New SEC and CFTC whistleblower reward programs in financial reform law

WASHINGTON, DC, July 21 -- The promise of substantial rewards contained in the Dodd-Frank legislation will entice a large number of corporate insiders to report securities law violations to the Securities and Exchange Commission (SEC), adding a powerful weapon to SEC enforcement, predict whistleblower attorneys with Phillips & Cohen LLP.

The Wall Street Reform and Consumer Protection Act also guarantees whistleblowers confidentiality and job protection, making the decision to report securities law violations an even more attractive proposition.

"The SEC whistleblower provisions will be an extremely effective enforcement tool that will have an immediate impact - probably far quicker than any other aspect of the financial reform legislation," said Erika A. Kelton, a Washington, DC, attorney with Phillips & Cohen. "Not only will whistleblowers enhance the SEC's enforcement efforts, but they will cause greater corporate compliance and deter future illegal conduct."

The law, which President Obama is expected to sign today, covers whistleblowers who report almost any securities law violation, including insider trading, money laundering and violations of the Foreign Corrupt Practices Act, an anti-bribery law.

"The new law contains a trifecta of enticements for whistleblowers, a San Francisco attorney with Phillips & Cohen. "They will receive an assurance of confidentiality, solid protection against retaliation, and a guaranteed reward if their information leads to a recovery. With this combination of protections and incentives, the SEC should receive a flood of high quality submissions."

The financial reform law creates whistleblower programs for the SEC and the Commodities Futures Trading Commission (CFTC) that will offer:

  • Whistleblower rewards. Whistleblowers who report securities law violations will receive 10 percent to 30 percent of the amount the SEC, CFTC and any other government entity collects as a result of the whistleblower's information when the amount collected exceeds $1 million.
  • Confidentiality to whistleblowers. The law contains one of the strongest confidentiality provisions for whistleblowers ever enacted. For the first time, whistleblowers will be allowed to report fraud anonymously. In some cases, their identities may remain unknown even to the SEC until the time comes for the payment of a reward.
  • Job protection for whistleblowers. The law prohibits employers from retaliating against whistleblowers. Employers may not fire, demote, suspend, threaten, harass, or discriminate against a whistleblower. Whistleblowers who suffer from employment retaliation may sue for reinstatement, back pay and any other damages that occurred.

The SEC and the CFTC will establish regulations for each program. But the law says the agencies will use the following criteria to determine whistleblower rewards:

  • The significance of the information provided.
  • The assistance provided by the whistleblower and the whistleblower's attorney.
  • The "programmatic interest" of the SEC "in deterring violations of the securities law."

The SEC currently has a whistleblower reward program for information about insider trading. But that program has been ineffective, largely because rewards aren't mandatory and are small - no more than 10 percent of the monies collected by the SEC in a whistleblower's case. In more than 20 years, according to an SEC Office of Inspector General report, the SEC paid only seven rewards totaling just $159,000 -- which means that the agency collected less than $2 million total from those cases.

The new whistleblower provisions of the financial overhaul legislation are posted on the Phillips & Cohen website.

For more information about Phillips & Cohen's record, see P&C's Successful Whistleblower Cases.