [the whistleblwer] frm the SEC, the Public Cmpany Accunting Oversight Bard ( PCAOB ) r any ther self-regulatry rganizatin, r in cnnectin with an investigatin by Cngress, any ther authrity f the federal gvernment, r a state Attrney General r securities regulatry authrity. 8 Submissins will nt be deemed vluntary: if they are first furnished in respnse t a request r inquiry by the SEC r ther regulatry authrity, even if furnishing the infrmatin in respnse t the request is nt cmpelled by subpena r ther applicable law; 9 r if the infrmatin is required t be reprted t the SEC by a preexisting legal r cntract duty wed t the SEC r ne f the ther regulatry authrities listed in the Rules r is required by judicial r administrative rder Original Infrmatin The Rules define riginal infrmatin as infrmatin that is: (i) derived frm the independent knwledge r independent analysis f the whistleblwer; (ii) nt already knwn t the SEC frm anther surce, unless the whistleblwer is the riginal surce; (iii) nt exclusively frm infrmatin publicly available; and (iv) prvided t the SEC fr the first time after July 21, 2010, the date f enactment f Ddd-Frank. 11 The Rules further define independent knwledge as factual infrmatin... nt derived frm publicly available surces, and define independent analysis as the examinatin and evaluatin f infrmatin that may be publicly available, but which reveals infrmatin that is nt generally knwn r available t the public. 12 B. Exclusins frm whistleblwer status One f the mst htly cntested debates during the cmmenting prcess was the scpe f the exclusins frm whistleblwer status in light f Cngressinal intent in enacting Exchange Act Sectin 21F, and the Rules Rule 21F-4(a)(1). Ntably, the Cmmissin declined t include internal cmpliance investigatin requests in the Rule 21F-4(a)(1) list. Rule 21F-4(a)(2). Rule 21F-4(a)(3). The Cmmissin rejected suggested mdificatins which wuld have precluded vluntariness in situatins in which the whistleblwer had already becme aware f an investigatin, but nt yet been requested t prvide infrmatin by a regulatr. Adpting Release at Rule.21F-4(b)(1). This definitin tracks the definitin f riginal infrmatin in Exchange Act Sectin 21F(a)(3). Rule 21F-4(b) (2) and (3). 2 2

3 cntain a list f exclusins. The Cmmissin will nt cnsider infrmatin by surces within any f the enumerated exclusins t be based n the independent knwledge r analysis f a whistleblwer, and the surce f the infrmatin will nt be eligible fr an award. 1. Attrney-client privilege and ther attrney cnduct Infrmatin btained frm a cmmunicatin prtected by attrney-client privilege is excluded frm whistleblwer eligibility as nt being derived frm independent knwledge r independent analysis. 13 Similarly, a whistleblwer may nt receive an award due t infrmatin btained thrugh legal representatin f a client f the whistleblwer r the whistleblwer s emplyer. 14 Neither f these exclusins will apply in circumstances where an attrney is permitted t disclse therwise privileged infrmatin. Such circumstances may include instances in which the attrney-client privilege has been waived r when reprting is permitted under the SEC s rules f practice 15 r is therwise permitted by state bar rules. The prpsed frm fr submitting infrmatin asks the whistleblwer t identify with particularity any infrmatin that was btained frm an attrney r in a cmmunicatin where an attrney was present Respnsible cmpany persnnel, cmpliance prcesses, and independent public accuntants 17 The Rules list fur additinal categries f peple wh cannt meet the criteria fr independent knwledge r analysis. They are: All fficers, directrs, trustees, r partners f an entity in circumstances where they btained the infrmatin because smene else infrmed them f ptential miscnduct, r if they learned f a pssible vilatin thrugh the entity s internal cmpliance mechanisms. 18 Emplyees wh wrk primarily fr the entity s internal cmpliance r audit prcesses, as well as emplyees f utside firms retained fr internal cmpliance r audit services fr the entity Rule 24F-4(b)(4)(i). Rule 24F-4(b)(4)(ii). Standards f Prfessinal Cnduct fr Attrneys Appearing and Practicing befre the Cmmissin in the Representatin f an Issuer, 17 CFR 205.3(d)(2). The Cmmissin felt that the Rules send a clear, imprtant signal t attrneys, clients, and thers that there will be n prspect f financial benefit fr submitting infrmatin in vilatin f an attrney s ethical bligatins. Adpting Release at 61. Rules 21F-4(b)(4)(iii)(A)-(D). The Cmmissin narrwed the scpe f this exclusin as riginally prpsed by remving nn-fficer supervisrs because the Cmmissin believed this wuld create t sweeping an exclusin f persns wh may be in a key psitin t learn abut miscnduct. The Cmmissin als made explicit that this exclusin shuld nt perate as a general bar against fficers, s lng as the fficer discvers the infrmatin by means ther than internal cmpliance r emplyee allegatins. Adpting Release at This rule differs frm the rules cncerning attrneys and fficers in that the manner by which the internal cmpliance r audit emplyees discver a pssible vilatin is irrelevant: the rule excludes internal cmpliance and audit emplyees per se, subject t the exceptins set frth in Rule 21F-4(b)(4)(v). 3 3

