Philip H. Hilder [1]
Khoa Thran [2]
On May 25, 2011, the Securities and Exchange Commission (“Commission”) implemented Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) entitled “Securities Whistleblower Incentives and Protection.”
[i] Section 21F, established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”), substantially expands the Commission’s authority to compensate individuals who provide the Commission with information about violations of federal securities law. Prior to the Act, the Commission’s bounty program was limited to insider trading cases and the amount of an award was capped at 10 percent of the penalties collected in the action. [ii]
The Act now requires the Commission to pay an award, subject to certain limitations, to eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of an action brought by the Commission that results in monetary sanctions exceeding $1 million. Awards will range, at the discretion of the Commission, from 10 to 30 percent of the sanctions. The Act also prohibits employer retaliation against individuals who provide the Commission with information about possible securities violations.
With the possibility of larger rewards and a larger set of reportable violations to claim such rewards, the Commission has set out specific regulations as to what a whistleblower is, which whistleblowers qualify, and what steps qualifying whistleblowers have to take to claim and appeal awards. This article will lay out the general guidelines for those who qualify for an award and the procedures for claiming and appealing an award. It will also address, in brief, the anti-retaliation protection afforded by the Act.
Who is a whistleblower?
The Commission has established two separate definitions for a whistleblower. The first applies to individuals seeking an award. It is important to note that not all whistleblowers qualify for an award. The second definition of whistleblower applies to individuals who are seeking anti-retaliation protection.
For the purposes of awards, the Commission has broadly defined qualifying violations and, therefore, broadly defined who qualifies as a whistleblower. According to § 240.21F-2(a), a whistleblower is a natural person who, alone or jointly with others, provides the Commission with information of a
possible violation of federal securities laws that has occurred, is ongoing, or
is about to occur. The rule establishes a low standard for reportable security law violations, allowing you to report “possible” violations rather than “likely” or “probable” violations. It also allows for you to report violations that have yet to occur.
The definition of a whistleblower is similarly broad for the anti-retaliation protections afforded under § 21F(h)(1) of the Exchange Act. For anti-retaliation purposes, a whistleblower is someone who (i) possesses a reasonable belief that the information provided relates to a possible securities violation and (ii) has provided the information in a manner described by the § 21F(h)(1)(A) of the Exchange Act. A “reasonable belief” is a subjective-objective standard, wherein you must subjectively believe that there is a potential violation and this belief must be objectively reasonable. The anti-retaliation protections apply regardless of whether you satisfy the requirements for an award. It is important to note that being a whistleblower does not grant amnesty to the individuals that partook in the violations. (§ 240.21F-15).
Eligibility Requirements
To qualify for an award, a person must be an
eligible whistleblower. Eligible whistleblowers are the individuals that meet the definition in the prior section (§ 240.21F-2) and are not disqualified by §§ 240.21F-8 and 240.21F-16. These disqualifications will be discussed in the next Section of the article.
The Commission, per § 240.21F-3, will pay an award to any eligible whistleblower that (i) voluntarily provide the Commission (ii) with original information (iii) that leads to the successful enforcement by the Commission of a federal or administrative action (iv) in which the Commission obtains monetary sanctions
totaling more than $1 million. The Commission will also award certain related actions that meet the above criteria. Related actions are judicial or administrative actions brought by (i) the Attorney General of the United States, (ii) an appropriate regulatory authority, (iii) a self-regulatory organization , or (iv) a state attorney general in a criminal case. The terms appropriate regulatory authority, self-regulatory organization, voluntary, original information, leads to successful enforcement, action, and monetary sanctions are defined in § 240.21F-4.
According to § 240.21F-8, to be eligible for a whistleblower award, a person must submit the information and make a claim in the form and manner proscribed by the Commission in §§ 240.21F-9 through 240.21F-11. The Commission may further require a whistleblower to (i) provide explanation and other assistance to evaluate the information submitted, (ii) provide all additional information in possession related to the subject matter, (iii) provide testimony or other acceptable evidence, and (iv) enter into a confidentiality agreement in a form acceptable to the Commission’s Office of the Whistleblower.
