[Federal Register Volume 75, Number 221 (Wednesday, November 17, 2010)]
[Proposed Rules]
[Pages 70488-70555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28186]
[[Page 70487]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Proposed Rules for Implementing the Whistleblower Provisions of Section
21F of the Securities Exchange Act of 1934; Proposed Rule
Federal Register / Vol. 75 , No. 221 / Wednesday, November 17, 2010 /
Proposed Rules
[[Page 70488]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-63237; File No. S7-33-10]
RIN 3235-AK78
Proposed Rules for Implementing the Whistleblower Provisions of
Section 21F of the Securities Exchange Act of 1934
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Proposed rule.
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SUMMARY: The Commission is proposing rules and forms to implement
Section 21F of the Securities Exchange Act of 1934 (``Exchange Act'')
entitled ``Securities Whistleblower Incentives and Protection'' and
seeking comment thereon. The Dodd-Frank Wall Street Reform and Consumer
Protection Act, enacted on July 21, 2010 (``Dodd-Frank''), established
a whistleblower program that requires the Commission to pay an award,
under regulations prescribed by the Commission and 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 a covered
judicial or administrative action, or a related action. Dodd-Frank also
prohibits retaliation by employers against individuals that provide the
Commission with information about potential securities violations.
DATES: Comments should be submitted on or before December 17, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed); or
Send an e-mail to [email protected]. Please include
File Number S7-33-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-33-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: In the Division of Enforcement: Sarit
Klein (202) 551-4577. In the Office of the General Counsel: Brian A.
Ochs (202) 551-5067, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background
Section 922 of Dodd-Frank added new Section 21F to the Exchange
Act, entitled ``Securities Whistleblower Incentives and Protection.''
\1\ Section 21F directs that the Commission pay awards, subject to
certain limitations and conditions, to whistleblowers who voluntarily
provide the Commission with original information about a violation of
the securities laws that leads to a successful enforcement of an action
brought by the Commission that results in monetary sanctions exceeding
$1,000,000, and of certain related actions.
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\1\ Pub. L. 111-203, Sec. 922(a), 124 Stat 1841 (2010).
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We are proposing Regulation 21F to implement Section 21F of the
Exchange Act. As described in detail below, the rules contained in
proposed Regulation 21F define certain terms critical to the operation
of the Whistleblower Program, outline the procedures for applying for
awards and the Commission's procedures for making decisions on claims,
and generally explain the scope of the whistleblower program to the
public and to potential whistleblowers. In this proposal, we have taken
several steps to address Congress's suggestion that the Commission's
whistleblower rules be clearly defined and user-friendly.\2\ First, to
the extent possible, we have tried to adopt a plain English approach in
writing the rules contained in Regulation 21F. Second, Regulation 21F
as proposed would provide a complete and self-contained set of rules
relating to the whistleblower program. This means that in some places,
we have proposed rules within the Regulation that largely restate key
provisions of the statute. Although we recognize that this approach
leads to some duplication between the statue and the rules, we believe
that overall it will assist potential whistleblowers and add clarity,
by providing in one place all the relevant provisions applicable to
whistleblower claims.
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\2\ See Dodd Frank sec. 922(d)(1), which specifies that a study
of the whistleblower program by the Inspector General of the
Commission shall consider whether the final rules and regulations
have made the program ``clearly defined and user-friendly.''
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In fashioning these proposed rules, the Commission has considered
and weighed a number of potentially competing interests that are
presented in implementing the statute. Among them was the potential for
the monetary incentives provided to whistleblowers by Section 21F of
the Exchange Act to reduce the effectiveness of a company's existing
compliance, legal, audit and similar internal processes for
investigating and responding to potential violations of the Federal
securities laws. With this possible tension in mind, we have included
provisions in the proposed rules intended not to discourage
whistleblowers who work for companies that have robust compliance
programs to first report the violation to appropriate company
personnel, while at the same time preserving the whistleblower's status
as an original source of the information and eligibility for an award.
At the same time, the proposed rules would not prohibit a whistleblower
in a compliance function from reporting information to the Commission
where the company did not provide the information to the Commission
within a reasonable time or acted in bad faith.
Another important policy issue raised by the statute is the
potential for the monetary incentives provided by Section 21F to invite
submissions from attorneys, independent auditors, and compliance
personnel who may attempt to use information they obtain through their
positions to make whistleblower claims. This exclusion focuses on those
groups with established professional obligations that play a critical
role in achieving compliance with the Federal securities laws. Our
proposed rules include certain exclusions for these professionals and
others under the definition of ``independent knowledge,'' and we seek
comment on whether the proposed exclusions are appropriate and whether
they should be extended to other types of privileged communications or
other types of professionals who frequently have
[[Page 70489]]
access to confidential client information.
Finally, we have attempted to maximize the submission of high-
quality tips and to enhance the utility of the information reported to
the Commission. More frequent reporting of high-quality information
promotes greater deterrence by enhancing the efficiency and
effectiveness of the Commission's enforcement program. To achieve this
goal, the proposed rules would impose certain procedural requirements
designed to deter false submissions, including a requirement that the
information be submitted under penalty of perjury, and requiring an
anonymous whistleblower to be represented by counsel who must certify
to the Commission that he or she has verified the whistleblower's
identity.
II. Description of the Proposed Rules
A. Proposed Rule 21F-1--General
Proposed Rule 21F-1 provides a general, plain English description
of Section 21F of the Exchange Act. It sets forth the purposes of the
rules and states that the Commission's Whistleblower Office administers
the whistleblower program. In addition, the proposed rule states that,
unless expressly provided for in the rules, no person is authorized to
make any offer or promise, or otherwise to bind the Commission with
respect to the payment of an award or the amount thereof.
B. Proposed Rule 21F-2--Definition of a Whistleblower
The term ``whistleblower'' is defined in Section 21F(a)(6) of the
Exchange Act.\3\ Consistent with this language, Proposed Rule 21F-2(a)
would define a whistleblower as an individual who, alone or jointly
with others, provides information to the Commission relating to a
potential violation of the securities laws. A whistleblower must be a
natural person; a company or another entity is not eligible to receive
a whistleblower award. This definition tracks the statutory definition
of a ``whistleblower,'' except that the proposed rule uses the term
``potential violation.'' Because the statute requires the Commission to
afford confidential treatment to information ``which could reasonably
be expected to reveal the identity of a whistleblower,'' \4\ it is
important to be able to determine whether a person is a
``whistleblower'' at the time he or she submits information to the
Commission. If the term ``whistleblower'' were defined to include only
individuals who provide the Commission with information about actual,
proven securities violations, then either the Commission would be
required to determine at the time information is submitted whether the
alleged conduct constitutes a violation of the securities laws, or the
status of the person as a ``whistleblower'' would be unknown. We do not
believe that this is the intended result.
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\3\ 15 U.S.C. 78u-6(a)(6).
\4\ 15 U.S.C. 78u-6(h)(2).
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In addition, use of the term ``potential violation'' makes clear
that the whistleblower anti-retaliation protections set forth in
Section 21F(h)(1) of the Exchange Act do not depend on an ultimate
adjudication, finding or conclusion that conduct identified by the
whistleblower constituted a violation of the securities laws. As noted
in the Senate Report accompanying the legislation, ``[t]he
Whistleblower Program aims to motivate those with inside knowledge to
come forward and assist the Government;'' \5\ affording broad anti-
retaliation protections to whistleblowers furthers this legislative
purpose.
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\5\ S. Rep. No. 111-176 at 110 (2010).
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Paragraph (b) of Proposed Rule 21F-2 would further make clear that
the anti-retaliation protections set forth in Section 21F(h)(1) of the
Exchange Act apply irrespective of whether a whistleblower satisfies
all the procedures and conditions to qualify for an award under the
Commission's whistleblower program. We believe the statute extends the
protections against employment retaliation in Section 21F(h)(1) to any
individual who provides information to the Commission about potential
violations of the securities laws regardless of whether the
whistleblower fails to satisfy all of the requirements for award
consideration set forth in the Commission's rules.
Proposed Rule 21F-2(c) makes clear, however, that, in order to be
eligible to be considered for an award, a whistleblower must submit
original information to the Commission in accordance with all the
procedures and conditions described in Proposed Rules 21F-4, 21F-8, and
21F-9.
Request for Comment:
1. In other provisions of these Proposed Rules--e.g., Proposed Rule
21F-15--we propose that whistleblowers not be paid awards based on
monetary sanctions arising from their own misconduct, based on the
notion that the statue is not intended to reward persons for blowing
the whistle on their own misconduct. Consistent with this approach,
should we define the term ``whistleblower'' to expressly state that it
is an individual who provides information about potential violations of
the securities laws ``by another person''?
C. Proposed Rule 21F-3--Payment of Award
Proposed Rule 21F-3 summarizes the general requirements for the
payment of awards set forth in Section 21F(b)(1) of the Exchange
Act.\6\ As set forth in the statute, paragraph (a) states that, subject
to the eligibility requirements in the Regulations, the Commission will
pay an award or awards to one or more whistleblowers who voluntarily
provide the Commission with original information that leads to the
successful enforcement by the Commission of a Federal court or
administrative action in which the Commission obtains monetary
sanctions totaling more than $1,000,000. Paragraph (b) of this proposed
rule describes the circumstances under which the Commission will also
pay an award to the whistleblower based upon monetary sanctions that
are collected from a ``related action.'' Payment based on the ``related
action'' will occur if the whistleblower's original information led the
Commission to obtain monetary sanctions totaling more than $1,000,000,
the related action is based upon the same original information that led
to the successful enforcement of the Commission action, and the related
action is brought by the Attorney General of the United States, an
appropriate regulatory agency, a self-regulatory organization, or a
state attorney general in a criminal case.
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\6\ 15 U.S.C. 78u-6(b)(1).
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Paragraph (c) of Proposed Rule 21F-3 explains that the Commission
must determine whether the original information that the whistleblower
gave to the Commission also led to the successful enforcement of a
related action using the same criteria used to evaluate awards for
Commission actions. To help make this determination, the Commission may
seek confirmation of the relevant facts regarding the whistleblower's
assistance from the authority that brought the related action. However,
the proposed rule states that the Commission will deny an award to a
whistleblower if the Commission determines that the criteria for an
award are not satisfied or if the Commission is unable to obtain
sufficient and reliable information about the related action.
Paragraph (d) provides that the Commission will not make an award
in a related action if an award already has been granted to the
whistleblower by the Commodity Futures Trading Commission (``CFTC'')
for that same
[[Page 70490]]
action pursuant to its whistleblower award program under section 23 of
the Commodity Exchange Act.\7\ Rule 21F-3(d) also provides that, if the
CFTC has previously denied an award in a related action, the
whistleblower will be collaterally estopped from relitigating any
issues before the Commission that were necessary to the CFTC's denial.
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\7\ 7 U.S.C. 26.
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This provision serves two purposes. First, it would ensure that a
whistleblower will not obtain a double recovery on the same related
action. For example, if the CFTC makes an award of 10 percent to 30
percent on a criminal action brought by the U.S. Department of Justice,
the whistleblower would be precluded from obtaining a second recovery
of 10 percent to 30 percent from the SEC on the same action. Any other
reading of the interplay of the SEC and CFTC whistleblower award
provisions--which were both established by Dodd-Frank and which are
substantially identical in their substantive terms--would produce the
highly anomalous result of allowing the whistleblower to effectively
receive a 20 percent minimum to 60 percent maximum recovery on the same
related action. The SEC and CFTC whistleblower provisions, however,
embody a clear Congressional determination that a whistleblower award
on a successful action should lie within the 10 percent to 30 percent
range.
Second, this provision would ensure that once the CFTC decides an
issue of fact or law necessary to its determination to deny a
whistleblower an award on a related action, the whistleblower will be
precluded from relitigating the same issue before the Commission. For
example, if the CFTC determines that the whistleblower's information
did not lead to the successful enforcement of a related action, the
whistleblower may not attempt to circumvent this adverse determination
by relitigating the same issue before the Commission. The application
of collateral estoppel principles in these circumstances would promote
the orderly and consistent resolution of a whistleblower's claims, and
would ensure that the subset of whistleblowers who can pursue both SEC
and CFTC award claims on a related action are not unfairly afforded
``two bites at the apple'' relative to the majority of whistleblowers
who would not have this dual opportunity.\8\
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\8\ See Restatement Second of Judgments, Sec. 29 cmt. b
(explaining that ``[a] party who has had a full and fair opportunity
to litigate an issue has been accorded the elements of due process''
and ``there is no good reason for refusing to treat the issue as
settled so far as he is concerned'' in subsequent actions).
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D. Proposed Rule 21F-4--Other Definitions
Although the statute defines several relevant terms, Proposed Rule
21F-4 would define some additional terms that are important to
understanding the scope of the whistleblower award program, in order to
provide greater clarity and certainty about the operation and scope of
the program.
Proposed Rule 21F-4(a)--Voluntary submission of information.
Under Section 21F(b)(1) of the Exchange Act,\9\ whistleblowers are
eligible for awards only when they provide original information to the
Commission ``voluntarily.'' Proposed Rule 21F-4(a)(1) would define a
submission as voluntary if a whistleblower provides the Commission with
information before receiving any formal or informal request, inquiry,
or demand from the Commission, Congress, any other Federal, State or
local authority, any self-regulatory organization, or the Public
Company Accounting Oversight Board about a matter to which the
information in the whistleblower's submission is relevant.
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\9\ 15 U.S.C. 78u-6(b)(1).
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The first step in most Commission enforcement investigations is the
opening of an informal inquiry. At this stage, because the staff has
not yet been granted the authority to issue subpoenas, information is
frequently requested from companies and members of the public on a
``voluntary'' basis in the sense that there is generally no legal
requirement that the recipient of the request provide the information
or even respond to the request. After a formal investigation is opened
and the staff obtains subpoena authority, the staff retains discretion
to seek documents or other information without legal compulsion, and
often does so.
Proposed Rule 21F-4(a)(1) would make clear that, in order to have
acted ``voluntarily'' under the statute, a whistleblower must do more
than merely provide the Commission with information that is not
compelled by subpoena (or by a court order following a Commission
action to enforce a subpoena) or by other applicable law.\10\ Rather,
the whistleblower or his representative (such as an attorney) must come
forward with the information before receiving any formal or informal
request, inquiry, or demand from the Commission staff or from any other
authority described in the proposed rule about a matter to which the
whistleblower's information is relevant.\11\
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\10\ Various books and records provisions of the Federal
securities laws and rules generally require regulated entities to
furnish records to the Commission upon request. See, e.g., Section
17(a) and Rule 17a-4(j) under the Exchange Act (15 U.S.C. 78q(a) and
17 CFR 240.17a-4(j)).
\11\ The list of authorities set forth in the proposed rule does
not include an employer's personnel (such as legal counsel,
compliance, or audit staff) conducting an internal investigation,
compliance review, audit, or similar function. Thus, Proposed Rule
21F-4(a)(1) would credit a whistleblower with ``voluntarily''
providing information if the individual were to approach the
Commission staff after being questioned about possible violations by
such persons, unless, as noted, the individual's information is
within the scope of a request, inquiry, or demand directed to the
employer by one of the designated authorities . The objective of
this approach is to implement Section 21F in a way that encourages
and permits persons with knowledge of securities violations to come
forward to the Commission, other responsible Government authorities,
and other bodies of an official nature. We have included other
provisions in these proposed rules that are intended to facilitate
the operation of company compliance processes, audits, and internal
investigations. See Proposed Rules 21F-4(b)(4) and (b)(7). Further,
because there is no assurance that an employer will ultimately
disclose to the Commission potential violations uncovered in the
course of an internal investigation or similar process, a rule that
precluded employees with knowledge of unlawful conduct from coming
forward as whistleblowers merely because they were questioned about
the conduct by company personnel could undermine the purposes of
Section 21F.
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A request, inquiry, or demand that is directed to an employer is
also considered to be directed to employees who possess the documents
or other information that is within the scope of the request to the
employer. Accordingly, a subsequent whistleblower submission from any
such employee will not be considered ``voluntary'' for purposes of the
rule, and the employee will not be eligible for award consideration,
unless the employer fails to provide the employee's documents or
information to the requesting authority in a timely manner.\12\
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\12\ Production of documents or information in a timely manner
turns on the production schedule required, or otherwise agreed to,
by the requesting authority. Further, employees will not be
permitted to thwart the aim of Section 21F by causing an employer to
fail to respond to a request in a timely manner, and then claiming
that their whistleblower submission was therefore made
``voluntarily'' within the meaning of the proposed rule.
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This approach is consistent with the statutory purpose of creating
a strong incentive for whistleblowers to come forward early with
information about possible violations of the securities laws rather
than wait until Government or other official investigators ``come
knocking on the door.'' \13\ This approach is also consistent with the
approach
[[Page 70491]]
Federal courts have taken in determining whether a private plaintiff,
suing on behalf of the Government under the qui tam provisions of the
False Claims Act, ``voluntarily'' provided information about the false
or fraudulent claims to the Government before filing suit.\14\
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\13\ See S. Rep. No. 111-176 at 110 (2010) (``The Whistleblower
Program aims to motivate those with inside knowledge to come forward
and assist the Government to identify and prosecute persons who have
violated securities laws * * *.'').
\14\ See United States ex rel. Barth v. Ridgedale Electric,
Inc., 44 F.3d 699 (8th Cir. 1994); United States ex rel. Paranich v.
Sorgnard, 396 F.3d 326 (3d Cir. 2005); United States ex rel. Fine v.
Chevron, USA, Inc., 72 F.3d 740 (9th Cir. 1995), cert. denied, 517
U.S.1233 (1996) (rejecting argument that provision of information to
the Government is always voluntary unless compelled by subpoena) .
The qui tam provisions of the False Claims Act include a ``public
disclosure bar,'' which, as recently amended, requires a court to
dismiss a private action or claim if substantially the same
allegations or transactions as alleged in the action or claim were
publicly disclosed in certain fora, unless the Government opposes
dismissal or the plaintiff is an ``original source'' of the
information. 31 U.S.C. 3730(e)(4). An ``original source'' is further
defined, in part, with reference to whether the plaintiff
``voluntarily'' disclosed the information to the Government before
filing suit. Id. Because the qui tam provisions of the False Claims
Act have played a significant role in the development of
whistleblower law generally, and because some of the terminology
used by Congress in Section 21F has antecedents in the False Claims
Act, precedent under the False Claims Act can provide helpful
guidance in the interpretation of Section 21F of the Exchange Act.
At the same time, because the False Claims Act and Section 21F serve
different purposes are structured differently, and the two statutes
may use the same words in different contexts, we do not view False
Claims Act precedent as necessarily controlling or authoritative in
all circumstances for purposes of Section 21F.
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Disclosure to the Government should also not be considered
voluntary if the individual has a clear duty to report violations of
the type at issue.\15\ Thus, for example, Section 21F(c)(2) of the
statute \16\ prohibits awards to members, officers, or employees of an
appropriate regulatory agency, the Department of Justice, a self-
regulatory organization, the Public Company Accounting Oversight Board,
a law enforcement organization, or to persons who obtain their
information as a result of an audit of financial statements and who
would be subject to the requirements of Section 10A of the Exchange
Act. The Commission anticipates that there may be other similarly-
situated persons who are under a pre-existing legal duty to report
information about violations to the Commission or to any of the other
authorities described in subsection (a)(1) of the proposed rule.
