New SEC Whistleblower Rewards and Whistleblower Protections Approved by House Committee–But Improvements Are Needed

Since the Madoff and Stanford schemes proved ruinous to so many investors, many have asked why the SEC has no meaningful “whistleblower” program to expose wrongdoing, a topic we have written about previously.

Perhaps Harry Markopolis’ voice is finally being heard, albeit faintly. Last week, the House Financial Services Committee approved legislation that would expand both whistleblower rewards and whistleblower protections, among other things.

Still, past experience with the False Claims Act and the IRS Whistleblower statute shows that the proposed rewards need to be beefed up to be effective.

The “Investor Protection Act of 2009” (excerpted below) also would increase the SEC’s budget and make other changes designed to strengthen enforcement.

The new rewards to whistleblowers would be up to 30% of monetary sanctions of more than $1 million:

“In any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000, the Commission, under regulations prescribed by the Commission and subject to subsection (b), may pay an award or awards not exceeding an amount equal to 30 percent, in total, of the monetary sanctions imposed in the action or related actions to one or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the action.”

The proposed new whistleblower rewards are reminiscent of those under the new IRS Whistleblower Program, but need at least two corrections to be effective.

First, the current SEC bill creates no enforceable “right” to a reward–a defect that made the old IRS Whistleblower statute ineffective before it was amended in December 2006.

Second, there should be a minimum percentage of perhaps 15% for the SEC rewards; it should not be left at 0-30%, as the bill now reads. Who would risk a 1% (or even lower) reward? The False Claims Act only became effective after 1986 amendments increased rewards to at least 15% in most cases. The new IRS Whistleblower law is attracting whistleblowers left and right because it provides for a minimum of 15% in most instances.

The proposed SEC law has one advantage over the IRS version: The IRS law unfortunately omits protection of whistleblowers from retaliation, but the proposed SEC whistleblower provisions would provide a remedy similar to that furnished whistleblowers under the False Claims Act. Here is what the proposed bill states (in part):

“An employee, contractor, or agent prevailing in any action brought under subparagraph (B) shall be entitled to all relief necessary to make that employee, contractor, or agent whole, including reinstatement with the same seniority status that the employee, contractor, or agent would have had, but for the discrimination, 2 times the amount of back pay, with interest, and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorneys’ fees.”

The bill’s proposed SEC whistleblower language is below; the entire bill may be found here:

202. WHISTLEBLOWER PROTECTION.

The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by adding after section 21E the following new section:

`SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTECTION.

`(a) In General- In any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000, the Commission, under regulations prescribed by the Commission and subject to subsection (b), may pay an award or awards not exceeding an amount equal to 30 percent, in total, of the monetary sanctions imposed in the action or related actions to one or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the action. Any amount payable under the preceding sentence shall be paid from the fund described in subsection (f).

`(b) Determination of Amount of Award; Denial of Award-

`(1) DETERMINATION OF AMOUNT OF AWARD- The determination of the amount of an award, within the limit specified in subsection (a), shall be in the sole discretion of the Commission. The Commission may take into account the significance of the whistleblower’s information to the success of the judicial or administrative action described in subsection (a), the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in such action, the Commission’s programmatic interest in deterring violations of the securities laws by making awards to whistleblowers who provide information that leads to the successful enforcement of such laws, and such additional factors as the Commission may establish by rules or regulations.

`(2) DENIAL OF AWARD- No award under subsection (a) shall be made–

`(A) to any whistleblower who is, or was at the time he or she acquired the original information submitted to the Commission, a member, officer, or employee of any appropriate regulatory agency, the Department of Justice, or a self-regulatory organization;

`(B) to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section; or
`(C) to any whistleblower who fails to submit information to the Commission in such form as the Commission may, by rule, require.

`(c) Representation-

`(1) PERMITTED REPRESENTATION- Any whistleblower who makes a claim for an award under subsection (a) may be represented by counsel.

`(2) REQUIRED REPRESENTATION- Any whistleblower who makes a claim for an award under subsection (a) must be represented by counsel if the whistleblower submits the information upon which the claim is based anonymously. Prior to the payment of an award, the whistleblower must disclose his or her identity and provide such other information as the Commission may require.

`(d) No Contract Necessary- No contract with the Commission is necessary for any whistleblower to receive an award under subsection (a), unless the Commission, by rule or regulation, so requires.

`(e) Appeals- Any determinations under this section, including whether, to whom, or in what amounts to make awards, shall be in the sole discretion of the Commission, and any such determinations shall be final and not subject to judicial review.

`(f) Investor Protection Fund-

`(1) FUND ESTABLISHED- There is established in the Treasury of the United States a fund to be known as the `Securities and Exchange Commission Investor Protection Fund’ (referred to in this section as the `Fund’).