4 Infrmatin submitted by emplyees f firms retained t cnduct internal investigatins int pssible vilatins by the entity. Infrmatin learned by emplyees f a public accunting firm thrugh an audit r ther engagement required under federal securities law. 20 There are, hwever, a number f exceptins t the fur categries f exclusins listed abve. 21 If ne f the exceptins applies, then the whistleblwer may be eligible t receive an award ntwithstanding the fact that the whistleblwer falls within ne f the excluded categries. The exceptins are: If the designated persn has a reasnable basis t believe that the disclsure f the infrmatin t the Cmmissin is necessary t prevent the relevant entity frm engaging in cnduct that is likely t cause substantial injury t the financial interest r prperty f the entity r investrs. 22 If the designated persn has a reasnable basis t believe that the relevant entity is engaging in cnduct that will impede an investigatin f the miscnduct. 23 If the infrmatin is prvided t the Cmmissin 120 days after the whistleblwer brught the pssible vilatin t the attentin f the audit cmmittee, chief legal fficer, r chief cmpliance fficer Exclusin f infrmatin btained thrugh vilatin f criminal law Infrmatin that a whistleblwer btained by a means r in a manner that vilates applicable federal r state criminal law is als excluded frm the definitin f independent knwledge. The SEC stated that it did nt believe individuals shuld be rewarded fr vilating a federal r state criminal law E.g., brker dealer annual audits pursuant t Rule 17a-5 f the Exchange Act. Rule 21F-4(b)(v). The Cmmissin justified the exceptin based n a belief that it is in the public interest t accept whistleblwer submissins and reward whistleblwers wh prvide infrmatin that allws the Cmmissin t take enfrcement actin t prevent substantial injury t the entity r t investrs. Adpting Release at 74. Examples f such cnduct are: destrying dcuments, imprperly influencing witnesses, r engaging in ther imprper cnduct that may hinder an SEC investigatin. Adpting Release at 75. Cmmissiner Paredes in his pen meeting remarks pined that this and the ther exceptins culd ptentially swallw the general rule that cmpliance and internal audit persnnel are nt eligible t receive bunties. Paredes suggested that it may nt be difficult fr an individual t assert the reasnable belief required t fall within ne r bth f these exceptins, even if the belief is nt well-funded in fact. The 120 day perid begins running either frm the date the whistleblwer infrmed ther senir respnsible persns at the entity, r his r her supervisr, abut the vilatins, r frm the date the whistleblwer received the infrmatin, if the whistleblwer was aware that these ther persns already knew f the vilatins. The Cmmissin nted that the 120 day perid is nt intended t, and des nt, create and new r special duties f disclsure n entities t reprt vilatins r pssible vilatins f law t the Cmmissin r t ther authrities. The Cmmissin als stated that the requirement is nt intended as an implicit deadline fr any internal investigatin. Adpting Release at Rule 21F-4(b)(4)(iv). Adpting Release at