Proposed Rule 21F-4(a)(2) provides that submissions from such
individuals will not be considered voluntary for purposes of Section
21F. For example, a Government contracting officer would not be
considered for a whistleblower award if the officer discovered and
reported fraud on a Government contract that was material to the
contractor's earnings.\17\ Depending on the particular regulations or
other authorities that governed, a city officer or employee with
responsibility for the city's pension fund might have a pre-existing
legal duty to report fraud in connection with the fund's management or
financial reporting to appropriate city authorities. Proposed Rule 21F-
4(a)(2) also includes a similar exclusion for information that the
whistleblower is contractually obligated to report to the Commission or
to other authorities. This exclusion is intended to preclude awards to
persons who provide information pursuant to preexisting agreements that
obligate them to assist Commission staff or other investigative
authorities.
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\15\ See United States ex rel. Biddle v. Board of Trustees of
The Leland Stanford, Jr. University, 161 F.3d 533 (9th Cir. 1998),
cert. denied, 526 U.S. 1066 (1999) (government employee whose duties
required that he report knowledge of contract fraud to superiors
could not ``voluntarily'' supply information to government for
purposes of False Claims Act because employee was obligated to alert
superiors to contractor wrongdoing); United States ex rel. Schwedt
v. Planning Research Corp., 39 F. Supp. 2d 28 (D.D.C. 1999) (same).
\16\ 15 U.S.C. 78u-6(c)(2).
\17\ See Biddle, 161 F.3d 533; Schwedt, 39 F. Supp. 2d 28.
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Request for Comment:
2. Does Proposed Rule 21F-4(a)(1) appropriately define the
circumstances when a whistleblower should be considered to have acted
``voluntarily'' in providing information about securities law
violations to the Commission? Are there other circumstances not clearly
included that should be in the rule?
3. Should the Commission exclude from the definition of
``voluntarily'' situations where the information was received from a
whistleblower after he received a request, inquiry, or demand from a
foreign regulatory authority, law enforcement organization or self-
regulatory organization? Similarly, should the Commission exclude from
the definition of ``voluntarily'' situations where the information was
received from a whistleblower where the individual was under a pre-
existing legal duty to report the information to a foreign regulatory
authority, law enforcement organization or self-regulatory
organization?
4. Is it appropriate for the proposed rule to consider a request or
inquiry directed to an employer to be directed at individual employees
who possess the documents or other information that is within the scope
of the request? Should the class of persons who are covered by this
rule be narrowed or expanded? Will the carve-out that permits such an
employee to become a whistleblower if the employer fails to disclose
the information the employee provided in a timely manner promote
compliance with the law and the effective operation of Section 21F?
5. The standard described in Proposed Rule 21F-4(a)(1) would credit
an individual with acting ``voluntarily'' in certain circumstances
where the individual was aware of fraudulent conduct for an extended
period of time, but chose not to come forward as a whistleblower until
after he became aware of a governmental investigation or examination
(such as by observing document requests being served on his employer or
colleagues, but before he received an inquiry, request, or demand
himself, assuming that he was not within the scope of an inquiry
directed to his employer). Is this an appropriate result, and, if not,
how should the proposed rule be modified to account for it?
6. Is the exclusion set forth in Proposed Rule 21F-4(a)(2) for
information provided pursuant to a pre-existing legal or contractual
duty to report violations appropriate? Should specific circumstances
where there are pre-existing duties to report violations to
investigating authorities be set forth in the rule, and if so, what are
they? For example, should the rule preclude submissions from all
Government employees?
Proposed Rule 21F-4(b)--Original Information.
Paragraph (1) of Proposed Rule 21F-4(b) begins with the definition
of ``original information'' set forth in Section 21F(a)(3) of the
Exchange Act.\18\ ``Original information'' means information that is
derived from the whistleblower's independent knowledge or analysis; is
not already known to the Commission from any other source, unless the
whistleblower is the original source of the information; and is not
exclusively derived from an allegation made in a judicial or
administrative hearing,\19\ in a governmental report, hearing, audit,
or investigation, or from the news media, unless the whistleblower is a
source of the information. Paragraph (1) also requires that ``original
information'' be provided to the Commission for the first time after
July 21, 2010 (the date of enactment of Dodd-Frank). Although Dodd-
Frank authorizes the Commission to pay whistleblower awards on the
basis of original information that is submitted in writing prior to the
effective date of final rules implementing Section 21F
[[Page 70492]]
(assuming that all of the other requirements for an award are met),
Dodd-Frank does not authorize the Commission to apply Section 21F
retroactively to pay awards based upon information submitted before the
effective date of the statute.\20\
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\18\ 15 U.S.C. 78u-6(a)(3).
\19\ We would interpret the term ``judicial or administrative
hearing'' as used in Section 21F(a)(3) to include hearings in
arbitration proceedings.
\20\ Section 924(b) of Dodd-Frank directs that ``Information
provided to the Commission in writing by a whistleblower shall not
lose the status of original information * * * solely because the
whistleblower provided the information prior to the effective date
of the regulations, if the information is provided by the
whistleblower after the effective date of this subtitle.''
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Paragraphs (2) through (7) of Proposed Rule 21F-4(b) define some of
the constituent terms in the definition of ``original information,'' so
as to further describe when a whistleblower provides ``original
information.''
Paragraph (2) of Proposed Rule 21F-4(b) defines ``independent
knowledge'' as factual information in the whistleblower's possession
that is not obtained from publicly available sources. Publicly
available sources may include both sources that are widely disseminated
(such as corporate press releases and filings, media reports, and
information on the Internet), and sources that, though not widely
disseminated, are generally available to the public (such as court
filings and documents obtained through Freedom of Information Act
requests). Importantly, the proposed definition of ``independent
knowledge'' does not require that a whistleblower have direct, first-
hand knowledge of potential violations. Instead, knowledge may be
obtained from any of the whistleblower's experiences, observations, or
communications (subject to the exclusion for knowledge obtained from
public sources). Thus, for example, under Proposed Rule 21F-4(b)(2), a
whistleblower would have ``independent knowledge'' of information even
if that knowledge derives from facts or other information that has been
conveyed to the whistleblower by third parties.\21\
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\21\ Until this year, the ``public disclosure bar'' provisions
of the False Claims Act defined an ``original source'' of
information, in part, as ``an individual who [had] direct and
independent knowledge of the allegations of the information on which
the allegations [were] based * * *. '' 31 U.S.C. 3130(e)(4) (prior
to 2010 amendments). Courts interpreting these terms generally
defined ``direct knowledge'' to mean first-hand knowledge from the
relator's own work and experience, with no intervening agency. E.g.,
United States ex rel. Fried v. West Independent School District, 527
F.3d 439 (5th Cir. 2008); United States ex rel. Paranich v.
Sorgnard, 396 F.3d 326 (3d Cir. 2005). See generally John T. Boese,
Civil False Claims and Qui Tam Actions sec. 4.02[D][2] (citing
cases). Earlier this year, Congress amended the ``public disclosure
bar'' to, among other things, remove the requirement that a relator
have ``direct and independent knowledge'' of information, replacing
that standard with one that instead requires only ``knowledge that
is independent and materially adds to the publicly-disclosed
allegations or transactions * * *'' 31 U.S.C. 3130(e)(4), Pub. L.
111-148 Sec. 10104(h)(2), 124 Stat. 901 (Mar. 23, 2010). Many
practitioners have observed that, with this amendment, the False
Claims Act now permits qui tam actions based upon ``second-hand
knowledge.'' E.g., Robert T. Rhoad and Matthew T. Fornataro,
Whistling While They Work: Limiting Exposure in the Face of PPACA's
Invitation to Employee Whistleblower Lawsuits, 22 Health Lawyer 19
(Aug. 2010).
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The Commission preliminarily believes that defining ``independent
knowledge'' in this manner best effectuates the purposes of Section
21F. An individual may learn about potential violations of the
securities laws without being personally involved in the conduct. If an
individual voluntarily comes forward with such information, and the
information leads the Commission to a successful enforcement action (as
defined in Proposed Rule 21F-4(c)), that individual should be eligible
to receive a whistleblower award.
Under Section 21F(a)(3)(A) of the Exchange Act,\22\ the original
information provided by a whistleblower can include information that is
derived from independent knowledge and also from independent
``analysis.'' Proposed Rule 21F-4(b)(3) would define ``independent
analysis'' to mean the whistleblower's own analysis, whether done alone
or in combination with others. The proposed rule thus recognizes that
analysis--which may include academic or professional studies--can be
the product of collaboration among two or more individuals.
``Analysis'' would mean the whistleblower's examination and evaluation
of information that may be generally available, but which reveals
information that is not generally known or available to the public.
This definition recognizes that there are circumstances where
individuals can review publicly available information, and, through
their additional evaluation and analysis, provide vital assistance to
the Commission staff in understanding complex schemes and identifying
securities violations.
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\22\ 15 U.S.C. 78u-6(a)(3)(A).
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Proposed Rule 21F-4(b)(4) provides that information will not be
considered to derive from an individual's ``independent knowledge'' or
``independent analysis'' in seven circumstances. The first two
exclusions apply to attorneys and to persons such as accountants and
experts when they assist attorneys on client matters, because of the
prominent role that attorneys play in all aspects of practice before
the Commission and the special duties they owe to clients. The first
proposed exclusion is for information that was obtained through a
communication that is subject to the attorney-client privilege.\23\
Compliance with the Federal securities laws is promoted when
individuals, corporate officers, and others consult with counsel about
potential violations, and the attorney-client privilege furthers such
consultation. This important benefit could be undermined if the
whistleblower award program created monetary incentives for counsel to
disclose information about potential securities violations that they
learned of through privileged communications.
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\23\ See Proposed Rule 21F-4(b)(4)(i).
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The exception for information obtained through privileged attorney-
client communications would not apply in circumstances where the
attorney is permitted to disclose the substance of a communication that
would otherwise be privileged. This would include, for example,
circumstances where the privilege has been waived, or where disclosure
of confidential information to the Commission without the client's
consent is permitted pursuant to either 17 CFR 205.3(d)(2) or the
applicable state bar ethical rules.\24\
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\24\ See Model Rules of Professional Conduct 1.6(b), 1.13(c).
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This exclusion is not intended to preclude an individual who has
independent knowledge of facts indicating potential securities
violations from becoming a whistleblower if that individual chooses to
consult with an attorney. Facts in the possession of such an individual
do not become privileged simply because he or she consulted with an
attorney. Rather, this exclusion from independent knowledge or analysis
only means that an attorney cannot make a whistleblower submission on
his or her own behalf that is based upon information the attorney
obtained through a privileged communication with a client.
The second exclusion applies when a would-be whistleblower obtains
information as a result of the legal representation of a client on
whose behalf the whistleblower's services, or the services of the
whistleblower's employer or firm, have been retained, and the person
seeks to make a whistleblower submission for his or her own benefit.
The second exclusion would, for example, preclude an attorney from
using information obtained in connection with the attorney's
representation of a client to make a whistleblower submission for the
attorney's own benefit. This exclusion would not be limited to
information obtained through privileged
[[Page 70493]]
communications, but would instead extend to any information obtained by
the attorney in the course and as a result of representation of the
client. For example, under the proposed rule, an attorney who obtained
evidence of securities violations through document discovery from an
opposing party in litigation could not use that information to make a
whistleblower submission on his or her own behalf. However, the
attorney could use the information to make a submission on behalf of
the client in whose litigation the discovery was obtained. The
Commission believes that this limitation is generally consistent with
attorneys' ethical obligations,\25\ and is a reasonable measure to
prevent creating financial incentives for attorneys to take undue
advantage of clients. The language of the exclusion is also intended to
apply to other members or employees of a firm in which the attorney
works, as well as to other persons who are retained, or whose company
or firm is retained, to perform services in relation to, or to assist,
an attorney's representation of a client (e.g., accountants and
experts). As with the previous exclusion, this exclusion would not
apply where the attorney is permitted to make a disclosure pursuant to
17 CFR 205.3(d)(2), the applicable state bar ethical rules, or
otherwise.
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\25\ See Model Rule of Professional Conduct 1.6, comment 3
(``The confidentiality rule * * * applies not only to matters
communicated in confidence by the client but also to all information
relating to the representation, whatever its source. A lawyer may
not disclose such information except as authorized or required by
the Rules of Professional Conduct or other law.).
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The third proposed exclusion applies to persons who obtain
information through the performance of an engagement required under the
securities laws by an independent public accountant, if that
information relates to a violation by the engagement client or the
client's directors, officers or other employees.\26\ Section
21F(c)(2)(C) of the Exchange Act excludes from award eligibility ``any
person who obtained the information provided to the Commission through
an audit of a company's financial statements, and making a
whistleblower submission would be contrary to the requirements of
Section 10A of the Exchange Act.'' \27\ Section 10A requires registered
public accounting firms with respect to an audit of the issuer to
include audit procedures to detect illegal acts.\28\ It also prescribes
requirements for the auditor if the auditor detects or otherwise
becomes aware of information indicating an illegal act, which in
certain circumstances can include reporting directly to the Commission.
In addition to these requirements, there are other Commission-required
engagements by an independent public accountant, such as audits of
broker-dealers \29\ and custody exams of investment advisers,\30\ that
require the external accountant to report instances of noncompliance.
Professional standards for independent public accountants also
prescribe responsibilities when a possible illegal act is detected.\31\
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\26\ Proposed Rule 21F-4(b)(4)(iii).
\27\ 15 U.S.C. 78u-6(c)(2)(C).
\28\ See 15 U.S.C. 78j-1.
\29\ See 17 CFR 240.17a-5(h)(2).
\30\ See 17 CFR 275.206(4)-2(a)(3)(ii)(C).
\31\ See AU Section 317, Illegal Acts by Clients.
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In light of these pre-existing requirements, and consistent with
the role of an independent public accountant, we are proposing to
exclude from the definitions of ``independent knowledge and
``independent analysis'' any would-be whistleblowers whose information
was gained through the performance of an engagement required under the
securities laws by an independent public accountant.\32\ This proposed
exclusion applies to the employees of the independent public accountant
and would not apply to the client's employees who perform an accounting
function, even if they were interacting with the company's outside
auditor. This proposed exclusion only would apply if the information
relates to a violation by the engagement client or the client's
directors, officers or other employees. It would not exclude
information with respect to the independent public accountant's
performance of the engagement itself, such as a violation of the
accountant's requirements with respect to the engagement.
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\32\ This would include reviews performed by an independent
public accountant of interim financial statements included in
quarterly reports on Form 10-Q (17 CFR 249.308(a)) pursuant to Rule
10-01(d) of Regulation S-X (17 CFR 210.10-01(d)). The Commission
anticipates this exclusion would also apply to information gained
through another engagement by the independent public accountant for
the same client, given that the independent public accountant would
generally already have an obligation to consider the information
gained in the separate engagement in connection with the Commission-
required engagement.
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The fourth proposed exclusion applies when a person with legal,
compliance, audit, supervisory, or governance responsibilities for an
entity receives information about potential violations, and the
information was communicated to the person with the reasonable
expectation that the person would take appropriate steps to cause the
entity to respond to the violation.\33\ The fifth proposed exclusion is
closely related, and applies any other time that information is
obtained from or through an entity's legal, compliance, audit, or
similar functions or processes for identifying, reporting, and
addressing potential non-compliance with applicable law.\34\ However,
each of these two exclusions ceases to be applicable, with the result
that an individual may be deemed to have ``independent knowledge,'' and
therefore may become a whistleblower, if the entity does not disclose
the information to the Commission within a reasonable time or if the
entity proceeds in bad faith.
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\33\ Proposed Rule 21F-4(b)(4)(iv). Under the Federal
Whistleblower Protection Act, 5 U.S.C. 2302(b)(8), a disclosure to a
supervisor who is in a position to remedy the wrongdoing, is treated
as a protected disclosure for purposes of the Federal Whistleblower
Protection Act, 5 U.S.C. 2302(b)(8). E.g., Reid v. Merit Systems
Protection Board, 508 F.3d 674 (Fed. Cir. 2007); Hooven-Lewis v.
Caldera, 249 F.3d 259 (4th Cir. 2001). Borrowing and building upon
this concept, the proposed rule would preclude such supervisors and
similarly-situated others from seeking whistleblower awards based
upon information they obtain when persons with knowledge of
potential wrongdoing come to them in an effort to redress the
violations.
\34\ Persons excluded under this provision would include those
retained to assist in such processes; e.g., forensic accountants
retained by outside counsel responsible for conducting an internal
investigation.
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Compliance with the Federal securities laws is promoted when
companies implement effective legal, audit, compliance, and similar
functions. The rationale for these proposed exclusions is the concern
that Section 21F not be implemented in a way that would create
incentives for persons who obtain information through such functions,
as well as other responsible persons who are informed of wrongdoing, to
circumvent or undermine the proper operation of the entity's internal
processes for responding to violations of law. Accordingly, the
proposed rule would limit the circumstances in which such persons may
use that knowledge to become whistleblowers. This would include
officers, directors, employees, and consultants who learn of potential
violations as part of their corporate responsibilities in the
expectation that they will take steps to address the violations, as
well as persons who gain knowledge about misconduct otherwise from or
through the various processes that companies employ to identify
problems and advance compliance with legal standards. The latter group
would include not only persons directly responsible for compliance-
related processes, but other persons as well. For
[[Page 70494]]
example, an employee who learns about potential violations only because
a compliance officer questions him about the conduct, and not from any
other source, would not be considered to have ``independent knowledge''
for purposes of the proposed rule, and therefore could not become a
whistleblower (unless, as is explained below, the company does not
disclose the conduct to the Commission within a reasonable time or
proceeds in bad faith).\35\
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\35\ This proposed exclusion would not, however, apply to
individuals with knowledge of potential violations who report their
knowledge to supervisors, compliance or legal personnel. In fact, as
is further explained below, such individuals would be given a 90-day
grace period after reporting their information internally to make a
whistleblower submission to the Commission and have their submission
deemed effective as of the date of their internal report.
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Internal compliance and similar functions, when effective, can
constrain the opportunities for unlawful activity. In some cases, an
entity's compliance program will fail to lead the entity to respond
appropriately to violations. Under the proposed rule, if the entity did
not disclose the information to the Commission within a reasonable time
or proceeded in bad faith, these exclusions would no longer apply,
thereby making an individual who knows this undisclosed information
eligible to become a whistleblower by providing ``independent
knowledge'' of the violations.
This approach is intended to strike a balance between two competing
goals. On the one hand, it is designed to facilitate the operation of
effective internal compliance programs by not creating incentives for
company personnel to seek a personal financial benefit by ``front
running'' internal investigations and similar processes that are
important components of effective company compliance programs. On the
other hand, it would permit such persons to act as whistleblowers in
circumstances where the company knows about material misconduct but has
not taken appropriate steps to respond. Accordingly, in determining
whether these persons would be considered to have provided
``independent knowledge'' and would be eligible for whistleblower
awards, the proposed rule focuses on whether the entity proceeded in
bad faith or did not disclose the information to the Commission within
a reasonable time.\36\
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\36\ This provision does not impose new reporting requirements
in addition to those already existing under the Federal securities
laws.