`(2) USE OF FUND- The Fund shall be available to the Commission, without further appropriation or fiscal year limitation, for the following purposes:

`(A) Paying awards to whistleblowers as provided in subsection (a).

`(B) Funding investor education initiatives designed to help investors protect themselves against securities fraud or other violations of the securities laws, or the rules and regulations thereunder.

`(3) DEPOSITS AND CREDITS- There shall be deposited into or credited to the Fund–

`(A) any monetary sanction collected by the Commission in any judicial or administrative action brought by the Commission under the securities laws that is not added to a disgorgement fund pursuant to section 308 of the Sarbanes-Oxley Act of 2002 or other fund or otherwise distributed to victims of a violation of the securities laws, or the rules and regulations thereunder, underlying such action, unless the balance of the Fund at the time the monetary sanction is collected exceeds $100,000,000;

`(B) any monetary sanction added to a disgorgement fund pursuant to section 308 of the Sarbanes-Oxley Act of 2002 or other fund that is not distributed to the victims for whom the disgorgement fund was established, unless the balance of the Fund at the time the determination is made not to distribute the monetary sanction to such victims exceeds $100,000,000; and
`(C) all income from investments made under paragraph (4).

`(4) INVESTMENTS-

`(A) AMOUNTS IN FUND MAY BE INVESTED- The Commission may request the Secretary of the Treasury to invest the portion of the Fund that is not, in the Commission’s judgment, required to meet the current needs of the Fund.

`(B) ELIGIBLE INVESTMENTS- Investments shall be made by the Secretary of the Treasury in obligations of the United States or obligations that are guaranteed as to principal and interest by the United States, with maturities suitable to the needs of the Fund as determined by the Commission.

`(C) INTEREST AND PROCEEDS CREDITED- The interest on, and the proceeds from the sale or redemption of, any obligations held in the Fund shall be credited to, and form a part of, the Fund.

`(5) REPORTS TO CONGRESS- Not later than October 30 of each year, the Commission shall transmit to the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representatives a report on–

`(A) the Commission’s whistleblower award program under this section, including a description of the number of awards granted and the types of cases in which awards granted during the preceding fiscal year;

`(B) investor education initiatives described in paragraph (2)(B) that were funded by the Fund during the preceding fiscal year;

`(C) the balance of the Fund at the beginning of the preceding fiscal year;

`(D) the amounts deposited into or credited to the Fund during the preceding fiscal year;

`(E) the amount of earnings on investments of amounts in the Fund during the preceding fiscal year;

`(F) the amount paid from the Fund during the preceding fiscal year to whistleblowers pursuant to subsection (a);

`(G) the amount paid from the Fund during the preceding fiscal year for investor education initiatives described in paragraph (1)(B);

`(H) the balance of the Fund at the end of the preceding fiscal year; and
`(I) a complete set of audited financial statements, including a balance sheet, income statement, and cash flow analysis.

`(g) Protection of Whistleblowers-

`(1) PROHIBITION AGAINST RETALIATION-

`(A) IN GENERAL- No employer may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee, contractor, or agent in the terms and conditions of employment because of any lawful act done by the employee, contractor, or agent in providing information to the Commission in accordance with subsection (a), or in assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information.

`(B) ENFORCEMENT-

`(i) CAUSE OF ACTION- An individual who alleges discharge or other discrimination in violation of subparagraph (A) may bring an action under this subsection in the appropriate district court of the United States for the relief provided in subparagraph (C).

`(i) SUBPOENAS- A subpoena requiring the attendance of a witness at a trial or hearing conducted under this section may be served at any place in the United States.

`(ii) STATUTE OF LIMITATIONS- An action under this subsection may not be brought more than 6 years after the date on which the violation of subparagraph (A) occurred, or more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the employee alleging a violation of subparagraph (A), but in no event after 10 years after the date on which the violation occurs.

`(C) RELIEF- An employee, contractor, or agent prevailing in any action brought under subparagraph (B) shall be entitled to all relief necessary to make that employee, contractor, or agent whole, including reinstatement with the same seniority status that the employee, contractor, or agent would have had, but for the discrimination, 2 times the amount of back pay, with interest, and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorneys’ fees.

`(2) CONFIDENTIALITY-

`(A) IN GENERAL- Except as provided in subparagraph (B), all information provided to the Commission by a whistleblower shall be confidential and privileged as an evidentiary matter (and shall not be subject to civil discovery or other legal process) in any proceeding in any Federal or State court or administrative agency, and shall be exempt from disclosure, in the hands of an agency or establishment of the Federal Government, under the Freedom of Information Act (5 U.S.C. 552), or otherwise, unless and until required to be disclosed to a defendant or respondent in connection with a public proceeding instituted by the Commission or any entity described in subparagraph (B). For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552. Nothing herein is intended to limit the Attorney General’s ability to present such evidence to a grand jury or to share such evidence with potential witnesses or defendants in the course of an ongoing criminal investigation.

