The U.S. Securities and Exchange Commission has broad authority to investigate violations of federal securities law. While the SEC has a variety of ways to uncover illegal insider trading, the commission regularly relies on information from whistleblowers.
To encourage whistleblowers to report what they know, the SEC has established the Whistleblower Protection Program. Those who have information about an unlawful securities transaction and are considering sharing it with an investigative or enforcement authority should know how to take advantage of the WPP.
In response to the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, this wide-sweeping legislation prevents employers from taking adverse employment action against their whistleblower employees.
To comply with Dodd-Frank, employers must not discharge, suspend, demote, harass or otherwise discriminate against employees who report conduct that may violate U.S. securities law. Employers also must not otherwise impede an employee from reporting possible securities violations.
To encourage whistleblower disclosures, Dodd-Frank also offers financial awards to those who provide original and material information about a possible breach of securities law. For a tip to qualify for the WPP, the information provided must not be publicly available. It must also make a difference in an investigation of securities malfeasance.
The SEC regularly accepts whistleblower tips about the following:
- Insider trading
- Securities fraud
- Ponzi schemes
- Unregistered securities offerings
- Other types of securities fraud
If a whistleblower’s material tip leads to monetary sanctions of at least $1 million, his or her participation in the WPP may lead to financial compensation. Dodd-Frank authorizes eligible whistleblowers to receive an award of between 10% and 30% of recovered monetary sanctions.
Financial compensation may motivate employees to file an SEC whistleblower complaint, but they may not want to act too quickly. After all, legal exposure is a possibility. Accordingly, after determining the information is original and material, they should carefully weigh the risks and benefits of participating in the SEC’s WPP.