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In determining whether an entity acted in bad faith, the Commission
will, among other things, consider whether the entity or any personnel
who were responsible for responding to allegations of misconduct took
affirmative steps to hinder the preservation of evidence or a timely
and appropriate investigation. For example, an effort by company
officials to destroy documents or to interfere with witnesses would
constitute bad faith conduct. Similarly, if a company engaged in a sham
investigation of allegations, then the company's response would
constitute bad faith.
The determination of what is a ``reasonable time'' in this context
will necessarily be a flexible concept that will depend on all of the
facts and circumstances of the particular case. In some cases--for
example, an ongoing fraud that poses substantial risk of harm to
investors--a ``reasonable time'' for disclosing violations to the
Commission may be almost immediate. Nonetheless, given the competing
concerns just described, the Commission preliminarily believes that the
proposed rule should not define one fixed period that would represent a
``reasonable time'' in all cases. We anticipate that in evaluating any
whistleblower submissions by personnel covered by these exclusions, we
will review all of the circumstances of the case after the fact in
order to determine whether the company disclosed the misconduct to the
Commission within a reasonable time or proceeded in bad faith.
Further, if we determine that the whistleblower played a role in
causing the company not to disclose the violations, or to delay in
disclosing them, we will take this fact into consideration in our
determination of whether to consider the whistleblower eligible for an
award. A whistleblower will not be permitted to claim that the company
did not disclose information to the Commission in a reasonable time if
the whistleblower bears some responsibility for that failure.
The following chart illustrates the fourth and fifth exclusions
from ``independent knowledge:''
------------------------------------------------------------------------
Does it qualify as
Source of employee's knowledge ``independent knowledge''?
------------------------------------------------------------------------
Employee receives information because Employee will not be deemed to
he/she is reasonably expected to take have independent knowledge of
appropriate steps to respond to the the information unless (1) the
violation because of his/her legal, entity did not disclose the
compliance, audit or supervisory violation to the Commission
responsibilities. within a reasonable period of
time, or (2) acts in bad
faith.
Employee learns of information through Same as above.
company's legal, compliance, audit or
similar functions or processes for
identifying or addressing potential
non-compliance with laws.
Employee otherwise lawfully learns of Employee will generally be
information through his/her work- deemed to have independent
related functions. knowledge of the information
[Note: if employee elects to
report internally first, he/
she will receive the benefit
of a ``90-day look-back'' for
subsequent submission of
information to SEC (See
Proposed Rule 21F-4(b)(7))].
------------------------------------------------------------------------
The sixth exclusion from ``independent knowledge'' is for
information that was obtained by a means or in a manner that violates
applicable Federal or state criminal law. The policy rationale for this
proposed exclusion is that a whistleblower should not be rewarded for
violating a Federal or State criminal law. While Congress clearly
intended through Section 21F to provide greater incentives for
whistleblowers to come forward with information about wrongdoing, we
think it is questionable that Congress intended to encourage
whistleblower assistance to a law enforcement authority where the
assistance itself is undertaken in violation of Federal or State
criminal law.
Finally. in order to prevent evasion of the rules, the seventh
proposed exclusion would apply to anyone who obtained their information
from persons subject to the first six exclusions.
Request for Comment:
7. Is it appropriate to include knowledge that is not direct,
first-hand knowledge, but is instead learned from others, as
``independent knowledge,'' subject only to an exclusion for knowledge
learned from publicly-available sources?
[[Page 70495]]
8. Is there a different or more specific definition of ``analysis''
that would better effectuate the purposes of Section 21F?
9. Is it appropriate to exclude from the definition of
``independent knowledge'' or ``independent analysis'' information that
is obtained through a communication that is protected by the attorney-
client privilege? Are there other ways these rules should address
privileged communications? For example, should other specific
privileges be identified (spousal privilege, physician-patient
privilege, clergy-congregant privilege, or others)? Should the
exclusion apply broadly to information that is obtained through
communications that are subject to any common law evidentiary
privileges recognized under the laws of any state?
10. Is it appropriate to exclude from the definition of independent
knowledge'' or ``independent analysis'' information that is obtained
through the performance of an engagement required under the securities
laws by an independent public accountant, if that information relates
to a violation by the engagement client or the client's directors,
officers or other employees? Are there other ways that our rules should
address the roles of accountants and auditors?
11. Should the exclusion for ``independent knowledge'' or
``independent analysis'' go beyond attorneys and auditors, and include
other professionals who may obtain information about potential
securities violations in the course of their work for clients? If so,
are there appropriate ways to limit the nature or extent of the
exclusion so that any recognition of relationships of professional
trust does not undermine the purposes of Section 21F?
12. Apart from persons who obtain information through privileged
communications, and professionals who have access to client
information, are there still other categories of persons who should not
be considered for whistleblower awards based upon their professional
duties or the manner in which they may acquire information about
potential securities violations? If such exclusions are appropriate,
what limits, if any, should be placed on them in order not to undermine
the purposes of Section 21F? Is the exclusion for knowledge obtained
through violations of criminal law appropriate?
13. Do the proposed exclusions for information obtained by a person
with legal, compliance, audit, supervisory, or governance
responsibilities for an entity under an expectation that the person
would cause the entity to take steps to respond to the violation, and
for information otherwise obtained from or through an entity's legal,
compliance, audit, or similar functions strike the proper balance? Will
the carve-out for situations where the entity does not disclose the
information within a reasonable time promote effective self-policing
functions and compliance with the law without undermining the operation
of Section 21F? Should a ``reasonable time'' be defined in the rule
and, if so, what period should be specified (e.g., three months, six
months, one year)? Does this provide sufficient incentives for people
to continue to utilize internal compliance processes? Are there
alternative or additional provisions the Commission should consider
that would promote effective self-policing and self-reporting while
still being consistent with the goals and text of Section 21F?
14. Is the proposed exclusion for information obtained by a
violation of Federal or State criminal law appropriate? Should the
exclusion extend to violations of the criminal laws of foreign
countries? What would be the policy reasons for either extending the
exclusion to violations of foreign criminal law or not? Are there any
other types of criminal violations that should be included? If so, on
what basis?
15. How should our rules treat information that may be provided to
us in violation of judicial or administrative orders such as protective
orders in private litigation? Should we exclude from whistleblower
awards persons who provide information in violation of such orders?
What would be the policy reason for this proposed exclusion?
Under the statutory definition of ``original information,'' a
whistleblower who provides information that the Commission already
knows from another source has not provided original information, unless
the whistleblower is the ``original source'' of that information.
Paragraphs (5) and (6) of Proposed Rule 21F-4(b) describe how the
Commission proposes to interpret and apply the term ``original source''
as used in the definition of ``original information.'' Under the
proposed rule, a whistleblower is an ``original source'' of the same
information that the Commission obtains from another source if the
other source obtained the information from the whistleblower or his
representative. The whistleblower bears the burden of establishing that
he is the original source of information.
In Commission investigations, one way that this situation may arise
is if the staff receives a referral from another authority such as the
Department of Justice, a self-regulatory organization, or another
organization that is identified in the proposed rule. In these
circumstances, the proposed rule would credit the whistleblower with
being the ``original source'' of information on which the referral was
based as long as the whistleblower ``voluntarily'' provided the
information to the other authority within the meaning of these rules;
i.e., the whistleblower or his representative must have come forward
and given the other authority the information before receiving any
request, inquiry, or demand to which the information was relevant. If a
whistleblower claims to be the original source of information provided
to the Commission by one of these authorities or another entity such as
the whistleblower's employer, the Commission may seek assistance and
confirmation from the other authority or entity in determining whether
the whistleblower is the original source of the information.
Paragraph (6) of Proposed Rule 21F-4(b) addresses circumstances
where the Commission already possesses some information about a matter
at the time that a whistleblower provides additional information about
the same matter. The whistleblower will be considered the ``original
source'' of any information that is derived from his independent
knowledge or independent analysis and that materially adds to the
information that the Commission already possesses. The standard is
modeled after the definition of ``original source'' that Congress
included in the False Claims Act through amendments earlier this
year.\37\
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\37\ 31 U.S.C. 3730(e)(4)(B), Pub. L. 111-148 sec. 10104(h)(2),
124 Stat. 901 (Mar. 23. 2010).
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As is described elsewhere in these proposed rules, a whistleblower
will need to submit his information as well as a Form WB-DEC in order
to start the process and establish the whistleblower's eligibility for
award consideration.\38\ A whistleblower who provides information to
another authority first will need to follow these same procedures and
submit the necessary forms to the Commission in order to perfect his
status as a whistleblower under the Commission's whistleblower program.
However, under paragraph (7) of Proposed Rule 21F-4(b), as long as the
whistleblower submits the necessary forms to the Commission within 90
days after he provided the same information to the other authority, the
Commission will consider the whistleblower's submission to be effective
as of that earlier date. As noted above, the
[[Page 70496]]
whistleblower must establish that he is the original source of the
information provided to the other authority as well as the date of his
submission, but the Commission may seek confirmation from the other
authority in making this determination. The objective of this procedure
is to provide further incentive for persons with knowledge of
securities violations to come forward (consistent with the purposes of
Section 21F) by assuring potential whistleblowers that they can provide
information to appropriate Government or regulatory authorities, and
their ``place in line'' will be protected in the event that other
whistleblowers later provide the same information directly to the
Commission.
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\38\ See Proposed Rule 21F-9.
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For similar reasons, proposed rule 21F-4(b)(7) extends the same
protection to whistleblowers who provide information about potential
violations to the persons specified in Rules 21F-4(b)(4)(iv) and (v)
(i.e., personnel involved in compliance or similar functions, or who
are informed about potential violations with the expectation that they
will take steps to address them), and who, within 90 days, submit the
necessary whistleblower forms to the Commission. Compliance with the
Federal securities laws is promoted when companies have effective
programs for identifying, correcting, and self-reporting unlawful
conduct by company officers or employees. The objective of this
provision is to support, not undermine, the effective functioning of
company compliance and related systems by allowing employees to take
their concerns about potential violations to appropriate company
officials first while still preserving their rights under the
Commission's whistleblower program. This objective is also important
because internal compliance and reporting systems are essential sources
of information for companies about misconduct that may not be
securities-related (e.g., employment discrimination or harassment
complaints), as well as for securities-related complaints. The
Commission does not intend for its rules to undermine effective company
processes for receiving reports on potential violations that may be
outside of the Commission's enforcement interest, but are nonetheless
important for companies to address.
Given the policy interest in fostering robust corporate compliance
programs, we considered the possible approach of requiring potential
whistleblowers to utilize in-house complaint and reporting procedures,
thereby giving employers an opportunity to address misconduct, before
they make a whistleblower submission to the Commission. Among our
concerns was the fact that, while many employers have compliance
processes that are well-documented, thorough, and robust, and offer
whistleblowers appropriate assurances of confidentiality, others lack
such established procedures and protections.
We emphasize, however, that our proposal not to require a
whistleblower to utilize internal compliance processes does not mean
that our receipt of a whistleblower complaint will lead to internal
processes being bypassed. We expect that in appropriate cases,
consistent with the public interest and our obligation to preserve the
confidentiality of a whistleblower, our staff will, upon receiving a
whistleblower complaint, contact a company, describe the nature of the
allegations, and give the company an opportunity to investigate the
matter and report back. The company's actions in these circumstances
will be considered in accordance with the Commission's Report of
Investigation Pursuant to Section 21(a) of the Securities Exchange Act
of 1934 and Commission Statement on the Relationship of Cooperation to
Agency Enforcement Decisions.\39\ This has been the approach of the
Enforcement staff in the past, and the Commission expects that it will
continue in the future. Thus, in this respect, we do not expect our
receipt of whistleblower complaints to minimize the importance of
effective company processes for addressing allegations of wrongful
conduct.\40\
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\39\ Exchange Act Release No. 44969 (October 23, 2001).
\40\ See Rule 21F-6. In addition, as discussed below, in order
to encourage whistleblowers to utilize internal reporting processes,
we expect to give credit in the calculation of award amounts to
whistleblowers who utilize established internal procedures for the
receipt and consideration of complaints about misconduct.
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The Commission's primary goal, consistent with the congressional
intent behind Section 21F, is to encourage the submission of high-
quality information to facilitate the effectiveness and efficiency of
the Commission's enforcement program. At the same time, we also want to
implement Section 21F in a way that encourages strong company
compliance programs. Therefore, we request comment on all aspects of
the intersection between Section 21F and established internal systems
for the receipt, handling, and response to complaints about potential
violations of law. We particularly seek recommendations on structures,
processes, and incentives that we should consider implementing in order
to strike the right balance between the Commission's need for a strong
and effective whistleblower awards program, and the importance of
preserving robust corporate structures for self-policing and self-
reporting.
Request for Comment. The Commission requests comment on all aspects
of the definition of ``original source'' set forth in Proposed Rule
21F-4(b)(4) and (5).
16. Is the provision that would credit individuals with providing
original information to the Commission as of the date of their
submission to another Governmental or regulatory authority, or to
company legal, compliance, or audit personnel, appropriate? In
particular, does the provision regarding the providing of information
to a company's legal, compliance, or audit personnel appropriately
accommodate the internal compliance process?
17. Is the 90-day deadline for submitting Forms TCR and WB-DEC to
the Commission (after initially providing information about violations
or potential violations to another authority or the employer's legal,
compliance, or audit personnel) the appropriate timeframe? Should a
longer time period apply in instances where a whistleblower believes
that the company has or will proceed in bad faith? Would a 90-day
deadline for submitting the TCR and WB-DEC also be appropriate in
circumstances where an individual provides information to an SEC staff
member? Would a shorter time frame be appropriate? Should there be
different time frames for disclosures to other authorities and
disclosures to an employer's legal, compliance or audit personnel?
18. Should the Commission consider other ways to promote continued
robust corporate compliance processes consistent with the requirements
of Section 21F? If so, what alternative requirements should be adopted?
Should the Commission consider a rule that, in some fashion, would
require whistleblowers to utilize employer-sponsored complaint and
reporting procedures? What would be the appropriate contours of such a
rule, and how could it be implemented without undermining the purposes
of Section 21F? Are there other incentives or processes the Commission
could adopt that would promote the purposes of Section 21F while still
preserving a critical role for corporate self-policing and self-
reporting?
19. Would the proposed rules frustrate internal compliance
structures and systems that many companies have established in response
to Section 10A(m) of the Exchange Act, as added by Section 301 of the
Sarbanes-Oxley
[[Page 70497]]
Act of 2002, and related exchange listing standards? If so, consistent
with Section 21F, how can the potential negative impact on compliance
programs be minimized?
Proposed Rule 21F-4(c)--Information that Leads to Successful
Enforcement. Under Section 21F, a whistleblower's eligibility for an
award depends in part on whether the whistleblower's original
information ``led to the successful enforcement'' of the Commission's
action or a related action. Proposed Rule 21F-4(c) defines when
original information ``led to successful enforcement.''
The Commission's enforcement practice generally proceeds in several
stages. First, the staff opens an investigation based upon some
indication of potential violations of the Federal securities laws.
Second, the staff conducts its investigation to gather additional facts
in order to determine whether there is sufficient basis to recommend
enforcement action. If so, the staff may recommend, and the Commission
may authorize, the filing of an action. The definition in Proposed Rule
21F-4(c) would consider the significance of the whistleblower's
information to both the decision to open an investigation and the
success of any resulting enforcement action. The proposed rule would
distinguish between situations where the whistleblower's information
causes the staff to begin an investigation, and situations where the
whistleblower provides information about conduct that is already under
investigation. In the latter case, awards would be limited to the rare
circumstances where the whistleblower provided essential information
that the staff would not have otherwise obtained in the normal course
of the investigation. Paragraphs (1) and (2) of Proposed Rule 21F-4(c)
reflect these considerations.
Paragraph (1) of Proposed Rule 21F-4(c) applies to situations where
the staff is not already reviewing the conduct in question, and
establishes a two-part test for determining whether original
information voluntarily provided by a whistleblower led to successful
enforcement of a Commission action. First, the information must have
caused the staff to commence an examination, open an investigation,
reopen an investigation that had been closed, or to inquire concerning
new and different conduct as part of an open examination or
investigation.\41\ This does not necessarily contemplate that the
whistleblower's information will be the only information that the staff
obtains before deciding to proceed. However, the proposed rule would
apply when the whistleblower gave the staff information about conduct
that the staff is not already investigating or examining, and that
information was a principal motivating factor behind the staff's
decision to begin looking into the whistleblower's allegations.
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\41\ The proposed rule includes examinations within its scope in
recognition of the fact that, in some cases involving regulated
entities, tips about potentially unlawful conduct are directed in
the first instance to staff of the Commission's Office of Compliance
Inspections and Examinations, and after some additional
consideration by examination staff may then lead to an
investigation.
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Second, if the whistleblower's information caused the Commission
staff to start looking at the conduct for the first time, the proposed
rule would require that the information ``significantly contributed''
to the success of an enforcement action filed by the Commission. The
proposed rule includes this requirement because the Commission believes
that it is not the intent of Section 21F to authorize whistleblower
awards for any and all tips about conduct that led to the opening of an
investigation if the resulting investigation concludes in a successful
enforcement action. Rather, implicit in the requirement that a
whistleblower's information ``led to * * * successful enforcement'' is
the further expectation that the information, because of its high
quality, reliability, and specificity, had a meaningful connection to
the Commission's ability to successfully complete its investigation and
to either obtain a settlement or prevail in a litigated proceeding.
Ultimately, successful enforcement of a judicial or administrative
action depends on the staff's ability to establish unlawful conduct by
a preponderance of evidence. Thus, in order to ``lead to successful
enforcement,'' the ``original information'' provided by a whistleblower
should be connected to evidence that plays a significant role in
successfully establishing the Commission's claim. For example, the
``led to'' standard of Proposed Rule 21F-4(c)(1) would be met if a
whistleblower were to provide the Commission staff with strong, direct
evidence of violations that supported one or more claims in a
successful enforcement action. To give another example, a whistleblower
whose information did not provide this degree of evidence in itself,
but who played a critical role in advancing the investigation by
leading the staff directly to evidence that provided important support
for one or more of the Commission's claims could also receive an award,
in particular if the evidence the whistleblower pointed to might have
otherwise been difficult to obtain. A whistleblower who only provided
vague information, or an unsupported tip, or evidence that was
tangential and did not significantly help the Commission successfully
establish its claims, would not meet the standard of this proposed
rule.
If information that a whistleblower provides to the Commission
consists of ``independent analysis'' rather than ``independent
knowledge,'' the evaluation of whether this analysis ``led to
successful enforcement'' similarly would turn on whether it
significantly contributed to the success of the action. This would
involve, for example, considering the degree to which the analysis, by
itself and without further investigation, indicated a high likelihood
of unlawful conduct that was the basis, or was substantially the basis,
for one or more claims in the Commission's enforcement action. The
purpose of this provision is to ensure that the analysis provided to
the Commission results in the efficiency and effectiveness benefits to
the enforcement program that were intended by Congress.