Restrictions on Eligibility
Although there are many reportable offenses that would qualify an individual as a whistleblower, the Commission has placed many restrictions on which of these whistleblowers may collect an award. Generally, § 240.21F-8(c) states that individuals who have a duty to find, to assess, and to report violations are not entitled to awards.
Individuals who are a part of the SEC or other governmental regulating organization during the time they acquired the original information do not qualify for awards. Neither do people who are members, officers, or employees of a foreign government or foreign regulatory authority. Immediate family members of a member or an employee of the Commission and people who reside in the same household as a member or an employee of the Commission may not qualify for an award. Subject to exceptions in § 240.21F-8(c)(6), individuals who received their information from an audit of a company’s financial statement and those who receive their information from such auditors are also excluded. Individuals are disqualified if they are convicted of a criminal violation that is related to the Commission’s or a related action. Individuals are further disqualified if, in their whistleblower submission or in dealings with an authority related to an action, they knowingly and willfully make any false, fictitious, or fraudulent statement with the intent to mislead or otherwise hinder the authority.
Further limitations are imposed through the definitions in § 240.21F-4 of the terms “voluntary” and “original information.” The Commission will not consider information voluntarily submitted if the individual is required to report the information to the Commission because of a preexisting legal duty, a contractual duty owed to the Commission or other authorities, or if a duty that arises out of a judicial or administrative order. Furthermore, a submission is not voluntary if it is made after a request, inquiry, or demands from the Commission or other authorities.
Original Information Required
Original information must, among other things, be from the whistleblower’s independent knowledge or independent analysis. The Commission will not consider the following independent:
- (i) information obtained through attorney-client privilege communication,
- (ii) information obtained in connection with the legal representation of a client, and a person makes a whistleblower submission for their own benefit, and
- (iii) generally, if a person is employed or associated with a firm’s process to identify, report, and address possible violations of law.
Exceptions to (i) and (iii) are if there is a reasonable basis to believe that disclosure of the information to the Commission is necessary to prevent the relevant entity from engaging in conduct likely to cause substantial injury to financial interests or property of the entity or investors, a person will have a reasonable basis to believe that the relevant entity is engaging in conduct that will impede an investigation of the misconduct, or 120 days have elapsed since the information was provided to the relevant entity’s conduct committee or equivalent. Lastly, information does not qualify if it is gathered by means that violates applicable federal or state criminal law.
Amount of award
If all the above conditions are met and a whistleblower is eligible for an award in connection with an Commission action or related action, § 240.21F-5 states that the Commission will award between 10 to 30 percent of the monetary sanctions that the Commission and other authorities are able to collect. The Commission has full discretion as to the exact amount and may consider several factors listed in § 240.21F-6. Factors that may increase the amount awarded include (i) the significance of the information provided, (ii) the assistances provided by the whistleblower, (iii) law enforcement interests, and (iv) participation in internal compliance systems. Factors that may decrease the amount of awarded include (i) the whistleblower’s culpability, (ii) unreasonable reporting delay, and (iii) interference with internal compliance and reporting systems.
Making a Claim
Submitting original information – § 240.21F-9
To submit information to the Commission, a person or their counsel must use the Commission’s website (
www.sec.gov) or a Form TCR (Tip, Complaint or Referral). Forms must be sent to the Office of the Whistleblower, and must be declared, under penalty of perjury, at the time of submission that the information is true and accurate to the best of your knowledge.
Submitting a claim – §§ 240.21F-10 and 240.21F-11
Whenever the Commission secures a final judgment in an action that results in monetary sanctions totaling more than $1 million, the Office of the Whistleblower will publish a “Notice of Covered Action” on the Commission’s website. A claimant will have 90 calendar days from the date the Notice to file a claim for an award.
