SEC Rules in Effect for Whistleblowers

The Dodd-Frank Wall Street Reform and Consumer Protection Act established a whistleblower program to be adopted by the Securities and Exchange Commission (SEC). Specifically, section 922 of the Dodd-Frank act amended the Securities Exchange Act of 1934 by adding a new section called "Securities Whistleblower Incentives and Protection." According to this new section, the SEC is to pay awards to whistleblowers that provide the SEC with original information that leads to the successful action whereby the SEC assesses greater than $1 million in fines and sanctions. The rules for this program to be adhered to by corporate compliance departments were finalized on May 25, 2011. Prior to the Dodd-Frank Act, the SEC's authority for rewarding whistleblowers covered only insider trading cases.

On August 12, 2011, the new rules became effective and the SEC launched a webpage designed for individuals to access, report violations and apply for financial awards. The new webpage at contains necessary information regarding how to submit a tip, eligibility requirements, and frequently asked questions and answers.

The final rules of this program, seen as one of the most controversial requirements of Dodd-Frank, were adopted by a very slim margin, a 3-2 vote by the SEC. Mary Schapiro, chairman of the SEC commented that the new rules "build upon our efforts over the past two years and our experience with the Sarbanes-Oxley Act - an Act that made great strides in creating whistleblower protections and requiring the internal reporting systems at public companies. From that experience, we learned that despite Sarbanes-Oxley, too many people remain silent in the face of fraud. Today's rules are intended to break the silence of those who see a wrong."

The 'no' votes were entered by Commissioners Kathleen Casey and Troy Paredes, their concerns being that the new rules would weaken corporations' internal compliance programs. The rules actually provide that whistleblowers are still eligible for a reward if they internally report wrongdoing to the company, and the company, in turn, reports it to the SEC. Additionally, a whistleblower could achieve a higher award if it is reported to the company first.

Commissioner Casey went on to elaborate that the rules could further decrease the bandwidth of the commission that is already struggling to keep up with limited resources. Commissioner Paredes believes that the new rules and process for providing tips to the SEC and then obtaining awards are "burdensome" and that individuals may not be as willing to report information.

Sean McKessy, Chief of the SEC's Office of the Whistleblower, commented that the agency would make changes if problems occurred. After a speech, delivered at Georgetown University's McDonough School of Business, he said, "If our program is not doing what it's intended to do, then we'll look at it and figure out ways to fix it."

McKessy also commented that, "Whistleblowers remain loathed in industry, but financial incentives should help the SEC ferret out more wrongdoing and could make investigations quicker and cheaper." He went on to say, "Look in a thesaurus under 'whistleblower' and see what kind of words you get out. I'm either the head of the office of the rats, or the rat finks, or rat bastards," McKessy said. "If even one fraud is stopped before it gets to a Madoff-type situation, then all the effort has been worth it."


US SEC Says Will Fix Whistleblower Rule if Any Problems, Reuters, by Andrea Shalal-Esa, August 11, 2011

SEC's new Whistleblower Program Takes Effect Today, Securities and Exchange Commission, August 12, 2011

Price WaterHouse, A closer Look, The Dodd-Frank Wall Street Reform and Consumer Protection Act, PwC, May 19, 2011.