Paragraph (2) of Proposed Rule 21F-4(c) sets forth a separate,
higher standard for cases in which a whistleblower provides original
information to the Commission about conduct that is already under
examination or investigation by the Commission, Congress, any other
Federal, state, or local authority, any self-regulatory organization,
or the Public Company Accounting Oversight Board. In this situation,
the information will be considered to have led to the successful
enforcement of a judicial or administrative action if the information
would not have otherwise been obtained and was essential to the success
of the action.\42\ Although the Commission believes that awards under
Section 21F generally should be limited to cases where whistleblowers
provide original information about violations that are not already
under investigation,\43\ there may
[[Page 70498]]
be rare circumstances where information received from a whistleblower
in relation to an ongoing investigation is so significant to the
success of a Commission action that a whistleblower award should be
considered. For example, a whistleblower who has not been questioned by
the staff in an investigation, but who nonetheless has access to, and
comes forward with a document that had been concealed from the staff,
and that establishes proof of wrongdoing that is critical to the
Commission's ability to sustain its burden of proof, provides the type
of assistance that should be considered for an award without regard to
whether the staff was already investigating the conduct at the time the
document was provided. We anticipate applying Proposed Rule 21F-4(c)(2)
in a strict fashion, however, such that awards under this standard
would be rare.
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\42\ The proposed rule also makes clear that paragraph (2) of
Proposed Rule 21F-4(c) does not apply when a whistleblower provides
information to the Commission about a matter that is already under
investigation by another authority if the whistleblower is the
``original source'' for that investigation under Proposed Rule 21F-
4(b)(4). In those circumstances, paragraph (1) of Proposed Rule 21F-
4(c) would govern the Commission's analysis.
\43\ See Lacy v. United States, 221 Ct. Cl. 526 (1979); cf.
United States ex rel. Merena v. Smith-Kline Beecham Corp., 205 F.3d
97 (3d Cir 2000).
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In considering the relationship between information obtained from a
whistleblower and the success of an enforcement action, the Commission
will apply the same standards in both settled and litigated actions.
Specifically, in a litigated action the whistleblower's information
must significantly contribute, or, in the case of conduct that is
already under investigation, be essential, to the success of a claim on
which the Commission prevails in litigation. For example, if a court
finds in favor of the Commission on a number of claims in an
enforcement action, but rejects the claims that are based upon the
information the whistleblower provided, the whistleblower would not be
considered eligible to receive an award.\44\ Similarly, in a settled
action the Commission would consider whether the whistleblower's
information significantly contributed, or was essential, to allegations
included in the Commission's Federal court complaint, or to factual
findings in the Commission's administrative order.
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\44\ As discussed below, however, if the Commission prevails on
a claim that is based upon the information the whistleblower
provided, and if all the conditions for an award are otherwise
satisfied, the award to the whistleblower would be based upon all of
the monetary sanctions obtained as a result of the action. See
Proposed Rule 21F-4(d).
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Request for Comment:
20. Is the proposed standard for when original information
voluntarily provided by a whistleblower ``led to'' successful
enforcement action appropriate?
21. In cases where the original information provided by the
whistleblower caused the staff to begin looking at conduct for the
first time, should the standard also require that the whistleblower's
information ``significantly contributed'' to a successful enforcement
action?
a. If not, what standards should be used in the evaluation?
b. If yes, should the proposed rule define with greater specificity
when information ``significantly contributed'' to enforcement action?
In what way should the phrase be defined?
22. Is the proposal in Paragraph (c)(2), which would consider that
a whistleblower's information ``led to'' successful enforcement even in
cases where the whistleblower gave the Commission original information
about conduct that was already under investigation, appropriate? Should
the Commission's evaluation turn on whether the whistleblower's
information would not otherwise have been obtained and was essential to
the success of the action? If not, what other standard(s) should apply?
Proposed Rule 21F-4(d)--Action
Proposed Rule 21F-4(d) defines the term ``action.'' For purposes of
calculating whether monetary sanctions in a Commission action exceed
the $1,000,000 threshold required for an award payment pursuant to
Section 21F of the Exchange Act, as well as determining the monetary
sanctions on which awards are based,\45\ the Commission proposes to
interpret the term ``action'' to mean a single captioned civil or
administrative proceeding. This approach to determining the scope of an
``action'' is consistent with the most common meaning of the term,\46\
and is driven by the plain text of Section 21F. Section 21F(a)(1)
defines a ``covered judicial or administrative action'' as ``any
judicial or administrative action brought by the Commission under the
securities laws that results in monetary sanctions exceeding
$1,000,000.'' \47\ When the conditions for an award are satisfied in
connection with a ``covered judicial or administrative action,'' the
Commission must pay an award or awards in an aggregate amount equal to
not less than 10 percent and not more than 30 percent ``in total, of
what has been collected of the monetary sanctions imposed in the action
* * *.'' \48\
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\45\ See Proposed Rule 21F-5.
\46\ E.g., SEC v. McCarthy, 322 F.3d 650, 656 (9th Cir. 2003)
(``An `action' is defined as `a civil or criminal judicial
proceeding.' '').
\47\ 15 U.S.C. 78u-6(a)(1).
\48\ 15 U.S.C. 78u-6(b).
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Two implications follow from this interpretation. First, the
``action'' would include all defendants or respondents, and all claims,
that are brought within that proceeding without regard to which
specific defendants or respondents, or which specific claims, were
included in the action as a result of the information that the
whistleblower provided. For example, if a whistleblower provided
information concerning insider trading by a single individual, and,
after an investigation, the Commission brought an action against that
individual and others in a single captioned proceeding in Federal
court, then the sanctions collected from all the defendants in the
action would be added up to determine whether the $1,000,000 threshold
has been met. Similarly, if a corporate accounting employee provided
the Commission with information about a fraudulent accounting practice,
and, after investigation, the Commission brought an action that also
included unrelated claims discovered during the investigation, the
$1,000,000 threshold amount for an award would be determined based upon
the total monetary sanctions obtained in the action. This approach
would effectuate the purposes of Section 21F by enhancing the
incentives for individuals to come forward and report potential
securities law violations to the Commission,\49\ and would avoid the
challenges associated with attempting to allocate monetary sanctions
involving multiple individuals and claims based upon the select
individuals and claims reported by whistleblowers.
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\49\ This approach offers enhanced potential incentives for
whistleblowers when compared to other similar programs because those
programs have typically limited awards to successful claims that the
whistleblower actually identified. See Rockwell International Corp.
v. United States, 549 U.S. 457 (2007) (False Claims Act); John Doe
v. United States, 65 Fed. Cl. 184 (2005) (Customs moiety statute, 19
U.S.C. 1619); Internal Revenue Manual 25.2.2.2.8.A (under IRS
whistleblower program, collected proceeds only include proceeds from
the single issue identified by the whistleblower, or substantially
similar improper activity).
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Second, this proposed approach to interpreting the term ``action''
also would mean that the Commission would not aggregate sanctions that
are imposed in separate judicial or administrative actions for purposes
of determining whether the $1,000,000 threshold is satisfied, even if
the actions arise out of a single investigation. For example, if a
whistleblower's submission leads to two separate enforcement actions,
each with total sanctions of $600,000, then no whistleblower award
would be authorized because no single action will have obtained
sanctions exceeding $1,000,000.
Request for Comment:
[[Page 70499]]
23. The Commission requests comment on the proposed definition of
the word ``action.'' Are there other ways to define an ``action'' that
are consistent with the text of Section 21F and that will better
effectuate the purposes of the statute?
Proposed Rules 21F-4(e)--Monetary Sanctions. Proposed Rule 21F-4(e)
defines ``monetary sanctions'' to mean any money, including penalties,
disgorgement, and interest, ordered to be paid and any money deposited
into a disgorgement fund or other fund pursuant to Section 308(b) of
the Sarbanes-Oxley Act of 2002 as a result of a Commission action or a
related action. This definition tracks the definition of the same term
found in Section 21F of the Exchange Act.\50\ The Commission interprets
the reference in the statute to ``penalties, disgorgement, and
interest'' to be examples of monetary sanctions, and not exclusive.
Thus, regardless of how designated, the Commission will consider all
amounts that are ``ordered to be paid'' in an action as ``monetary
sanctions'' for purposes of Section 21F.
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\50\ 15 U.S.C. 78u-6(a)(4).
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Proposed Rule 21F-4(f)--Appropriate Regulatory Agency.
Section 3(a)(34) of the Exchange Act \51\ designates the
Commission, the Comptroller of the Currency, the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision as ``appropriate regulatory
agencies'' for specified entities and functions.\52\ For example, when
a national bank is a municipal securities dealer, the Comptroller of
the Currency is designated as the appropriate regulatory agency; when a
state member bank of the Federal Reserve System is a municipal
securities dealer, the Federal Reserve Board is designated as the
appropriate regulatory agency.
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\51\ 15 U.S.C. 78c(a)(34).
\52\ Title III of Dodd-Frank abolishes the Office of Thrift
Supervision and transfers its functions to other agencies one year
after the date of enactment, unless the transfer date is extended.
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Proposed Rule 21F-4(f) would make clear that the Commission, the
Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, and the
Office of Thrift Supervision (as well as any other agencies that may be
added to Section 3(a)(34) of the Exchange Act by future amendment) are
deemed to be ``appropriate regulatory agencies'' for all purposes under
Section 21F of the Exchange Act.\53\ This means, in particular, that
the Commission would consider a member, officer, or employee of one of
the designated agencies to be ineligible to receive a whistleblower
award under any circumstances, even if the information that the person
possesses is unrelated to the agency's regulatory function. This
interpretation would place members, officers, and employees of
appropriate regulatory agencies on equal footing with those of other
organizations, such as the Public Company Accounting Oversight Board
and law enforcement organizations, who are also statutorily ineligible
to receive whistleblower awards.\54\
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\53\ Section 21F alternately uses the terms ``appropriate
regulatory agency'' and ``appropriate regulatory authority.''
Compare Section 21F(c)(2)(A)(i) (15 U.S.C. 78u-6(c)(2)(A)(i)) with
Section 21F(h)(2)(D)(i)((II) (15 U.S.C. 78u-6(h)(2)(D)(i)((II)).
Because we do not believe that Congress intended this differing
terminology to reflect substantive distinctions, the proposed rules
use the term ``appropriate regulatory agency'' in all instances.
\54\ See Section 21F(c)(2)(A), 15 U.S.C. 78u-6(c)(2)(A).
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Request for Comment:
24. Is the proposed definition of ``appropriate regulatory agency''
appropriate? Are there other definitions that that should be adopted
instead?
Proposed Rule 21F-4(g)--Self-Regulatory Organization. Section
3(a)(26) of the Exchange Act \55\ designates national securities
exchanges, registered securities associations, and registered clearing
agencies as self-regulatory organizations, and the Municipal Securities
Rulemaking Board as a self-regulatory organization solely for purposes
of Sections 19(b) and (c) of the Exchange Act (relating to
rulemaking).\56\ Consistent with the approach taken with regard to the
definition of ``appropriate regulatory agency'' (see discussion above),
Proposed Rule 21F-4(g) would make clear that the Municipal Securities
Rulemaking Board is considered to be a ``self-regulatory organization''
for all purposes under Section 21F.
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\55\ 15 U.S.C. 78c(a)(26).
\56\ 15 U.S.C. 78s(b) and (c).
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Request for Comment:
25. Is the proposed definition of ``self-regulatory organization''
appropriate? Are there other definitions that that should be adopted
instead?
E. Proposed Rule 21F-5--Amount of Award
Proposed Rule 21F-5 states that, if all conditions are met, the
Commission will pay an award of at least 10 percent and no more than 30
percent of the total monetary sanctions collected in successful
Commission and related actions. This range is specified in Section
21F(b)(1) of the Exchange Act. Where multiple whistleblowers are
entitled to an award, paragraph (b) states that the Commission will
independently determine the appropriate award percentage for each
whistleblower, but total award payments, in the aggregate, will equal
between 10 and 30 percent of the monetary sanctions collected in the
Commission's action and the related action. Thus, for example, one
whistleblower could receive an award of 25 percent of the collected
sanctions, and another could receive an award of 5 percent, but they
could not each receive an award of 30 percent. Since the Commission
anticipates that the timing of award determinations and the value of a
whistleblower's contribution could be different for the Commission's
action and for related actions, the proposed rule would provide that
the percentage awarded in connection with a Commission action may
differ from the percentage awarded in related actions.
Request for Comment:
24. Is the provision stating that the percentage amount of an award
in a Commission action may differ from the percentage awarded in a
related action appropriate?
F. Proposed Rule 21F-6--Criteria for Determining Amount of Award
Assuming that all of the conditions for making an award to a
whistleblower have been satisfied, Proposed Rule 21F-6 sets forth the
criteria that the Commission would take into consideration in
determining the amount of the award. Paragraphs (a) through (c) of the
proposed rule recite three criteria that Section 21F of the Exchange
Act requires the Commission to consider, and paragraph (d) adds a
fourth criterion.
Paragraph (a) requires the Commission to consider the significance
of the information provided by a whistleblower to the success of the
Commission action or related action. Paragraph (b) requires the
Commission to consider the degree of assistance provided by the
whistleblower and any legal representative of the whistleblower in the
Commission action or related action. Paragraph (c) requires the
Commission to consider its programmatic interest in deterring
violations of the securities laws by making awards to whistleblowers
that provide information that leads to successful enforcement actions.
Paragraph (d) would permit the Commission to consider whether an award
otherwise enhances its ability to enforce the Federal securities laws,
protect investors, and encourage the
[[Page 70500]]
submission of high quality information from whistleblowers.
The Commission anticipates that the determination of awards amounts
pursuant to paragraphs (a)-(d) will involve highly individualized
review of the circumstances surrounding each award. To allow for this,
the Commission preliminarily believes that the four criteria afford the
Commission broad discretion to weigh a multitude of considerations in
determining the amount of any particular award. Depending upon the
facts and circumstances of each case, some of the considerations may
not be applicable or may deserve greater weight than others.
The permissible considerations include, but are not limited to,
those set forth below. These considerations are not listed in order of
importance nor are they intended to be all-inclusive or to require a
specific determination in any particular case:
The character of the enforcement action, including whether
its subject matter is a Commission priority, whether the reported
misconduct involves regulated entities or fiduciaries, the type and
severity of the securities violations, the age and duration of
misconduct, the number of violations, and the isolated, repetitive, or
ongoing nature of the violations;
The dangers to investors or others presented by the
underlying violations involved in the enforcement action, including the
amount of harm or potential harm caused by the underlying violations,
the type of harm resulting from or threatened by the underlying
violations, and the number of individuals or entities harmed;
The timeliness, degree, reliability, and effectiveness of
the whistleblower's assistance;
The time and resources conserved as a result of the
whistleblower's assistance;
Whether the whistleblower encouraged or authorized others
to assist the staff who might otherwise not have participated in the
investigation or related action;
Any unique hardships experienced by the whistleblower as a
result of his or her reporting and assisting in the enforcement action;
The degree to which the whistleblower took steps to
prevent the violations from occurring or continuing;
The efforts undertaken by the whistleblower to remediate
the harm caused by the violations, including assisting the authorities
in the recovery of the fruits and instrumentalities of the violations;
Whether the information provided by the whistleblower
related to only a portion of the successful claims brought in the
Commission or related action; \57\
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\57\ As described elsewhere in these rules, if the information
provided by a whistleblower relates to only a portion of a
successful enforcement action, the Commission proposes to look to
the entirety of the action (including all defendants or respondents,
all claims, and all monetary sanctions obtained) in determining
whether the action is eligible for an award (because it meets the
$1,000,000 threshold) and the total dollar amount of sanctions on
which the whistleblower's award will be based. However, under
paragraph (a) of Proposed Rule 21F-6, the fact that the
whistleblower's information related to only a portion of the overall
action would be a factor in determining the amount of the
whistleblower's award. Thus, if the whistleblower's information
supported only a small part of a larger case, that would be a reason
for making an award based upon a smaller percentage amount than
otherwise would have been awarded.
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The culpability of the whistleblower including whether the
whistleblower acted with scienter, both generally and in relation to
others who participated in the misconduct; and
Whether, and the extent to which, a whistleblower reported
the potential violation through effective internal whistleblower, legal
or compliance procedures before reporting the violation to the
Commission.
This last consideration is not a requirement for an award above the
10 percent statutory minimum and whistleblowers will not be penalized
if they do not avail themselves of this opportunity for fear of
retaliation or other legitimate reasons. The Commission will consider
higher percentage awards for whistleblowers who first report violations
through their compliance programs. Corporate compliance programs play a
role in preventing and detecting securities violations that could harm
investors. If these programs are not utilized or working, our system of
securities regulation will be less effective. Accordingly, the
Commission believes that encouraging whistleblowers to report
securities violations to their corporate compliance programs is
consistent with the Commission's investor protection mission.
Request for Comment:
27. Should the Commission identify, by rule, additional criteria
that it will consider in determining the amount of an award? If so,
what criteria should be included? Should we include as a criterion the
consideration of whether, and the extent to which, a whistleblower
reported the potential violation through effective internal
whistleblower, legal or compliance procedures before reporting the
violation to the Commission? Should we include any of the other
considerations described above?
28. Should we include the role and culpability of the whistleblower
in the unlawful conduct as an express criterion that would result in
reducing the amount of an award within the statutorily-required range?
Should culpable whistleblowers be excluded from eligibility for awards?
Would such an exclusion be consistent with the purposes of Section 21F?
G. Proposed Rule 21F-7--Confidentiality of Submissions
Proposed Rule 21F-7 reflects the confidentiality requirements set
forth in Section 21F(h)(2) of the Exchange Act \58\ with respect to
information that could reasonably be expected to reveal the identity of
a whistleblower. As a general matter, it is the Commission's policy and
practice to treat all information obtained during its investigations as
confidential and nonpublic. Disclosures of enforcement-related
information to any person outside the Commission may only be made as
authorized by the Commission and in accordance with applicable laws and
regulations. Consistent with Section 21F(h)(2), the proposed rule
explains that the Commission will not reveal the identity of a
whistleblower or disclose other information that could reasonably be
expected to reveal the identity of a whistleblower, except under
circumstances described in the statute and the rule.\59\ As is further
explained below, there may be circumstances in which disclosure of
information that identifies a whistleblower will be legally required or
will be necessary for the protection of investors.
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\58\ 15 U.S.C. 78u-6(h)(2).
\59\ Under Section 21F(h)(2), whistleblower-identifying
information is also expressly exempted from the provisions of the
Freedom of Information Act, 5 U.S.C. 552.
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Paragraph (a)(1) of the proposed rule would authorize disclosure of
information that could reasonably be expected to reveal the identity of
a whistleblower when disclosure is required to a defendant or
respondent in a Federal court or administrative action that the
Commission files or in another public action or proceeding filed by an
authority to which the Commission may provide the information. For
example, in a related action brought as a criminal prosecution by the
Department of Justice, disclosure of a whistleblower's identity may be
required, in light of the requirement of the Sixth Amendment of the
Constitution that a criminal defendant have the right to be confronted
with witnesses against him.\60\ Paragraph (a)(2) would authorize
disclosure to the Department of Justice, an appropriate regulatory
agency, a self regulatory organization, a state attorney
[[Page 70501]]
general in connection with a criminal investigation, any appropriate
state regulatory authority, the Public Company Accounting Oversight
Board, or foreign securities and law enforcement authorities when it is
necessary to achieve the purposes of the Exchange Act and to protect
investors. With the exception of foreign securities and law enforcement
authorities, each of these entities is subject to the confidentiality
requirements set forth in Section 21F(h) of the Exchange Act. Since
foreign securities and law enforcement authorities are not bound by
these confidentiality requirements, the proposed rule states that the
Commission may determine what assurances of confidentiality are
appropriate prior to disclosing such information. Paragraph (a)(3)
would authorize disclosure in accordance with the Privacy Act of 1974.