To file a claim for a whistleblower award, the eligible whistleblower must use Form WB-APP (Application for Award for Original Information Provided Pursuant to Section 21F of the Securities Exchange Act of 1934). The Office of the Whistleblower must receive the form, by mail or fax, within 90 calendar days of the date the Notice. If the information was provided anonymously, the person’s identity must be disclosed on the Form WB-APP and their identity must be verified in a form and manner that is acceptable to the Office of the Whistleblower.
If eligible to receive an award following a Commission action, the whistleblower may also be eligible to receive an award based on monetary sanctions for a related action. If the final order imposing monetary sanctions has been entered in a related action, a person must submit the claim for an award for a related action on the
same Form WB-APP that was submitted for the Commission’s action. If a final order has not been entered for a related action, there is a 90 day period from the issuance of a final order imposing sanctions in the related action to the submission of a
separate Form WB-APP to the Office of the Whistleblower.
Preliminary Determination
Once the time for filing any appeals of the Commission’s judicial or administrative action has expired or after all appeals in the action have been concluded, the staff designated by the Direct of the Division of Enforcement (“Claims Review Staff’) will evaluate all timely whistleblower award claims submitted on Form WB-APP. Following this evaluation, the Office of the Whistleblower will send to the whistleblower a Preliminary Determination setting forth a preliminary assessment as to whether the claim should be allowed or denied and, if allowed, the proposed award percentage amount.
To contest the Preliminary Determination made by the Claims Review Staff, submit a written response to the Office of the Whistleblower setting forth the grounds of objection(s) to either the denial of an award or the proposed amount. Include documentation or other evidentiary support.
Before determining whether to contest a Preliminary Determination, within 30 days of the Preliminary Determination, request that the Office of the Whistleblower make available for review the materials from § 240.21F-12(a) that formed the basis for the Claims Review Staff’s Preliminary Determination. Within this period, request a meeting with the Office of the Whistleblower, however, such meetings are not required and the Office may decline. If a Preliminary Determination is contested, submit the written response and supporting materials within 60 days of the date of the Preliminary Determination, or within 60 days of the Office of the Whistleblower making the requested materials available for review.
If a timely response is not made, the Preliminary Determination will become the Final Order of the Commission. However, if a timely response is made, the Claims Review Staff will consider the issues and grounds advanced in the response, along with any supporting documentation, and make its Proposed Final Determination. The Office of the Whistleblower will then notify each of the Commissioners of the Proposed Final Determination. Within 30 days, any Commissioner may request that the Proposed Final Determination be reviewed by the Commissioner. If no review is requested, the Proposed Final Determination becomes the Final Order of the Commission.
Appealing the Commission’s final decision
§ 240.21F-13 reiterates that the Commission has the sole discretion to determine whether to grant awards, to whom the awards should be grant, and the amount of the awards. Of these determinations, the question of whether and to whom can be appealed, within 30 days after the Commission issues its final decision, in the United States Court of Appeals for the District of Columbia Circuit or to the circuit where the aggrieved person resides or has in principal place of business. The Commission’s determination of how much to award, however, is not appealable
[1] Philip H. Hilder is a former federal prosecutor and founder of Hilder & Associates, P.C., located in Houston, Texas. Mr. Hilder focuses on white-collar criminal defense matters. He is co-founder of the ABA National Institute on Securities Fraud. He had been the Attorney-in-Charge of the Organized Crime Strike Force, Houston Field Office, and was an assistant U.S. Attorney for the Southern District of Texas. Hilder & Associates, P.C., 819 Lovett Blvd., Houston, TX 77006-3905; (713) 655-9111;
www.hilderlaw.com.
[1] Khoa Tran is on Law Review at University of California, Berkeley School of Law. He obtained his undergraduate from Harvard University. Mr. Tran interned at Hilder & Associates, P.C., summer of 2011.
[i] Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, SEC Release No. 34-64656 (May 25, 2011).
[ii]
SEC Adopts Rules to Establish Whistleblower Program, SEC (May 25, 2011), http://www.sec.gov/news/press/ 2011/2011-116.htm.
