Friday, November 12, 2010

SEC Proposes Rules for Tipster Program

On November 3, 2010, the Securities and Exchange Commission voted unanimously to propose a whistleblower program pursuant to Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Dodd-Frank substantially expands the SEC’s authority to compensate individuals who provide information that results in a successful action for violations of securities laws.

Cosgrove Law, LLC has previously written about the specific provisions in Section 922, which an in-depth discussion of this Section can be found here. The SEC’s rule proposals maintain the original language and definitions provided by Dodd-Frank; however, the proposed rules go a bit further to address concerns about the beefed-up tip program. According to an SEC press release, the primary concern was that companies feared the program would undermine existing anonymous hotlines and other internal whistleblower programs put into place after Sarbanes-Oxley in 2002.

To address those fears, the SEC proposal includes a protection that will not disqualify tipsters if they first report internally provided they report to the SEC within 90 days and to give them extra bounty for first reporting wrongdoing through the proper company channels.

Additionally, the SEC’s proposed rules set out a list of ineligible informants. Generally, compliance staff, outside accountants, attorneys who attempt to use information gathered from internal investigations, people within a company who are in positions of responsibility, and people who have a pre-existing duty to report their information are all barred from the award system.

Despite these exclusions, the bounty program is very broad. It allows tips on any securities law violation by an individual or company, public or private. The program also awards people that have no insider knowledge, but provide an analysis to help uncover or detect fraud. Further, even tipsters who were complicit in the fraud can get an award if they are not convicted of any wrongdoing.

The promise of potentially multi-million dollar payouts for tipsters could provide the agency with more information from insiders with knowledge of big frauds than in the past.

The rule comment period will be open until December 17, 2010.

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