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\60\ See U.S. Const. Amend. VI.
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Because many whistleblowers may wish to provide information
anonymously, paragraph (b) of the proposed rule states that anonymous
submissions are permitted with certain specified conditions. Paragraph
(b)(1) would require that anonymous whistleblowers be represented by an
attorney and that the attorney's contact information be provided to the
Commission at the time of the whistleblower's initial submission. The
purpose of this requirement is to prevent fraudulent submissions and to
facilitate communication and assistance between the whistleblower and
the Commission's staff. Any whistleblower may be represented by
counsel--whether submitting information anonymously or not.\61\
Paragraph (b)(2) would require that anonymous whistleblowers and their
counsel follow the required procedures outlined in Proposed Rule 21F-9.
Paragraph (b)(3) would require that anonymous whistleblowers disclose
their identity, pursuant to the procedures outlined in Proposed Rule
21F-10, before the Commission will pay any award. We emphasize that
anonymous whistleblowers have the same rights and responsibilities as
other whistleblowers under Section 21F of the Exchange Act and these
proposed rules, unless expressly exempted.
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\61\ See Section 21F(d)(1), 15 U.S.C. 78u-6(d)(1). Under the
statute, however, an anonymous whistleblower seeking an award is
required to be represented by counsel. Section 21F(d)(2), 15 U.S.C.
78u-6(d)(2).
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Pursuant to Rule 102(e) of the Commission's Rules of Practice,\62\
the Commission may deny the privilege of practicing before the
Commission to any person who, after notice and opportunity for hearing,
is found not to possess the requisite qualifications to represent
others, to be lacking in character or integrity, to have engaged in
unethical or improper professional conduct, or to have willfully
violated or willfully aided and abetted the violation of any provision
of the Federal securities laws or rules. Practice before the Commission
is defined to include transacting any business with the Commission.\63\
The Commission cautions attorneys that representation of whistleblowers
will constitute practice before the Commission. Accordingly, misconduct
by an attorney representing a whistleblower can result in the attorney
being subject to disciplinary sanctions under any of the conditions set
forth in Rule 102(e).
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\62\ 17 CFR 201.102(e).
\63\ 17 CFR 102(f).
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Request for Comment:
29. Because representation of whistleblowers constitutes practice
before the Commission by an attorney, should the Commission consider
adopting rules governing conduct by attorneys engaged in this type of
practice? In some contexts, courts have disallowed excessive fee
requests to attorneys for whistleblowers.\64\ Should we adopt a rule
regarding fees in the representation of whistleblower clients? Would
such a rule encourage or discourage whistleblower submissions?
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\64\ United States v. Overseas Shipholding Group, Inc., 2010 WL
4104663 at *7 (1st Cir. 2010) (limitations on fees ``are
particularly appropriate in situations such as this where awarding
an excessive fee to the attorney would itself undermine the
objectives of the Federal statutory scheme. The whole purpose of the
discretionary award to whistleblowers under this statute is to
create incentives for the whistleblower to take risks that may
disadvantage the whistleblower in his relationship to his employer.
The amount of the fee that will be siphoned off by the lawyer
significantly affects the size of that award and the power of the
incentive. The court in administering this statute is obligated to
ensure his excessive legal fees will not diminish the statutory
incentive.'').
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H. Proposed Rule 21F-8--Eligibility
Paragraph (a) of Proposed Rule 21F-8 makes clear that providing
information in the form and manner required by these rules is a
fundamental criterion of eligibility for a whistleblower award.\65\
However, in order to prevent undue hardship, the Commission, in its
sole discretion, may waive any of these procedural requirements based
upon a showing of extraordinary circumstances.
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\65\ See Section 21F(c)(2)(D), which prohibits the Commission
from paying an award to any whistleblower ``who fails to submit
information to the Commission in such form as the Commission may, by
rule, require. 15 U.S.C. 78u-6(c)(2)(D).
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The specific procedures required for submitting original
information and making a claim for a whistleblower award are described
in Proposed Rules 21F-9 through 21F-11. Proposed Rule 21F-8(b) contains
several additional procedural requirements, which are designed to
assist the Commission in evaluating and using the information provided.
These include that the whistleblower, upon request, agree to provide
explanations and other assistance including, but not limited to,
providing all additional information in the whistleblower's possession
that is related to the subject matter of his submission. In order to
accommodate whistleblowers who elect to submit information anonymously,
the staff will have discretion to make special arrangements to meet
these procedural requirements.
Paragraph (b) of the proposed rule also would require
whistleblowers, if requested by the staff, to provide testimony or
other acceptable evidence relating to whether they are eligible for or
otherwise satisfy any of the conditions for an award. Because Section
21F(c)(2) of the Exchange Act statutorily excludes certain persons from
receiving whistleblower awards,\66\ and Section 21F further conditions
the grant of an award on factors that are unique to each individual
whistleblower (e.g., that the individual act ``voluntarily'' and
provide information that meets all the criteria of ``original
information''), this provision is designed to ensure that the staff has
authority to confirm that whistleblowers meet all of the necessary
eligibility criteria and conditions. It is anticipated that the staff
may seek such confirming evidence at any point after a whistleblower
files Form WB-DEC (as set forth in Proposed Rule 21F-9), including,
without limitation, in connection with the claims review process
described in Proposed Rules 21F-10 and 21F-11.
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\66\ 15 U.S.C. 78u-6(c)(2).
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Finally, paragraph (b) of proposed rule 21F-8 would authorize the
staff to require that a whistleblower enter into a confidentiality
agreement in a form acceptable to the Whistleblower Office, including a
provision that a violation may result in the whistleblower being
ineligible for an award.\67\ In some cases, a confidentiality agreement
may be required if it becomes necessary or advisable for the staff to
share non-public information with a whistleblower either during the
course of the investigation (for example, to obtain the whistleblower's
assistance in interpreting documents), or as part of
[[Page 70502]]
the claims process set forth in Proposed Rules 21F-10 and 21F-11.
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\67\ Section 21F(e) of the Exchange Act authorizes the
Commission to require that a whistleblower enter into a contract. 15
U.S.C. 78u-6(e).
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Paragraph (c) of Proposed Rule 21F-8 recites the categories of
individuals who are ineligible for an award, many of which are set
forth in Section 21F(c)(2). These include persons who are, or were at
the time they acquired the original information, a member, officer, or
employee of the Department of Justice, an appropriate regulatory
agency, a self-regulatory organization, the Public Company Accounting
Oversight Board, or any law enforcement organization; anyone who is
convicted of a criminal violation that is related to the Commission
action or to a related action for which the person otherwise could
receive an award; any person who obtained the information provided to
the Commission through an audit of a company's financial statements,
and making a whistleblower submission would be contrary to the
requirements of Section 10A of the Exchange Act, 15 U.S.C. 78j-1); \68\
and any person who in his whistleblower submission, his other dealings
with the Commission, or his dealings with another authority in
connection with a related action, knowingly and willfully makes any
false, fictitious, or fraudulent statement or representation, or uses
any false writing or document, knowing that it contains any false,
fictitious, or fraudulent statement or entry. Paragraph (c)(2) of
Proposed Rule 21F-8 also would make foreign officials ineligible to
receive a whistleblower award. The payment of awards to foreign
officials could have negative repercussions for United States foreign
relations, including creating a perception that the United States is
interfering with foreign sovereignty, potentially undermining foreign
government cooperation under existing treaties (including multilateral
and bilateral mutual legal assistance treaties),\69\ encouraging
corruption, and raising concerns about protection of foreign officials
who become whistleblowers. In order to prevent evasion of these
exclusions, paragraph (c)(5) of the proposed rule also provides that
persons who acquire information from ineligible individuals are
ineligible for an award. In addition, paragraph (c)(6) would make any
person ineligible who is the spouse, parent, child, or sibling of a
member or employee of the Commission, or who resides in the same
household as a member or employee of the Commission, in order to
prevent the appearance of improper conduct by Commission employees.
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\68\ As noted above, Section 10A of the Exchange Act requires
that a registered public accounting firm engaged in an audit of
financial statements of an issuer required under the Exchange Act
take certain steps if the auditor detects or otherwise becomes aware
of information indicating an illegal act, which in certain
circumstances can include reporting directly to the Commission. The
Commission interprets the exclusion in Section 21F(c)(2)(C) to apply
to persons who obtain information through the performance of an
audit that is subject to the requirements of Section 10A, whether or
not the audit results in the accounting firm making a report to the
Commission. In addition to this statutory exclusion, the Commission
is proposing, through the definition of ``original information,'' a
broader exclusion for persons who obtain information through the
performance of an engagement required under the securities laws by
an independent public accountant. See Proposed Rule 21F-
4(b)(4)(iii).
\69\ For example, Article 8(4) of the United Nations Convention
Against Corruption requires that party states consider establishing
measures and systems to facilitate the reporting by public officials
of acts of corruption to appropriate authorities, when such acts
come to their notice in the performance of their functions.
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Paragraph (d) of Proposed Rule 21F-8 reiterates that a
determination that a whistleblower is ineligible to receive an award
for any reason does not deprive the individual of the anti-retaliation
protections set forth in Section 21F(h)(1) of the Exchange Act.\70\
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\70\ See Proposed Rule 21F-2.
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Request for Comment.
30. We request comment on the manner of submission requirements set
forth in Proposed Rule 21F-8(b). Are these requirements appropriate?
Should there be different or additional requirements to supplement the
submission of information as set forth in Proposed Rule 21F-9?
31. We also request comment on the ineligibility criteria set forth
in Proposed Rule 21F-8(c). Are there other statuses or activities that
should render an individual ineligible for a whistleblower award?
I. Proposed Rule 21F-9--Procedures for Submitting Original Information
The Commission proposes a two-step process for the submission of
original information under the whistleblower award program. In general,
the first step would require the submission of information either on a
standard form or through the Commission's online database for receiving
tips, complaints and referrals. The second step would require the
whistleblower to complete a Whistleblower Office form, signed under
penalties of perjury, in which the whistleblower would be required to
make certain representations concerning the veracity of the information
provided and the whistleblower's eligibility for a potential award. The
use of standardized forms and the electronic database will greatly
assist the Commission in managing and tracking the thousands of tips
that it receives annually. This will also better enable the Commission
to connect tips to each other so as to make better use of the
information provided, and to connect tips to requests for payment under
the whistleblower provisions. The purpose of requiring a sworn
declaration is to help deter the submission of false and misleading
tips and the resulting inefficient use of the Commission's resources.
The requirement should also mitigate the potential harm to companies
and individuals that may be caused by false or spurious allegations of
wrongdoing.
1. Form TCR and Instructions
Paragraph (a) of Proposed Rule 21F-9 requires the submission of
information in one of two ways. A whistleblower may submit the
information electronically through the Commission's Electronic Data
Collection System available on the Commission's Web site or by
completing and submitting proposed Form TCR--Tip, Complaint or
Referral.\71\ Form TCR, and the instructions thereto, are designed to
capture basic identifying information about a complainant and to elicit
sufficient information to determine whether the conduct alleged
suggests a violation of the Federal securities laws. Proposed items A1
through A3 of Form TCR would request the whistleblower's name and
contact information, including a physical address, email address and
telephone number. Proposed item A4 would ask the whistleblower to
indicate his occupation. In instances where a whistleblower submits
information anonymously, the identifying information for the
whistleblower would not be required, but proposed Items B1 through B4
of the form would require the name and contact information of the
whistleblower's attorney. This information may also be included in the
case of whistleblowers whose identities are known and who are
represented by counsel in the matter. Proposed Items C1 through C4
would request basic identifying information for
[[Page 70503]]
the individual(s) or entity(ies) to which the complaint relates.
Proposed Items D1 through D9 are designed to elicit details concerning
the alleged securities violation. Proposed Items D1 and D2 would ask
the whistleblower to provide the date of the occurrence and describe
the nature of the complaint. Proposed Items D3 and D4 would ask whether
the complaint relates to an entity of which the whistleblower is or was
an officer, director, employee, consultant or contractor and, if so,
whether the whistleblower has taken any prior action regarding the
complaint, what actions were taken and the date on which the action(s)
were taken. Proposed Item D5 would ask about the type of security or
investment involved, the name of the issuer and the ticker symbol or
CUSIP number, if applicable. Proposed Item D6 would ask the
whistleblower to state in detail all facts pertinent to the alleged
violation. Proposed Item D7 would ask for a description of all
supporting materials in the whistleblower's possession and the
availability and location of any additional supporting materials not in
the whistleblower's possession. Item D8 would ask for an explanation of
how the whistleblower obtained the information that supports the claim.
Proposed Item D9 would provide the whistleblower with an opportunity to
provide any additional information the whistleblower thinks may be
relevant to his submission. The questions posed on proposed Form TCR
are designed to elicit the minimum information required for the
Commission to make a preliminary assessment concerning the likelihood
that the alleged conduct suggests a violation of the securities laws.
Moreover, the proposed instructions to Form TCR are designed to assist
the whistleblower and facilitate the completion of the form.
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\71\ The Commission anticipates that, by the time final rules
are adopted to implement Section 21F, potential whistleblowers will
be able to submit information to the Commission online through the
Electronic Data Collection System, an interactive, web-based
database for submission of tips, complaints and referrals.
Whistleblowers who wish to submit their information in paper format
would be required to use proposed Form TCR. Both methods of
submission are designed to elicit substantially similar information
concerning the individual submitting the information and the
violation alleged. For purposes of these rules, the Commission is
only discussing proposed Form TCR. The Commission will be separately
submitting a request to the Office of Management and Budget for
Paperwork Reduction Act approval of the Electronic Data Collection
System.
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2. Form WB-DEC and Instructions
In addition to submitting information in the form and manner
required by paragraph (a), the Commission proposes in paragraph (b) of
Proposed Rule 21F-9 to require that whistleblowers who wish to be
considered for an award in connection with the information they provide
to the Commission also complete and provide the Commission with
proposed Form WB-DEC, Declaration Concerning Original Information
Provided Pursuant to Sec. 21F of the Securities Exchange Act of 1934.
Proposed Form WB-DEC would require a whistleblower to answer certain
threshold questions concerning the whistleblower's eligibility to
receive an award. The form also would contain a statement from the
whistleblower acknowledging that the information contained in the Form
WB-DEC, as well as all information contained in the whistleblower's
submission, is true, correct and complete to the best of the
whistleblower's knowledge, information and belief. Moreover, the
statement would acknowledge the whistleblower's understanding that the
whistleblower may be subject to prosecution and ineligible for an award
if, in the whistleblower's submission of information, other dealings
with the Commission, or dealings with another authority in connection
with a related action, the whistleblower knowingly and willfully makes
any false, fictitious, or fraudulent statements or representations, or
uses any false writing or document knowing that the writing or document
contains any false, fictitious, or fraudulent statement or entry.
In instances where information is provided by an anonymous
whistleblower, proposed paragraph (c) of Proposed Rule 21F-9 would
require the attorney representing the whistleblower to provide the
Commission with a separate Form WB-DEC certifying that the attorney has
verified the identity of the whistleblower, and will retain the
whistleblower's original, signed Form WB-DEC in the attorney's files.
The proposed certification from counsel is an important element of the
whistleblower program to help ensure that the Commission is working
with whistleblowers whose identities have been verified by their
counsel. The proposed certification process also would provide a
mechanism for anonymous whistleblowers to be advised by their counsel
regarding their preliminary eligibility for an award.
Proposed Items A1 through A3 of Form WB-DEC would request the
whistleblower's name and contact information. In the case of
submissions by an anonymous whistleblower, the form would require the
name and contact information of the whistleblower's attorney instead of
the whistleblower's identifying information in proposed Items B1 though
B4. This section could also be completed in cases where a
whistleblower's identity is known but the whistleblower is represented
by an attorney in the matter. Proposed Items C1 through C3 would
request information concerning the information submitted by the
whistleblower to the SEC. Item C1 would require the whistleblower to
indicate the manner in which the information was submitted to the
Commission. Proposed Item C2 would ask for the Tip, Complaint or
Referral (``TCR'') number assigned to the whistleblower's submission.
The Commission expects that the TCR number would be generated
automatically in cases where the whistleblower submits his information
online through the Commission's Electronic Data Collection System or,
in the case of hard copy submissions, would be provided to the
whistleblower in a written confirmation sent by the Commission staff.
In instances where a whistleblower submits both forms in hard copy and
thus does not have access to the TCR number at the time of submission,
the forms would be linked together by virtue of having been included in
the same mailing. Proposed Items C3 would ask a whistleblower to
identify any communications the whistleblower or his counsel may have
had with the Commission concerning the matter since submitting the
information. Proposed Item C4 asks whether the whistleblower has
provided the same information being provided to the Commission to any
other agency or organization and, if so, requests details concerning
the submission, including the name and contact information for the
point of contact at the agency or organization, if known. Proposed
Items D1 through D9 would require the whistleblower to make certain
representations concerning the whistleblower's eligibility for an
award. Finally, the form would require the sworn declarations from the
whistleblower and the whistleblower's counsel discussed above. In
proposed Item E, the whistleblower would be required to declare under
penalty of perjury that the information contained on Form WB-DEC, and
all information submitted to the SEC is true, correct and complete to
the best of the whistleblower's knowledge, information and belief. In
addition, the whistleblower would acknowledge his understanding that he
may be subject to prosecution and ineligible for a whistleblower award
if, in the whistleblower's submission of information, other dealings
with the SEC, or dealings with another authority in connection with a
related action, the whistleblower knowingly and willfully makes any
false, fictitious, or fraudulent statements or representations, or uses
any false writing or document knowing that the writing or document
contains any false, fictitious, or fraudulent statement or entry.
The counsel certification in proposed Item F would require an
attorney for an anonymous whistleblower to certify that the attorney
has verified the identity of the whistleblower who completed Form
[[Page 70504]]
WB-DEC in connection with the information submitted to the SEC by
viewing the whistleblower's valid, unexpired government issued
identification, that the attorney has reviewed the whistleblower's Form
WB-DEC for completeness and accuracy, and that the attorney will retain
an original, signed copy of the Form WB-DEC completed by the
whistleblower in his or her records.
As explained above, the Commission proposes to allow two
alternative methods of submission of a whistleblower's information. A
whistleblower would have the option of submitting the information
electronically through the Commission's Electronic Data Collection
System or by sending or faxing Form TCR to the Whistleblower Office.
Form WB-DEC could be submitted electronically, in accordance with
instructions set forth on the Commission's Web site or, alternatively,
by mailing or faxing the form to the Whistleblower Office.
3. Perfecting Whistleblower Status for Submissions Made Before
Effectiveness of the Rules
As previously discussed, Section 924(b) of Dodd-Frank states that
information provided to the Commission in writing by a whistleblower
after the date of enactment but before the effective date of these
proposed rules retains the status of original information. The
Commission has already received numerous tips from potential
whistleblowers after the date of enactment of Dodd-Frank. Proposed Rule
21F-9(d) would provide a mechanism by which whistleblowers who fall
into this category could perfect their status as whistleblowers under
the Commission's award program once final rules are adopted. Paragraph
(d)(1) requires a whistleblower who provided original information to
the Commission in a format or manner other than that required by
paragraph (a) of Rule 21F-9 to either submit the information
electronically through the Commission's Electronic Data Collection
System or to submit a completed Form TCR within one hundred twenty
(120) days of the effective date of the proposed rules and to otherwise
follow the procedures set forth in paragraph (b) of Proposed Rule 21F-
9. If the whistleblower provided the original information to the
Commission in the format or manner required by paragraph (a) of Rule
21F-9, paragraph (d)(2) would require the whistleblower to submit Form
WB-DEC within one hundred twenty (120) days of the effective date of
the proposed rules in the manner set forth in paragraph (b) of Proposed
Rule 21F-9.
