In the wake of financial collapse and corporate scandal, Congress acted to create incentives for employees to report securities fraud to the Securities and Exchange Commission. Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act aims to do just that. This section, also referred to as the “whistleblower bounty” provision, amends the Securities and Exchange Act of 1934 to provide that any whistleblower who voluntarily provides “original information” regarding a violation of securities law to the SEC shall receive between 10% and 30% of any successful enforcement of penalties greater than $1,000,000. On November 3, 2010, the SEC submitted a notice of proposed rulemaking to implement this section of the Act, with a deadline for final rules of April 21, 2011.Since the passage of the bill, debate has swirled about the effect of the provision on employees who may have knowledge regarding securities law violations by their employers. One argument in favor of the new section is that the financial incentives will provide the SEC with reliable information leading to successful enforcement of securities law as well as information that may be used to further investigations into questionable practices by reporting companies. Since the Act’s passage, the SEC has already reported a marked increase in the number of whistleblower complaints filed.
There are, however, a number of concerns associated with awarding such large bounties to whistleblowers. Since successful SEC enforcement actions routinely reach figures in the tens of millions of dollars, whistleblowers stand to become multi-millionaires over night. Such an incentive has led some commentators to worry about a deluge of tips that increase quantity, but not quality of information. The former head of the SEC’s Office of Internet Enforcement, John Stark, has stated that he believes the new provision may be “the most dramatic thing to ever hit the SEC.”
Furthermore, with personal financial gain at stake, employees may be incentivized to bypass company hotlines or other internal reporting mechanisms in lieu of bringing their complaints directly to the SEC. Regardless of the success of an enforcement action, SEC investigations are very costly to companies that must defend the complaint. As such, it would be beneficial for companies to be informed of a potential violation before the employee brings his or her complaint to the SEC to avoid the burdens of an investigation. Therefore, the best course of action that reporting companies can take at this time, is to ensure that they create hotlines and internal reporting mechanisms that counteract the bounties offered by the SEC.
Michael Perez Open Season: Dodd-Frank’s Whistleblower Bounty Provision, Berkeley Bus L.J.. Network (February 23, 2011), http://thenetwork.berkeleylawblogs.org/2011/02/23/open-season-dodd-frank%E2%80%99s-whistleblower-bounty-provision/