5 C. Infrmatin that leads t successful enfrcement The Rules define infrmatin that leads t successful enfrcement as any infrmatin: [S]ufficiently specific, credible, and timely that wuld cause the SEC t cmmence an examinatin, pen an investigatin, repen an investigatin that the Cmmissin had clsed r t inquire int new cnduct regarding an pen investigatin, s lng as the actin was brught based in whle r in part n cnduct that was the subject f [the whistleblwer s] riginal infrmatin. 26 The Cmmissin has stated that it des nt anticipate a rigid, mechanical applicatin f this standard and will mainly assess the degree t which the persns, entities, and cnduct crrespnd between the submissin and the actin. 27 Abut cnduct already under investigatin if the submissin significantly cntributed t the success f the actin. 28 The Cmmissin clarified its psitin n this standard smewhat, stating that factrs it will cnsider are: whether the infrmatin reduced the amunt f time r resurces necessary t carry ut the actin r added successful claims t the actin. 29 The Cmmissin als made explicit that, in mst cases, there will be n award fr a whistleblwer wh was aware f an inquiry r demand by the SEC r ther enfrcement agency and wh withheld r delayed prviding respnsive dcuments t the SEC. 30 Infrmatin reprted t internal cmpliance which reaches the Cmmissin by the actins f either the whistleblwer r by internal cmpliance persnnel may be attributed t the whistleblwer if it meets either f the abve tw criteria. 31 II. Criteria fr Determining the Amunt f an Award In general, determining the amunt f an award is within the SEC s discretin, 32 althugh it must be at least 10 percent and n mre than 30 percent f the ttal mnetary sanctins that the SEC is able t cllect. 33 If mre than ne whistleblwer cntributes t the same r related actin, the aggregate award t all whistleblwers must fall within the 10 percent t 30 percent windw. 34 As determined by the Cmmissin, factrs that may increase the amunt f an award are: Rule 21F-4(c)(1). Adpting Release at 98. Rule 21F-4(c)(2). Adpting Release at 100. Id. Rule 21F-4(c)(3). Rule 21F-5(a). Rule 21F-5(b). Rule 21F-5(c). 5 5

6 The significance f the infrmatin prvided by the whistleblwer, including its relatin t the underlying actin, the reliability and cmpleteness f the infrmatin, and the degree t which the infrmatin supprted a successful claim r claims. 35 The assistance prvided by the whistleblwer. 36 The factrs the Cmmissin may cnsider under this prng are: Whether the whistleblwer prvided nging assistance and the depth f his r her assistance; The timeliness f the initial reprt; Resurces cnserved as a result f the whistleblwer s assistance; Whether the whistleblwer encuraged thers t prvide assistance t the investigatin; Effrts f the whistleblwer t lessen the harm caused by the vilatins; and Any hardship suffered by the whistleblwer as a result f prviding the infrmatin. The Cmmissin s interest in prmting whistleblwer submissins in given circumstances. Under this factr, the Cmmissin will cnsider whether an award will encurage high-quality tipping, whether the subject matter f the actin is a Cmmissin pririty, and the ptential harm t investrs frm the underlying cnduct. 37 The extent t which the whistleblwer participated in internal cmpliance mechanisms at the entity. Factrs that may decrease the amunt f an award are: The whistleblwer s persnal culpability in the cnduct underlying the actin. 38 The Cmmissin will als cnsider whether r nt the whistleblwer interfered with any prtin f the investigatin. 39 Whether the whistleblwer unreasnably delayed reprting the vilatin. 40 Whether the whistleblwer interfered with r undermined the entity s internal cmpliance mechanism Rule 21F-6(a)(1). Rule 21F-6(a)(2). Rule 21F-6(a)(3). Rule 21F-6(b)(1). Rule 21F-6(b)(1)(vii). Rule 21F-6(b)(2). 6 6

7 III. Cnfidentiality f Submissins 41 The Cmmissin may nt disclse infrmatin that culd reasnably be expected t reveal the identity f a whistleblwer, subject t the fllwing exceptins: If such disclsure is required t a defendant r respndent in a judicial r administrative actin; 42 If the SEC determines that such disclsure is necessary t accmplish the purpses f the Exchange Act... and t prtect investrs, it may prvide relevant infrmatin t the Department f Justice, regulatry authrities, self regulatry rganizatins, state attrneys general in cnnectin with a criminal investigatin, state regulatry authrities, r the PCAOB. The SEC may als prvide infrmatin t freign securities and law enfrcement agencies. In thse circumstances, the SEC will determine what assurances f cnfidentiality are apprpriate in a given situatin. 43 The Cmmissin is permitted t make disclsures in accrdance with the Privacy Act f IV. Prcedures fr Submitting Infrmatin 45 T be eligible fr an award, a whistleblwer must either submit infrmatin thrugh the SEC website r cmplete Frm TCR (Tip, Cmplaint, r Referral). 46 Frm TCR allws fr multiple whistleblwers t make a jint submissin n a single frm. The Rules require that the whistleblwer submit the infrmatin under penalty f perjury in rder t be eligible fr an award. Hwever, annymus submissins are permitted, prvided that an attrney representing the whistleblwer submits the infrmatin pursuant t and certifies that he r she knws the identity f the whistleblwer. 47 V. Prcedure fr Making a Whistleblwer Award Claim 48 After a successful enfrcement actin has been cmpleted, the SEC will pst a Ntice f Cvered Actin n the SEC website. A whistleblwer has 90 days frm the date f the psting t file an award claim. In Exchange Act Sectin 21F(h)(2) and Rule 21F-7(a). Rule 21F-7(a)(1). Rule 21F-7(a)(2). Rule 21F-7(a)(3). The Privacy Act (5 U.S.C. 552a) prhibits the disclsure f infrmatin frm a system f recrds absent the written cnsent f the subject individual, unless the disclsure is pursuant t ne f twelve statutry exceptins. Rule 21F-9. Rule 24F-9(a). Rules 21F-9(b) and (c). Rule 24F