Request for Comment:
32. Although the Commission is proposing alternative methods of
submission, we expect that electronic submissions would dramatically
reduce our administrative costs, enhance our ability to evaluate tips
(generally and using automated tools), and improve our efficiency in
processing whistleblower submissions. Accordingly, we solicit comment
on whether it would be appropriate to eliminate the fax and mail option
and require that all submissions be made electronically. Would the
elimination of submissions by fax and mail create an undue burden for
some potential whistleblowers?
33. Is there other information that the Commission should elicit
from whistleblowers on Proposed Forms TCR and WB-DEC? Are there
categories of information included on these forms that are unnecessary,
or should be modified?
34. Is the requirement that an attorney for an anonymous
whistleblower certify that the attorney has verified the
whistleblower's identity and eligibility for an award appropriate? Is
there an alternative process the Commission should consider that would
accomplish its goal of ensuring that it is communicating with a
legitimate whistleblower?
35. Is the Commission's proposed process for allowing
whistleblowers 120 days to perfect their status in cases where the
whistleblower provided original information to the Commission in
writing after the date of enactment of Dodd-Frank but before adoption
of the proposed rules reasonable? Should the period be made shorter
(e.g., 30 or 60 days) or longer (e.g., 180 days)?
36. Are there any ways we can streamline and make the required
procedures more user-friendly?
J. Proposed Rule 21F-10--Procedures for Making a Claim for a
Whistleblower Award in SEC Actions That Result in Monetary Sanctions in
Excess of $1,000,000
Proposed Rule 21F-10 describes the steps a whistleblower would be
required to follow in order to make a claim for an award in relation to
a Commission action. In addition, the rule describes the Commission's
proposed claims review process, which includes the proposed
administrative appeals process.
The following flow chart represents a general overview of the
proposed process:
[[Page 70505]]
[GRAPHIC] [TIFF OMITTED] TP17NO10.020
The proposed process would begin with the publication of a ``Notice
of a Covered Action'' (``Notice'') on the Commission's Web site.
Whenever a judicial or administrative action brought by the Commission
results in the imposition of monetary sanctions exceeding $1,000,000,
the Whistleblower Office will cause this Notice to be published on the
Commission's Web site subsequent to the entry of a final judgment or
order in the action that by itself, or collectively with other
judgments or orders previously entered in the action, exceeds the
$1,000,000 threshold. If the monetary sanctions are obtained without a
judgment or order--as in the case of a contribution made pursuant to
Section 308(b) of the Sarbanes-Oxley Act of 2002--the Notice would be
published within thirty (30) days of the deposit of monetary sanctions
into a disgorgement or other fund pursuant to Section 308(b) that
causes total monetary sanctions in the action to exceed $1,000,000. The
Commission's proposed rule requires claimants to file their claim for
an award within sixty (60) days of the date of the Notice.\72\ A
claimant's failure to timely file a request for a whistleblower award
would bar that individual later seeking a recovery.\73\ The Commission
anticipates that, at the time a Notice of Covered Action is posted, the
staff will also attempt to contact persons who have filed a Form WB DEC
in relation to the case, in order to give them additional notice of the
opportunity to submit a claim for award.
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\72\ All references to ``days'' refer to calendar days.
\73\ See, e.g., Yuen v. U.S., 825 F.2d 244 (9th Cir. 1987)
(taxpayer barred from recovery due to failure to timely file a
written request for refund).
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Paragraph (b) of Proposed Rule 21F-10 describes the procedure for
making a
[[Page 70506]]
claim for an award. Specifically, a claimant would be required to
submit a claim for an award on proposed Form WB-APP, Application for
Award for Original Information Provided Pursuant to Sec. 21F of the
Securities Exchange Act of 1934. Proposed Form WB-APP, and the
instructions thereto, will elicit information concerning a
whistleblower's eligibility to receive an award at the time the
whistleblower files his claim. The purpose of the form is, among other
things, to provide an opportunity for the whistleblower to ``make his
case'' for why he is entitled to an award by describing the information
and assistance he has provided and its significance to the Commission's
successful action. Proposed Items A1 through A3 require the claimant to
provide basic identifying information, including first and last name
and contact information. Proposed Items B1 through B4 would request the
name and contact information for the whistleblower's attorney, if
applicable. Proposed Items C1 and C2 would request information
concerning the original tip or complaint underlying the claim,
including the TCR number, the date the information was submitted and
the subject of the tip, complaint or referral. Proposed Items D1
through D3 would request information concerning the Notice of Covered
Action to which the claim relates, including the date of the notice,
notice number, and the name and case number of the matter to which the
notice relates. Proposed Items E1 through E3 would request information
concerning related actions. A whistleblower would be required to
complete Section D in cases where the whistleblower's claim was
submitted in connection with information submitted to another agency or
organization in a related action (the questions pertaining to related
actions are explained in the discussion of proposed Rule 21F-11,
below). Proposed Items F1 through F9 would require the claimant to make
certain representations concerning the claimant's eligibility to
receive an award at the time the claim is made. In Item G, a claimant
may set forth the grounds for the claimant's belief that he is entitled
to an award in connection with the information submitted to the
Commission, or to another agency or organization in a related action.
Finally, item H would contain a declaration, to be signed by the
claimant, certifying that the information contained on the form is
true, correct and complete to the best of the claimant's knowledge,
information and belief. The declaration would further acknowledge the
claimant's understanding that he may be subject to prosecution and
ineligible for a whistleblower award for knowingly and willfully making
any false, fictitious, or fraudulent statements or representations in
his or her submission or dealings with the SEC or other authority.
Paragraph (b) of Proposed Rule 21F-10 provides that a claim on Form
WB-APP, including any attachments, must be received by the
Whistleblower Office within sixty (60) days of the date of the Notice
of Covered Action in order to be considered for an award.
Paragraph (c) requires a whistleblower who submitted information to
the Commission anonymously to disclose his identity to the Commission
on proposed Form WB-APP and to verify his identity in a form and manner
that is acceptable to the Whistleblower Office prior to the payment of
an award. This requirement is derived from Subsection 21F(d)(2)(B) of
the Exchange Act.\74\
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\74\ 15 U.S.C. 78u-6(d)(2)(B).
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Paragraph (d) of Proposed Rule 21F-10 describes the Commission's
claims review process. The claims review process would begin once the
time for filing any appeals of the Commission's judicial or
administrative action has expired, or where an appeal has been filed,
after all appeals in the action have been concluded.
Under the proposed process, the Whistleblower Office and designated
Commission staff (defined in Proposed Rule 21F-10 as the ``Claims
Review Staff'') \75\ would evaluate all timely whistleblower award
claims submitted on Form WB-APP. In connection with this process, the
Whistleblower Office could require that claimants provide additional
information relating to their eligibility for an award or satisfaction
of any of the conditions for an award, as set forth in Proposed Rule
21F-8(b).\76\ Following that evaluation, the Whistleblower Office would
send any claimant a Preliminary Determination setting forth a
preliminary assessment as to whether the claim should be allowed or
denied and, if allowed, setting forth the proposed award percentage
amount.
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\75\ Designated staff would likely include, but need not be
limited to, Commission staff members who were responsible for
investigating and prosecuting the covered action.
\76\ This is not intended to limit the authority of the staff to
require confirmation of eligibility or the satisfaction of other
conditions at any earlier time. See discussion of Proposed Rule 21F-
8(d).
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The proposed rule would allow a claimant the opportunity to contest
the Preliminary Determination made by the Claims Review Staff. Under
paragraph (e) of Proposed Rule 21F-10, the claimant could take any of
the following steps:
Within thirty (30) days of the date of the Preliminary
Determination, the claimant may request that the Whistleblower Office
make available for the claimant's review the materials that formed the
basis of the Claims Review Staff's Preliminary Determination. The
Whistleblower Office would make these materials available to the
claimant subject to any redactions necessary to comply with any
statutory restrictions or protect the Commission's law enforcement and
regulatory functions. The Whistleblower Office also could require the
claimant to sign a confidentiality agreement (as described in Rule 21F-
8) prior to providing these materials.
Within thirty (30) days of the date of the Preliminary
Determination, or if a request to review materials is made pursuant to
paragraph (1) above, then within thirty (30) days of the Whistleblower
Office making those materials available for the claimant's review, a
claimant may submit a written response to the Whistleblower Office
setting forth the grounds for the claimant's objection to either the
denial of an award or the proposed amount of an award. The claimant may
also include documentation or other evidentiary support for the grounds
advanced in his response.
Within thirty (30) days of the date of the Preliminary
Determination, the claimant may request a meeting with the
Whistleblower Office. However, such meetings are not required and the
Whistleblower Office may in its sole discretion decline the request.
Paragraph (f) of Proposed Rule 21F-10 makes clear that if a
claimant fails to submit a timely response pursuant to paragraph (e),
then the Preliminary Determination of the Claims Review Staff would be
deemed the Final Order of the Commission (except where the Preliminary
Determination recommended an award, in which case the Preliminary
Determination will be deemed a Proposed Final Determination, which
would make it subject to review by the Commission under paragraph (h).
In addition, a claimant's failure to submit a timely response to a
Preliminary Determination where the determination was to deny an award
would constitute a failure to exhaust the claimant's administrative
remedies, and the claimant would be prohibited from pursuing a judicial
appeal.\77\
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\77\ See, e.g., Benoit v. U.S. Dept. of Agriculture, 608 F.3d
17, 21-24 (DC Cir. 2010) (dismissing appeal because petitioners
failed to exhaust administrative remedies with respect to their
monetary claims against the government).
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[[Page 70507]]
Paragraph (g) of Proposed Rule 21F-10 describes the procedure in
cases where a claimant submits a timely response pursuant to Paragraph
(f). In such cases, the Claims Review Staff would consider the issues
and grounds advanced in the claimant's response, along with any
supporting documentation provided by the claimant, and would prepare a
Proposed Final Determination. Paragraph (h) provides that the
Whistleblower Office would notify the Commission of the Proposed Final
Determination, but would not make the Proposed Final Determination
public. Within thirty (30) days thereafter, any Commissioner would be
able to request that the Proposed Final Determination be reviewed by
the Commission. If no Commissioner requests such a review within the
30-day period, then the Proposed Final Determination would become the
Final Order of the Commission. In the event a Commissioner requests a
review, the Commission would review the record that the staff relied
upon in making its determination, including the claimant's previous
submissions to the Whistleblower Office. On the basis of its review of
the record, the Commission would issue its Final Order, which the
Commission's Secretary will provide to the claimant.
The objective of this administrative appeals process is to provide
a transparent award determination process and provide whistleblowers
full opportunity to make a written statement to the Commission for its
consideration when it makes eligibility and award determinations. The
proposed administrative process would enable a whistleblower to appeal
to the Commission a preliminary determination by the Whistleblower
Office concerning the percentage amount of an award; however, this
process would in no way limit the Commission's discretion to make a
determination with respect to the amount of an award. Under Section
21F(f) of the Exchange Act, determinations of the amount of an award
are not appealable to the courts when the Commission has followed the
statutory requirement to award between 10 and 30 percent of the
monetary sanctions collected.
K. Proposed Rule 21F-11--Procedures for Determining Awards Based Upon a
Related Action
Proposed Rule 21F-3(b) discussed above explains that the Commission
is required to pay an award on amounts collected in certain related
actions. Proposed Rule 21F-11 sets forth the procedures for determining
awards based upon related actions. Paragraph (a) informs a
whistleblower who is eligible to receive an award following a
Commission action that results in monetary sanctions totaling more than
$1,000,000 that the whistleblower may also be eligible to receive an
award based on the monetary sanctions that are collected from a related
action.
Paragraph (b) of Proposed Rule 21F-11 describes the procedures for
making a claim for an award in a related action. The process
essentially mirrors the procedure for making a claim in connection with
a Commission action and requires the claimant to submit the claim on
Form WB-APP. In addition to the questions previously described in our
discussion of proposed Rule 21F-10, the claimant in a related action
would be required to complete Section D of proposed form WB-APP.
Proposed Items D1 through D4 request the name of the agency or
organization to which the whistleblower provided the information and
the date the information was provided, the name and telephone number
for a contact at the agency or organization, if available, and the case
name, action number and date the related action was filed.
Paragraph (b) of Proposed Rule 21F-11 sets forth the deadline by
which a claimant must file his or her Form WB-APP in a related action.
Specifically, under proposed paragraph (b)(1), if a final order
imposing monetary sanctions has been entered in a related action at the
time the claimant submits the claim for an award in connection with a
Commission action, the claimant would be required to submit the claim
for an award in that related action on the same Form WB-APP used for
the Commission action. Under proposed paragraph (b)(2), if a final
order imposing monetary sanctions in a related action has not been
entered at the time the claimant submits a claim for an award in
connection with a Commission action, then the claimant would be
required to submit the claim on Form WB-APP within sixty (60) days of
the issuance of a final order imposing sanctions in the related action.
The Whistleblower Office may request additional information from
the claimant in connection with the claim for an award in a related
action to demonstrate that the claimant directly (or through the
Commission) voluntarily provided the governmental agency, regulatory
authority or self-regulatory organization the same original information
that led to the Commission's successful covered action, and that this
information led to the successful enforcement of the related action. In
addition, the Whistleblower Office may, in its discretion, seek
assistance and confirmation from the other agency in making this
determination.
Paragraphs (d) through (i) of Proposed Rule 21F-11 describe the
Commission's claims review process in related actions. The Commission
proposes to utilize the same claims review process in related actions
that it will utilize in connection with claims submitted in connection
with a covered Commission action.
The following represents an overview of the proposed process:
[[Page 70508]]
[GRAPHIC] [TIFF OMITTED] TP17NO10.021
L. Proposed Rule 21F-12--Appeals
Section 21F of the Exchange Act provides for certain rights of
appeal of orders of the Commission with respect to whistleblower
awards.\78\ Paragraph (a) of Proposed Rule 21F-12 tracks this provision
and describes claimants' appeal rights. A decision of the Commission
regarding the amount of an award is not appealable when the Commission
has followed the statutory mandate to award between 10 and 30 percent
of the monetary sanctions collected. A decision regarding whether or to
whom to make an award may be appealed to an appropriate court of
appeals within 30 days after the Commission issues its final decision.
Under Section 25(a)(1) of the Exchange Act,\79\ appeals of final orders
of the Commission entered pursuant to the Exchange Act may be made to
the United States Court of Appeals for the District of Columbia
Circuit, or to the circuit where the aggrieved person resides or has
his principal place of business.
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\78\ 15 U.S.C. 78u-6(f).
\79\ 15 U.S.C. 78y(a)(1).
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Paragraph (b) of Proposed Rule 21F-12 designates the materials that
shall be included in the record on any appeal. They include the
Whistleblower Office's Preliminary Determination, any materials
submitted by the claimant or claimants (including the claimant's Forms
TCR, WB-DEC, WB-APP, and materials filed in response to the Preliminary
Determination), and any other materials that supported the Final Order
of the Commission, with the exception of any internal deliberative
process materials that are prepared exclusively to assist the
Commission in deciding the claim, such as the staff's Proposed Final
Determination in the event it does not become the Final Order.
M. Proposed Rule 21F-13--Procedures Applicable to Payment of Awards
Proposed Rule 21F-13 (a) addresses the timing for payment of an
award to a whistleblower. Any award made pursuant to the rules would be
paid from the Securities and Exchange Commission Investor Protection
Fund (the ``Fund'') established by Section 21F(g) of the Exchange
Act.\80\ Paragraph (b) provides that a recipient of a whistleblower
award would be entitled to payment on the award only to the extent that
a monetary sanction is collected in the Commission action or in a
related action upon which the award is based. This requirement is
derived from Section 21F(b)(1) of the Exchange Act,\81\ which provides
that an award is based upon the monetary sanctions collected in the
Commission action or related action.
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\80\ 15 U.S.C. 78u-6(g).
\81\ 15 U.S.C. 78u-6(b)(1).
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Paragraph (c) states that any payment of an award for a monetary
sanction collected in a Commission action would be made following the
later of either the completion of the appeals process for all
whistleblower award claims arising from the Notice of Covered Action
for that action, or the date on which the monetary sanction is
collected. Likewise, the payment of an award for a monetary sanction
collected in a
[[Page 70509]]
related action would be made following the later of either the
completion of the appeals process for all whistleblower award claims
arising from the related action, or the date on which the monetary
sanction is collected. This provision is intended to cover situations
where a single action results in multiple whistleblowers claims. Under
this scenario, if one whistleblower appeals a Final Determination of
the Commission denying the whistleblower's claim for an award, the
Commission would not pay any awards in the action until that
whistleblower's appeal has been concluded, because the disposition of
that appeal could require the Commission to reconsider its
determination and thereby could affect all payments for that action.
Paragraph (d) of Proposed Rule 21F-13 describes how the Commission
would address situations where there are insufficient amounts available
in the Fund to pay an award to a whistleblower or whistleblowers within
a reasonable period of time of when payment should otherwise be made.
In this situation, the whistleblower or whistleblowers would be paid
when amounts become available in the Fund, subject to the terms set
forth in proposed paragraphs (d)(1) and (d)(2). Under proposed
paragraph (d)(1), where multiple whistleblowers are owed payments from
the Fund based on awards that do not arise from the same Notice of
Covered Action or related action, priority in making payment on these
awards would be determined based upon the date that the collections for
which the whistleblowers are owed payments occurred. If two or more of
these collections occur on the same date, those whistleblowers owed
payments based on these collections would be paid on a pro rata basis
until sufficient amounts become available in the Fund to pay their
entire payments. Under proposed paragraph (d)(2), where multiple
whistleblowers are owed payments from the Fund based on awards that
arise from the same Notice of Covered Action or related action, they
would share the same payment priority and would be paid on a pro rata
basis until sufficient amounts become available in the Fund to pay
their entire payments.
As noted above, whistleblower awards will be paid solely from the
Fund. Section 21F(g)(3) of the Exchange Act establishes the mechanism
for funding the Fund. In most circumstances, the Fund will be funded
with monetary sanctions that are collected by the Commission in its
judicial and administrative actions and that are not distributed to
victims of a violation of the securities laws underlying such actions.
However, if the balance of the Fund is not sufficient to satisfy a
whistleblower award, the law requires that there be deposited into or
credited to the Fund an amount equal to the unsatisfied portion of the
award from any monetary sanction collected by the Commission in the
Commission action on which the award is based. Therefore, it is
possible for there to be circumstances in which monies that otherwise
might have been distributed to victims pursuant to a Commission action
could be required to be deposited into or credited to the Fund to pay a
whistleblower award. In this situation, there would be a tension
between the competing interests of paying an award to a whistleblower
(as provided for in Section 21F) and compensating victims with monies
collected from wrongdoers (as recognized in Section 308 of the
Sarbanes-Oxley Act).
Request for Comment:
37. We request comment on the significance of the tension between
the interests of whistleblowers and victims in this circumstance, the
likelihood that this situation would arise, and whether there is
anything that the Commission can or should do to mitigate this tension.