`(B) AVAILABILITY TO GOVERNMENT AGENCIES- Without the loss of its status as confidential and privileged in the hands of the Commission, all information referred to in subparagraph (A) may, in the discretion of the Commission, when determined by the Commission to be necessary to accomplish the purposes of this Act and protect investors, be made available to–

`(i) the Attorney General of the United States,

`(ii) an appropriate regulatory authority,

`(iii) a self-regulatory organization,

`(iv) State attorneys general in connection with any criminal investigation, and
`(v) any appropriate State regulatory authority,

each of which shall maintain such information as confidential and privileged, in accordance with the requirements in subparagraph (A).

`(3) RIGHTS RETAINED- Nothing in this section shall be deemed to diminish the rights, privileges, or remedies of any whistleblower under any Federal or State law, or under any collective bargaining agreement.

`(h) Rulemaking Authority- The Commission shall have the authority to issue such rules and regulations as may be necessary or appropriate to implement the provisions of this section.

`(i) Definitions- For purposes of this section, the following terms have the following meanings:

`(1) ORIGINAL INFORMATION- The term `original information’ means information that–

`(A) is based on the direct and independent knowledge or analysis of a whistleblower;

`(B) is not known to the Commission from any other source; and
`(C) is not based on allegations in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is the initial source of the information that resulted in the judicial or administrative hearing, governmental report, hearing, audit, or investigation, or the news media’s report on the allegations.

`(2) MONETARY SANCTIONS- The term `monetary sanctions,’ when used with respect to any judicial or administrative action, means any monies, including but not limited to penalties, disgorgement, and interest, ordered to be paid, and any monies deposited into a disgorgement fund pursuant to section 308(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246(b)), as a result of such action or any settlement of such action.

`(3) RELATED ACTION- The term `related action,’ when used with respect to any judicial or administrative action brought by the Commission under the securities laws, means any judicial or administrative action brought by an entity described in subsection (g)(2)(B) that is based upon the same original information provided by a whistleblower pursuant to subsection (a) that led to the successful enforcement of the Commission action.

`(4) WHISTLEBLOWER- The term `whistleblower’ means an individual, or two or more individuals acting jointly, who submit information to the Commission as provided in this section.’.

SEC. 203. CONFORMING AMENDMENTS FOR WHISTLEBLOWER PROTECTION.

(a) In General- Each of the following provisions is amended by inserting `and section 21F of the Securities Exchange Act of 1934′ after `the Sarbanes-Oxley Act of 2002′:

(1) Section 20(d)(3)(A) of the Securities Act of 1933 (15 U.S.C. 77t(d)(3)(A)).

(2) Section 42(e)(3)(A) of the Investment Company Act of 1940 (15 U.S.C. 80a-41(e)(3)(A)).

(3) Section 209(e)(3)(A) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-9(e)(3)(A)).

(b) Securities Exchange Act- The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended–

(1) in section 21(d)(3)(C)(i) (15 U.S.C. 78u(d)(3)(C)(i)), by inserting `and section 21F of this title’ after `the Sarbanes-Oxley Act of 2002′;

(2) in section 21A(d)(1) (15 U.S.C. 78u-1(d)(1))–

(A) by striking `(subject to subsection (e))’; and
(B) by inserting `and section 21F of this title’ after `the Sarbanes-Oxley Act of 2002′; and
(3) in section 21A, by striking subsection (e) and redesignating subsections (f) and (g) as subsection (e) and (f), respectively.

SEC. 204. IMPLEMENTATION AND TRANSITION PROVISIONS FOR WHISTLEBLOWER PROTECTIONS.

(a) Implementing Rules- The Securities and Exchange Commission shall issue final regulations implementing the provisions of section 21F of the Securities Exchange Act of 1934, as added by this title, no later than 270 days after the date of enactment of this Act.

(b) Original Information- Information submitted to the Commission by a whistleblower in accordance with regulations implementing the provisions of section 21F of the Securities Exchange Act of 1934, as added by this title, shall not lose its status as original information, as defined in subsection (i)(1) of such section, solely because the whistleblower submitted such information prior to the effective date of such regulations, provided such information was submitted after the date of enactment of this Act, or related to insider trading violations for which a bounty could have been paid at the time such information was submitted.

(c) Awards- A whistleblower may receive an award pursuant to section 21F of the Securities Exchange Act of 1934, as added by this title, regardless of whether any violation of a provision of the securities laws, or a rule or regulation thereunder, underlying the judicial or administrative action upon which the award is based occurred prior to the date of enactment of this Act.