8 rder t submit a claim fr a whistleblwer award, the whistleblwer must submit the claim n Frm WB-APP. 49 The Claims Review Staff will then evaluate all timely Frm WB-APPs, and send the whistleblwer an initial assessment, entitled Preliminary Determinatin. 50 The whistleblwer will then have a 30 day perid within which he r she may cntest the Preliminary Determinatin. 51 Failure t submit a timely respnse will result in the Preliminary Determinatin becming a Final Order. 52 If the whistleblwer des file a timely respnse, the Claims Review Staff will review the issues raised in the respnse as well as any supprting dcuments and will then make a Prpsed Final Determinatin. 53 At this time, the Office f the Whistleblwer infrms the Cmmissin f the Prpsed Final Determinatin, and if within 30 days n Cmmissiner requests a review f the determinatin, it becmes a Final Order. 54 If a Cmmissiner des request a review, the entire Cmmissin will review the recrd and issue its Final Order. 55 The Cmmissin will als allw the whistleblwer t request that the Office f the Whistleblwer make available fr the whistleblwer s review the materials which were used as the basis fr the Preliminary Determinatin. A Final Order by the Office f the Whistleblwer may be appealed t a Federal appellate curt. Hwever, when the Cmmissin makes an award between 10 and 30 percent f the mnetary sanctin f the underlying actin, and bases its determinatin in the factrs set frth in the Rules, the Final Order award amunt is nt appealable. 56 VI. Materials Used in Determining Award Amunts In determining if an award is apprpriate and t what extent, the Claims Review Staff will use all publicly available materials relating t the actin, including the cmplaint, the ntice f hearing, the final judgment, any transcripts, any items that appear n the dcket, and any appellate decisins. 57 The staff will als review the claimant s Frm TCR, Frm WB-APP, and ther materials prvided by the whistleblwer. 58 The staff will lk at any swrn declaratins frm SEC staff r frm third parties Despite several cmments suggesting that the prcess fr claiming an award shuld be made simpler and less frmal by mdeling it after qui tam cases under the False Claims Act, the Cmmissin declined t d s, taking the psitin that such a prcess might unfairly favr whistleblwers wh wrked clsely with the SEC n a particular matter, while nt prviding full and fair pprtunity t ther submissins wrthy f an award. Adpting Release at Rule 24F-10(d). Rule 24F-10(e)(1)(i). Rule 24F-10(f). Rule 24F-10(g). Rule 24F-10(h). Id. Rule 21F-13(a). Rule 21F-12(a)(1). Rule 21F-12(a)(2)-(3). Rule 21F-12(a)(4) and (6). 8 8

9 VII. N Amnesty fr Whistleblwers The Rules state that prviding infrmatin t the Cmmissin under the Rules will nt prvide amnesty t any whistleblwer. While the Rules state that the Cmmissin will take any cperatin int cnsideratin, it will still pursue an actin against a whistleblwer if it deems ding s apprpriate. 60 Furthermre, in determining whether an actin meets the $1,000,000 threshld fr a whistleblwer t be eligible fr award, the Cmmissin will nt take int accunt any mnetary sanctins paid by the whistleblwer, r if the sanctin is based substantially n cnduct that the whistleblwer directed, planned, r initiated. 61 * * * If yu have any questins abut the issues addressed in this memrandum r if yu wuld like a cpy f any f the materials mentined, please d nt hesitate t call r Charles A. Gilman at r cgilman@cahill.cm; Jn Mark at r jmark@cahill.cm; Jhn Schuster at r jschuster@cahill.cm Rule 21F-15. Rule 21F-16. This memrandum is fr general infrmatin purpses nly and is nt intended t advertise ur services, slicit clients r represent ur legal advice. 9 9