N. Proposed Rule 21F-14--No Amnesty
Proposed Rule 21F-14 provides notice that the provisions of Section
21F of the Exchange Act do not provide amnesty to individuals who
provide information to the Commission relating to a violation of the
securities laws. Whistleblowers who have not participated in misconduct
will of course not need amnesty. However, some whistleblowers who
provide original information that significantly aids in detecting and
prosecuting sophisticated securities fraud schemes may themselves be
participants in the scheme who could be subject to Commission
enforcement actions. These individuals will not be immune from
prosecution. Rather, the Commission will analyze the unique facts and
circumstances of each case in accordance with its Policy Statement
Concerning Cooperation by Individuals in its Investigations and Related
Enforcement Actions, 17 CFR 202.12, to determine whether, how much, and
in what manner to credit cooperation by whistleblowers who have
participated in misconduct. This Policy Statement provides an incentive
to report information to the Commission notwithstanding that the
whistleblower program does not provide amnesty.
O. Proposed Rule 21F-15--Awards to Whistleblowers Who Engage in
Culpable Conduct
Proposed Rule 21F-15 states that in determining whether the
required $1,000,000 threshold has been satisfied for purposes of making
an award to a whistleblower, the Commission will not count any monetary
sanctions that the whistleblower is ordered to pay, or that are ordered
against any entity whose liability is based substantially on conduct
that the whistleblower directed, planned, or initiated. The Commission
also will not add those amounts to the total monetary sanctions
collected in the action for purposes of calculating any payment to the
culpable individual. The rationale for this limitation is to prevent
wrongdoers from financially benefiting by, in essence, blowing the
whistle on their own misconduct. Because the common understanding of a
whistleblower is one who reports misconduct by another person, we are
preliminarily of the view that it would not be consistent with the
purposes of the statute to pay awards to persons based on monetary
sanctions arising from their own misconduct. A logical corollary to
this principle is that a whistleblower also should not be paid an award
based on monetary sanctions paid by an entity whose liability resulted
from the whistleblower's conduct.
Request for Comment: We request comment on whether the limitations
provided in Proposed Rule 21F-15 are appropriate.
38. For example, in determining whether the $1,000,000 threshold
for a covered action has been met, should we exclude monetary sanctions
ordered against an entity whose liability is based substantially on
conduct that the whistleblower directed, planned, or initiated? Should
we exclude those amounts from monetary sanctions collected for purposes
of making payments to whistleblowers?
39. Is the proposed exclusion of monetary sanctions ordered against
an entity whose liability is based substantially on conduct that the
whistleblower directed, planned, or initiated appropriate? Is the
proposed exclusion sufficient to permit the Commission to deny awards
in cases where the payment of an award would be against public policy?
Should we instead exclude any wrongdoer from being eligible to receive
an award categorically, or in particular circumstances? Should an
individual's level of culpability be considered as a factor in
determining whether the person is eligible for an award? Are
[[Page 70510]]
there other ways in which we should limit the payment of awards to
culpable individuals?
P. Proposed Rule 21F-16--Staff Communications With Whistleblowers
Proposed Rule 21F-16(a) provides that no person may take any action
to impede a whistleblower from communicating directly with the
Commission staff about a potential securities law violation, including
enforcing, or threatening to enforce, a confidentiality agreement
(other than agreements dealing with information covered by Sec.
240.21F-4(b)(4)(i) & (ii) of this chapter related to the legal
representation of a client) with respect to such communications. As
noted, the Congressional purpose underlying Section 21F of the Exchange
Act is to encourage whistleblowers to report potential violations of
the securities laws by providing financial incentives, prohibiting
employment-related retaliation, and providing various confidentiality
guarantees. Efforts to impede a whistleblower's direct communications
with Commission staff about a potential securities law violation,
however, would appear to conflict with this purpose. For example, an
attempt to enforce a confidentiality agreement against a whistleblower
to prevent his or her communications with Commission staff about a
potential securities law violation could inhibit those communications
even when such an agreement would be legally unenforceable,\82\ and
would undermine the effectiveness of the countervailing incentives that
Congress established to encourage whistleblowers to disclose potential
violations to the Commission. Proposed Rule 21F-16(a) is designed to
prevent this result. The proposed rule would not, however, address the
effectiveness or enforceability of confidentiality agreements in
situations other than communications with the Commission about
potential securities law violations. Proposed Rule 21F-16(a) is not
intended to prevent a professional or religious organization from
responding to a breach of a recognized common-law or statutory
privilege (e.g., psychiatrist-patient, priest-penitent) by one of its
members.
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\82\ See, e.g., In re JDS Uniphase Corp. Sec. Litig., 238
F.Supp.2d 1127, 1137 (N.D.Cal.2002) (``To the extent that [the
confidentiality] agreements preclude former employees from assisting
in investigations of wrongdoing that have nothing to do with trade
secrets or other confidential business information, they conflict
with public policy in favor of allowing even current employees to
assist in securities fraud investigations.''); Chambers v. Capital
Cities/ABC, 159 F.R.D. 441, 444 (S.D.N.Y.1995) (holding that ``it is
against public policy for parties to agree not to reveal * * * facts
relating to alleged or potential violations of [Federal] law'').
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Proposed Rule 21F-16(b) would clarify the staff's authority to
communicate directly with whistleblowers who are directors, officers,
members, agents, or employees of an entity that has counsel, and who
have initiated communication with the Commission related to a potential
securities law violation. The proposed rule would make clear that the
staff is authorized to communicate directly with these individuals
without first seeking the consent of the entity's counsel. The
objective of proposed Rule 21F-16 is to implement several important
policies inherent in Section 21F in a manner consistent with the state
bar ethics rules governing the professional responsibilities of
lawyers.
Every jurisdiction that regulates the professional responsibility
of lawyers has adopted some variation of ABA Model Rule 4.2, which
provides: ``In representing a client, a lawyer shall not communicate
about the subject of the representation with a person the lawyer knows
to be represented by another lawyer in the matter, unless the lawyer
has the consent of the other lawyer or is authorized to do so by law or
a court order.'' \83\
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\83\ Model Rules of Prof'l Conduct R. 4.2. The primary purpose
of ABA Model Rule 4.2 is to protect the attorney-client relationship
and to protect represented persons, in the absence of their lawyers,
from being taken advantage of by lawyers who are not representing
their interests.
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In the context of organizational entities represented by
lawyers,\84\ a difficulty in applying the various state versions of ABA
Model Rule 4.2 is identifying those actors within the entity--such as
directors or officers--that are the embodiment of the represented
entity such that the proscription against contact applies.\85\ This is
so in part because the various state bar ethics rules have differing
definitions of which organizational constituents are covered by Rule
4.2.\86\
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\84\ See generally Upjohn Co. v. United States, 449 U.S. 383
(1981).
\85\ Comment 7 to ABA Model Rule 4.2 addresses this issue:
In the case of a represented organization, this Rule prohibits
communications with a constituent of the organization who
supervises, directs or regularly consults with the organization's
lawyer concerning the matter or has authority to obligate the
organization with respect to the matter or whose act or omission in
connection with the matter may be imputed to the organization for
purposes of civil or criminal liability. Consent of the
organization's lawyer is not required for communication with a
former constituent. If a constituent of the organization is
represented in the matter by his or her own counsel, the consent by
that counsel to a communication will be sufficient for purposes of
this Rule. Compare Rule 3.4(f). In communicating with a current or
former constituent of an organization, a lawyer must not use methods
of obtaining evidence that violate the legal rights of the
organization.
\86\ Comment 5 to the ABA Model Rule 4.2 specifically carves out
a potential exception for ``investigative activities of lawyers
representing governmental entities, directly or through
investigative agents, prior to the commencement of criminal or civil
enforcement proceedings.'' The commentary, and most state
professional responsibility rules, do not specify which governmental
investigative activities are exempt.
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As explained above, however, Section 21F of the Exchange Act
evinces a Congressional purpose to facilitate the disclosure of
information to the Commission relating to potential securities law
violations and to preserve the confidentiality of those who do so.\87\
This Congressional policy would be significantly impaired were the
Commission required to seek the consent of an entity's counsel before
speaking with a whistleblower who contacts us and who is a director,
officer, member, agent, or employee of the entity. Similarly,
whistleblowers falling within these categories could be less inclined
to report possible securities law violations if they believed there was
a risk that the Commission staff might be required to request consent
of the entity's counsel--thus disclosing the whistleblower's identity--
before speaking to him or her.
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\87\ See, e.g., Exchange Act Section 21F (b)-(d) and (h), 15
U.S.C. 78u-6 (b)-(d) and (h).
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For this reason, Section 21F necessarily authorizes the Commission
to communicate directly with these individuals without first obtaining
the consent of the entity's counsel. Proposed Rule 21F-16(b) would
clarify this authority by providing that, in the context of
whistleblower-initiated contacts with the Commission, all discussions
with a director, officer, member, agent, or employee of an entity that
has counsel are ``authorized by law'' \88\ and, will therefore not
require consent of the entity's counsel as might otherwise be required
by rules of professional conduct.\89\
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\88\ As noted, ABA Model Rule 4.2 allows for contacts with
represented persons without the consent of the person's lawyer if
such contacts are ``authorized by law.'' Every state bar ethics
rules, in accordance with ABA Model Rule 4.2, has some variation of
an authorized by law exception. Thus, in the context of
communications initiated by a whistleblower who is also the
director, officer, member, agent, or employee of an entity that has
counsel, the proposed rule would make clear that contacts and
communications between these individuals and the staff are
``authorized by law.''
\89\ The proposed rule is not intended, and will not be used, to
obtain otherwise privileged information about the entity. See SEC
Division of Enforcement Manual sec. 3.3.1.
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Request for Comment: We request comment on whether the provisions
dealing with whistleblowers' communications with the Commission
[[Page 70511]]
staff provided in Proposed Rule 21F-16 are appropriate.
40. Should these provisions be narrowed and, if so, why and in what
manner? Would these provisions encourage whistleblowers to provide
information to the Commission regarding potential securities law
violations? Are there additional measures that the Commission could
consider to encourage and facilitate whistleblowers' communications
with Commission staff?
41. Should the Commission consider rules to address other potential
issues that may arise from state bar professional responsibility rules
when the Commission staff receives information about potential
securities law violations from whistleblowers? For example, are there
circumstances where the staff's receipt of information from
whistleblowers potentially conflicts with the state bar professional
responsibility rules that are modeled on ABA Model Rules of
Professional Responsibility 4.4(a) and 8.4(a)? If so, should the
Commission consider promulgating rules to address these potential
conflicts?
III. General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of our Proposed Rules. With respect to any comments, we
note that they are of greatest assistance to our rulemaking initiative
if accompanied by supporting data and analysis of the issues addressed
in those comments and by alternatives to our proposals where
appropriate.
In addition, the Commission is seeking comment on whether it should
promulgate rules regarding the interpretation or implementation of the
anti-retaliation provisions of Section 21(h) of the Exchange Act. If
so, what specific rules should the Commission consider promulgating?
42. Should the anti-retaliation protections set forth in Section
21F(h)(1) of the Exchange Act be applied broadly to any person who
provides information to the Commission concerning a potential violation
of the securities laws, or should they be limited by the various
procedural or substantive prerequisites to consideration for a
whistleblower award? Should the application of the anti-retaliation
provisions be limited or broadened in any other ways? For example,
should the Commission consider promulgating a rule to exclude frivolous
or bad faith whistleblower claims from the protections afforded by the
anti-retaliation provisions? If so, what rules should be adopted to
address these problems?
43. Are there rule proposals that the Commission should consider
promulgating to ensure that the anti-retaliation provisions are not
used to protect employees from otherwise appropriate employment actions
(i.e., employment actions that are not based on reporting potential
securities law violations)?
IV. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (``PRA'') of 1995.\90\ An agency may not sponsor,
conduct, or require a response to an information collection unless a
currently valid Office of Management and Budget (``OMB'') control
number is displayed. The Commission is submitting the proposed
collections of information to OMB for review in accordance with the
PRA.\91\ The titles for the collections of information are: (1) Form
TCR (Tip, Complaint or Referral), (2) Form WB-DEC (Declaration
Concerning Original Information Provided Pursuant to Sec. 21F of the
Securities Exchange Act of 1934), and (3) Form WB-APP (Application for
Award for Original Information Provided Pursuant to Sec. 21F of the
Securities Exchange Act of 1934). Under Proposed Rules 21F-9, 10, and
11, all three proposed forms would be necessary to implement Section
21F of the Exchange Act; the forms allow a whistleblower to provide
information to the Commission and its staff regarding (i) potential
violations of the securities laws and (ii) the whistleblower's
eligibility for and entitlement to an award.
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\90\ 44 U.S.C. 3501 et seq.
\91\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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A. Summary of Collection of Information
Proposed Form TCR, submitted pursuant to Proposed Rule 21F-9, would
request the following information:
(1) Background information regarding the person submitting the TCR,
including the person's name contact information, and occupation;
(2) If the person is represented by an attorney, the name and
contact information for the person's attorney (in cases of anonymous
submissions the person must be represented by an attorney);
(3) Information regarding the person or entity that is the subject
of the tip, complaint or referral, including contact information;
(4) Information regarding the tip, complaint or referral, including
the date of occurrence of the event being described, whether the person
is complaining about an entity with which he is or was associated as an
officer, director, employee, consultant or contractor, whether the
person has taken any prior actions regarding his complaint, facts in
support of the allegations, any additional relevant information, a
description of all supporting materials, an explanation of why the
allegations described constitute a violation of the Federal securities
laws, and, if relevant, the name of the issuer, and the name and type
of security or investment involved;
(5) A description of how the person submitting the original
information learned about and/or obtained the information submitted
and, if any information was obtained from a public source, a
description of such source.
Proposed Form WB-DEC, submitted pursuant to Proposed Rule 21F-9,
would require the following information:
(1) Background information regarding the person submitting the TCR,
including the person's name and contact information;
(2) If the person is represented by an attorney, the name and
contact information for the attorney (in cases of anonymous submissions
the person must be represented by an attorney);
(3) Details concerning the tip or complaint, including (A) the
manner in which the information was submitted to the SEC, (B) the TCR
number (required if the person submitted his information through the
SEC Web site) and date submitted to the SEC, (C) the individual or
entity to which the tip, complaint or referral relates, (D) whether the
person or his counsel has had communications with the SEC concerning
his matter, (E) the relevant SEC staff member with whom they
communicated, and (F) if the person or his counsel provided the
information to another agency or organization, the details of that
communication, and the name and contact information for the point of
contact at the agency or organization, if known;
(4) A certification that the person submitting the original
information: (A) Is not, or was not at the time the person acquired the
original information submitted to the Commission, a member, officer or
employee of (i) the Securities and Exchange Commission, the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System,
the Federal Deposit
[[Page 70512]]
Insurance Corporation, the Office of Thrift Supervision; (ii) the
Department of Justice; (iii) the Public Company Accounting Oversight
Board; (iv) any law enforcement organization; (v) any national
securities exchange, registered securities association, registered
clearing agency, the Municipal Securities Rulemaking Board; or (vi) a
member, officer, or employee of a foreign government, any political
subdivision, department, agency, or instrumentality of a foreign
government, or any other foreign financial regulatory authority as that
term is defined in Section 3(a)(52) of the Exchange Act of 1934, 15
U.S.C. 78c(a)(52); (B) did not gain the information through the
performance of an engagement required under the securities by an
independent public accountant; (C) did not provided the information
pursuant to a cooperation agreement with the SEC or another agency or
organization; (D) is not a spouse, parent, child, or sibling of a
member or employee of the Commission, and does not reside in the same
household as a member or employee of the Commission; (E) did not
acquire the information from any person described in Subsection (4)(A)
through (D) above; (F) is not currently a subject or target of a
criminal investigation, or has not been convicted of a criminal
violation in connection with the information upon which the application
for the award is based; and (G) provided the information before he (or
anyone representing him) received any request, inquiry or demand from
the SEC, Congress, or any other Federal, State or local authority, or
any self regulatory organization, or the Public Company Accounting
Oversight Board;
(5) A declaration, signed under penalty of perjury under the laws
of the United States, that the information provided to the Commission
pursuant to Proposed Rule 21F-9 of this Subpart is true, correct and
complete to the best of the person's knowledge, information and belief;
and
(6) A counsel certification, certifying that the attorney has
verified the identity of the whistleblower who completed Form WB-DEC by
viewing the whistleblower's valid, unexpired government issued
identification, reviewed the whistleblower's Form WB-DEC for
completeness and accuracy, and will retain for his records an original,
signed copy of the Form WB-DEC completed by the whistleblower.
Proposed Form WB-APP, submitted pursuant to Proposed Rule 21F-10,
would require the following information:
(1) The applicant's name, address and contact information;
(2) The applicant's social security number, if any;
(3) If the person is represented by an attorney, the name and
contact information for the attorney (in cases of anonymous submissions
the person must be represented by an attorney);
(4) Details concerning the tip or complaint, including (A) the
manner in which the information was submitted to the SEC, (B) the
subject of the tip, complaint or referral, (C) the TCR number, and (D)
the date the TCR was submitted to the SEC;
(5) Information concerning the Notice of Covered Action to which
the claim relates, including (A) the date of the Notice, (B) the Notice
number, and (C) the Case name and number;
(6) For related actions, (A) the name and contact information for
the agency or organization to which the person provided the original
information; (B) the date the person provided his information, (C) the
date the agency or organization filed the related action, (D) the case
name and number of the related action, and (E) the name and contact
information for the point of contact at the agency or organization, if
known;
(7) A certification of the person's eligibility to receive an award
as described in Subsection (4) concerning Form WB-DEC above;
(8) An explanation of the reasons that the person believes he is
entitled to an award in connection with his submission of information
to the Commission, or to another agency in a related action including
any additional information and supporting documents that may be
relevant in light of the criteria for determining the amount of an
award set forth in Proposed Rule 21F-6 of this subpart, and any
supporting documents; and
(9) A declaration under penalty of perjury under the laws of the
United States that the information provided in Form WB-APP is true,
correct and complete to the best of the person's knowledge, information
and belief.
B. Proposed Use of Information
The collection of information on proposed Forms TCR, WB-DEC and WB-
APP would be used to permit the Commission and its staff to collect
information from whistleblowers regarding alleged violations of the
Federal securities laws and to determine claims for whistleblower
awards.
C. Respondents
The likely respondents to proposed Forms TCR and WB-DEC would be
those individuals who alone, or jointly with others, have provided the
Commission staff with information relating to a potential violation of
the securities laws, and those who wish to be eligible for
whistleblower awards under this Subpart, respectively.
The likely respondents to proposed Form WB-APP would be those
individuals who have provided the Commission staff with information
relating to a potential violation of the securities laws by filing
Forms TCR and WB-DEC signed under penalty of perjury, and who believe
they are entitled to an award under this Subpart.
D. Total Annual Reporting and Recordkeeping Burden
i. Proposed Form TCR
The Commission estimates that it would receive approximately 30,000
completed Forms TCR and electronic submissions through the Electronic
Data Collection System each year.\92\ Of those 30,000 submissions, the
Commission estimates that it would receive approximately 3,000 Forms
TCR each year.\93\ Each respondent would submit only one Form TCR and
would not have a recurring obligation. The Commission also estimates
that it will take a whistleblower, on average, one hour to complete
Form TCR. The completion time will depend largely on the complexity of
the alleged violation and the amount of information the whistleblower
possesses in support of the allegations. As a result, the Commission
estimates that the estimated annual PRA burden of Form TCR is 3,000
hours.
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\92\ This number is a staff estimate based upon the volume of
tips, complaints or referrals received by the Commission on a
monthly basis during the past year. The staff believes that the
volume of tips, complaints and referrals the Commission has received
more recently, and particularly in the months since the passage of
Dodd-Frank, provides a more accurate basis for estimating future
volumes.
\93\ This number is a staff estimate based upon the expectation
that roughly 10 percent of all tips received by the Commission would
be submitted in hard copy on proposed Form TCR. The staff
anticipates that most whistleblowers would elect to submit their
information electronically. The electronic submission of information
would provide whistleblowers with increased ease of use and will
allow whistleblowers to submit more detailed information in roughly
the same amount of time it would take them to complete a hard copy
Form TCR. Moreover, the Commission should be able to use the
information submitted electronically more effectively and
efficiently. For example, the Commission will be able to conduct
electronic searches of information without first having to convert
the data into an electronic format.
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ii. Proposed Form WB-DEC
Each whistleblower who has completed a Form TCR or made an
electronic submission of information
[[Page 70513]]
through the Electronic Data Collection System and wishes to be eligible
for an award under the Program would be required to provide a Form WB-
DEC to the Commission. The Commission estimates that it would receive a
Form WB-DEC in roughly 50 percent of the cases in which the Commission
receives a Form TCR or an electronic submission of information.\94\ As
noted above, the Commission estimates that it would receive
approximately 30,000 combined electronic submissions and submission on
Form TCR each year. Thus, the Commission estimates that it would
receive approximately 15,000 Forms WB-DEC each year. Each respondent
would submit only one Form WB-DEC and would not have a recurring
obligation. The Commission also estimates that it would take a
whistleblower, on average, 0.5 hours to complete Form WB-DEC. As a
result, the Commission estimates that the annual PRA burden of Form WB-
DEC is 7,500 hours.
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\94\ This number is a staff estimate. Because this is a new
program, the staff does not have prior relevant data on which it can
base its estimate.
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iii. Proposed Form WB-APP
Each whistleblower who believes that he is entitled to an award
because he provided original information to the Commission that led to
successful enforcement of a covered judicial or administrative action,
or a related action, would be required to submit a Form WB-APP to be
considered for an award. A whistleblower could only submit a Form WB-
APP after there has been a ``Notice of Covered Action'' published on
the Commission's Web site pursuant to Proposed Rule 21F-10. The
Commission estimates that it would post approximately 130 such Notices
each year.\95\ The Commission then estimates that it would receive
approximately 117 Forms WB-APP each year.\96\ The Commission also
estimates that it would take a whistleblower, on average, two hours to
complete Form WB-APP. The completion time would depend largely on the
complexity of the alleged violation and the amount of information the
whistleblower possesses in support of his application for an award. As
a result, the Commission estimates that the annual PRA burden of Form
WB-APP is 234 hours.
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\95\ This number is a staff estimate based upon the average
number of actions during the past five years in which the Commission
recovered monetary amounts, including penalties, disgorgement or
prejudgment interest, in excess of $1,000,000 and the assumption
that there should be an increase (roughly 30 percent) in the number
of such actions as a result of the whistleblower program.
\96\ This number is a staff estimate based upon several
expectations: first, that the Commission would receive Forms WB-APP
in approximately 30 percent of cases in which it posts a Notice of
Covered Action because we expect that we will continue to bring a
substantial number of enforcement cases that are not based on
whistleblower information; and second, that we will receive
approximately 3 Forms WB-APP in each of those cases. Because this is
a new program, the staff does not have prior relevant data on which
it can base these estimates.
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iv. Involvement and Cost of Attorneys
Under the Proposed Rules, a whistleblower who discloses his
identity may elect, and an anonymous whistleblower is required, to
retain counsel to represent the whistleblower in the Whistleblower
Program. The Commission expects that in most of those instances the
whistleblower's counsel will complete, or assist in the completion, of
some or all of the required forms on behalf of the whistleblower. The
Commission also expects that in the vast majority of cases in which a
whistleblower is represented by counsel, the whistleblower will enter
into a contingency fee arrangement with counsel, providing that counsel
will be paid for the representation through a fixed percentage of any
recovery by the whistleblower under the Program. Thus, most
whistleblowers will not incur any direct, quantifiable expenses for
attorneys' fees for the completion of the required forms.
The Commission anticipates that a small number of whistleblowers
(no more than five percent of all whistleblowers) will enter into
hourly fee arrangements with counsel.\97\ In those cases, a
whistleblower will incur direct expenses for attorneys' fees for the
completion of the required forms. To estimate those expenses, the
Commission makes the following assumptions:
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\97\ This estimate is based, in part, on the Commission's belief
that most whistleblowers likely will not retain counsel to assist
them in preparing the forms.
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(i) The Commission will receive approximately 3,000 Forms TCR,
15,000 Forms WB-DEC, and 117 Forms WB-APP annually; \98\
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\98\ The bases for these assumed amounts are explained in
Sections V.D.i., V.D.ii. and V.D.iii. above.
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(ii) Whistleblowers will pay hourly fees to counsel for the
submission of approximately 150 Forms TCR, 750 Forms WB-DEC, and 6
Forms WB-APP annually; \99\
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\99\ These amounts are based on the assumption, as noted above,
that no more than 5 percent of all whistleblowers will be
represented by counsel pursuant to an hourly fee arrangement. The
estimate of the number of Forms TCR submitted by attorneys on behalf
of whistleblowers may turn out to be high because it is likely that
most attorneys will submit tips electronically, rather than use the
hard-copy Form TCR. However, in the absence of any historical data
to rely upon, the Commission assumes that attorneys will submit
hard-copy Forms TCR in the same percentages as all whistleblowers.
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(iii) Counsel retained by whistleblowers pursuant to an hourly fee
arrangement will charge on average $400 per hour; \100\ and
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\100\ The Commission uses this hourly rate for estimating the
billing rates of securities lawyers for purposes of other rules.
Absent historical data for the Commission to rely upon in connection
with the whistleblower program, the Commission believes that this
billing rate estimate is appropriate, recognizing that some
attorneys representing whistleblowers may not be securities lawyers
and may charge different average hourly rates.
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(iv) Counsel will bill on average: (i) 2 hours to complete a Form
TCR, (ii) .5 hours to complete a Form WB-DEC, and (iii) 10 hours to
complete a Form WB-APP.\101\
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\101\ The Commission expects that counsel will likely charge a
whistleblower for additional time required to gather from the
whistleblower or other sources relevant information needed to
complete Forms TCR and WB-APP. Accordingly, the Commission estimates
that on average counsel will bill a whistleblower two hours for the
completion of Form TCR and ten hours for completion of Form WB-APP
(even though the Commission estimates that a whistleblower will be
able to complete Form TCR in one hour and Form WB-APP it two hours).
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Based on those assumptions, the Commission estimates that each year
whistleblowers will incur the following total amounts of attorneys'
fees for completion of the Whistleblower Program forms: (i) $120,000
for the completion of Form TCR; (ii) $150,000 for the completion of
Form WB-DEC; and (iii) $24,000 for the completion of Form WB-APP.
E. Mandatory Collection of Information
A whistleblower would be required to complete either a Form TCR or
submit his information electronically and to complete both Forms WB-DEC
and WB-APP to qualify for a whistleblower award.
F. Confidentiality
As explained above, the statute provides that the Commission must
maintain the confidentiality of the identity of each whistleblower,
subject to certain exceptions. Section 21F(h)(2) states that, except as
expressly provided:
[T]he Commission and any officer or employee of the
Commission shall not disclose any information, including information
provided by a whistleblower to the Commission, which could
reasonably be expected to reveal the identity of a whistleblower,
except in accordance with the provisions of section 552a of title 5,
United States Code, unless and until required to be disclosed to a
defendant or respondent in connection with a public proceeding
instituted by the Commission [or certain specific entities listed in
paragraph (C) of Section 21F(h)(2)].
[[Page 70514]]
Section 21F(h)(2) also allows the Commission to share information
received from whistleblowers with certain domestic and foreign
regulatory and law enforcement agencies. However, the statute requires
the domestic entities to maintain such information as confidential, and
requires foreign entities to maintain such information in accordance
with such assurances of confidentiality as the Commission deems
appropriate.
In addition, Section 21F(d)(2) provides that a whistleblower may
submit information to the Commission anonymously, so long as the
whistleblower is represented by counsel. However, the statute also
provides that a whistleblower must disclose his or her identity prior
to receiving payment of an award.
Request for Comment: Pursuant to 44 U.S.C. 3506(c)(2)(B), we
request comments to:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the Commission's estimate of
burden of the proposed collections of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
Evaluate whether there are ways to minimize the burden of
the collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
The Commission requests comment and supporting empirical data on
the burden and cost estimates for the proposed rule, including the
costs that potential whistleblowers may incur.
Persons wishing to submit comments on the collection of information
requirements of the proposed rule should direct them to the Office of
Management and Budget, Attention Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503 and should send a copy to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-33-10.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-33-10, and be submitted to the Securities and Exchange
Commission, Office of Investor Education and Advocacy, 100 F Street,
NE., Washington, DC 20549-0213. OMB is required to make a decision
concerning the collections of information between 30 and 60 days after
publication of this release. Consequently, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days
after publication.
V. Cost-Benefit Analysis
A. Introduction
The Commission is proposing rulemaking to implement the provisions
of new Section 21F of the Exchange Act, added by Section 922 of Dodd-
Frank to provide additional incentives and protections to
whistleblowers who provide information relating to violations of the
securities laws. Before Dodd-Frank, the Commission regularly received
tips, complaints and referrals concerning securities law violations.
Tips have provided, and continue to provide, the Commission with
valuable information regarding potential violations of the Federal
securities laws, as well as information about new market trends,
products or practices that may help the agency in support of its
mission.
In establishing the new whistleblower program in Section 21F,
Congress sought to create and enhance incentives and protections for
whistleblowers providing information leading to successful Commission
enforcement actions.\102\ Although whistleblowers can be motivated by
other factors,\103\ the statute creates new and substantial financial
incentives for individuals to provide the Commission with information
regarding potential violations of the Federal securities laws. The
statutory requirements for an award--that whistleblowers are entitled
to an award only if they voluntarily provide original information, and
then only if that information leads to a successful enforcement
action--are designed to encourage whistleblowers to provide high-
quality tips and continuing cooperation. Moreover, the statutory
provisions permitting anonymous submissions and prohibiting retaliation
against whistleblowers should encourage submissions from employees of
companies possibly engaged in misconduct.\104\ Overall, enhanced
whistleblower incentives should likely result in more frequent
reporting of misconduct, which will result in greater deterrence of
securities law violations and more effective and efficient enforcement
on the part of the Commission.\105\
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\102\ See S. Rep. No. 111-176 at 110 (2010) (``The Whistleblower
Program aims to motivate those with inside knowledge to come forward
and assist the Government to identify and prosecute persons who have
violated the securities laws * * *'').
\103\ The incentives to whistleblowers include not only the
monetary award, but also a desire to cleanse the conscience or
prevent harm to others. See Anthony Heyes and Sandeep Kapur, An
Economic Model of Whistleblower Policy, 25 J.L. ECON. & ORG. 157 at
159, 164, 171.
\104\ Specifically, Dodd-Frank makes it unlawful for any
employer to ``discharge, demote, suspend, threaten, harass, directly
or indirectly, or in any other manner discriminate against, a
whistleblower in the terms and conditions of employment.'' The
statute also provides that any individual who alleges retaliation
under the Act may bring an action in the appropriate Federal
district court. Moreover, the statute allows any individual to
submit information anonymously through a lawyer. As a result, in
many cases, employers will be unaware when their employees submit
tips to the Commission.
\105\ See Alexander Dyck et al., ``Who Blows the Whistle on
Corporate Fraud?'' working paper (2009) (reporting that ``having
access to * * * monetary rewards has a significant impact on the
probability a stakeholder becomes a whistleblower.''), available at
http://faculty.chicagobooth.edu/luigi.zingales/research/papers/whistle.pdf.
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The incentives created by the statute also present some significant
challenges. First, the statute could provide financial incentives for
attorneys and others to breach the attorney-client privilege in order
to seek an award. This would interfere with the ability of companies
and individuals to share information with an attorney while seeking
legal advice. Second, the statute could provide financial incentives
for employees to report violations to the Commission rather than follow
their employers' internal compliance procedures. This could undermine
the effectiveness of internal compliance programs. Third, the statute
could result in an increase in spurious allegations, forcing innocent
companies and individuals to incur substantial cost to investigate into
and defend against the false allegations. Finally, the statute could
result in award payments to individuals who have violated the Federal
securities laws. This could result in perverse incentives by
potentially encouraging violations of the law.
Although many of the requirements of the whistleblower award
program are established by the statute, Congress required the
Commission to issue rules and regulations necessary or appropriate to
implement the Program. In that regard, the Commission has exercised its
discretion in this rulemaking to propose rules that contain several key
definitional or interpretive provisions that help define the scope of
the program, and procedures that whistleblowers will be required to
follow to submit information to the
[[Page 70515]]
Commission and to apply for awards under the Program, as described
below.
Proposed Rule 21F-4 defines three terms--(i) ``Voluntary Submission
of Information,'' (ii) ``Independent Knowledge,'' and (iii)
``Information that Leads to Successful Enforcement''--that together
play a significant role in determining whether a whistleblower is
eligible for an award. Proposed Rule 21F-4(a) defines ``Voluntary
Submission of Information'' to state that a whistleblower must provide
information to the Commission prior to receiving a request from the
Commission or other relevant authority. The proposed definition also
provides that a whistleblower ``will be considered to have received a
request, inquiry or demand if documents or information from [the
whistleblower] are within the scope of a request, inquiry, or demand
that [the whistleblower's] employer receives unless, after receiving
the documents or information from [the whistleblower, the] employer
fails to provide [the whistleblower's] documents or information to the
requesting authority in a timely manner.'' This proposed definition
requires that, to be eligible for an award, a whistleblower or his
representative provide his information regarding a potential violation
before he or his company receives a request, inquiry or demand from the
Commission or other investigatory authority.
Proposed Rule 21F-4(b)(4) states that a whistleblower will not be
considered to have provided ``independent knowledge'' if ``[the
whistleblower] obtained the knowledge or the information upon which
[his] analysis is based: (i) Through a communication that was subject
to the attorney-client privilege, unless the disclosure of that
information is otherwise permitted by Sec. 205.3(d)(2) of this
chapter, the applicable state attorney conduct rules, or otherwise;
(ii) as a result of the legal representation of a client on whose
behalf [the whistleblower's] services, or the services of [the
whistleblower's] employer or firm, have been retained, and [the
whistleblower] seek[s] to use the information to make a whistleblower
submission for [his] own benefit unless disclosure is authorized by
Sec. 205.3(d)(2) of this chapter, the applicable state attorney
conduct rules, or otherwise; (iii) through the performance of an
engagement required under the securities laws by an independent public
accountant, if that information relates to a violation by the
engagement client or the client's directors, officers or other
employees; (iv) because [the whistleblower was] a person with legal,
compliance, audit, supervisory, or governance responsibilities for an
entity, and the information was communicated to [the whistleblower]
with the reasonable expectation that [he] would take steps to cause the
entity to respond appropriately to the violation, unless the entity did
not disclose the information to the Commission within a reasonable time
or proceeded in bad faith; or (v) otherwise from or through an entity's
legal, compliance, audit or other similar functions or processes for
identifying, reporting and addressing potential non-compliance with
law, unless the entity did not disclose the information to the
Commission within a reasonable time or proceeded in bad faith; (vi)
[b]y a means or in a manner that violates applicable Federal or State
criminal law.''
Proposed Rule 21F-4(c) defines ``Information that Leads to
Successful Enforcement'' such that a whistleblower is only entitled to
an award if (i) the whistleblower provides information that causes the
staff ``to commence an examination, open an investigation, reopen an
investigation that the Commission had closed, or to inquire concerning
new or different conduct as part of a current examination or
investigation'' and the information ``significantly contributed to the
success of the action'' or (ii) the whistleblower provides information
regarding ``conduct that was already under examination or
investigation'' and the information ``would not otherwise have been
obtained and was essential to the success of the action.''
Proposed Rule 21F-6 sets forth the criteria for determining the
amount of the award to be made to a whistleblower. Three of the stated
criteria are derived from the statute, but the proposed rule also
includes a fourth factor: whether the award otherwise enhances the
Commission's ability to enforce the Federal securities laws, protect
investors, and encourage the submission of high quality information
from whistleblowers.
Proposed Rule 21F-8 states additional criteria for eligibility for
an award. A number of these are derived from the statute, but the
proposed rule also provides that a whistleblower may be required to
provide various types of cooperation to the staff or enter a
confidentiality agreement. In addition to certain statutory exclusions
from eligibility, the proposed rule also excludes any person who is, or
was at the time of acquiring information, a member, officer, or
employee of a foreign government or certain other foreign entities.
Proposed rules 21F-9, 10, and 11 set forth the procedures for
submitting original information and making a claim for an award. First,
pursuant to Proposed Rule 21F-9(a), a whistleblower must complete
either Form TCR or submit information electronically through the
Electronic Data Collection System. Second, pursuant to Proposed Rule
21F-9(b), a whistleblower must complete and submit Form WB-DEC, sworn
under penalty of perjury. A whistleblower wishing to submit a hard-copy
Form TCR would be required to submit Form WB-DEC at the same time as he
or she submits a Form TCR. A whistleblower wishing to submit
information electronically could submit Form WB-DEC electronically or
in hard copy within 30 days of the Commission's receipt of the
whistleblower's electronic submission of information.
The proposed rules also require potential whistleblowers to
complete a third form in the claims phase to establish potential
eligibility for an award under the Program. Pursuant to Proposed Rules
21F-10 and 21F-11, a whistleblower must complete Form WB-APP to apply
for an award for a covered judicial or administrative action by the
Commission or a related action.
Proposed Rule 21F-15 would provide, that ``[i]n determining whether
the required $1,000,000 threshold has been satisfied * * * for purposes
of making any award [to a whistleblower], the Commission will not take
into account any monetary sanctions that the whistleblower is ordered
to pay.'' Likewise, Proposed Rule 21F-15 would provide that the
Commission will not take into account any monetary sanctions ``that are
ordered against any entity whose liability is based substantially on
conduct that the whistleblower directed, planned, or initiated.''
Proposed Rule 21F-15 further would provide that ``if the Commission
determines that a whistleblower is eligible for an award, any amounts
that the whistleblower or such an entity pay in sanctions as a result
of the action or related actions will not be included within the
calculation of the amounts collected for purposes of making payments
[to the whistleblower].''
Proposed Rule 21F-16(b) states that if a whistleblower who is a
director, officer, member, agent, or employee of an entity that has
counsel has initiated communications with the Commission relating to a
potential securities law violation, the staff is authorized to
communicate directly with the whistleblower regarding the subject of
the communication without seeking the consent of the entity's counsel.
We are sensitive to the costs and benefits of our rules. As
discussed
[[Page 70516]]
above, many of the key elements of the whistleblower program have been
established by the statute, and our proposed rules implementing the
statute in some respects largely track statutory provisions. The cost-
benefit analysis that follows focuses on the benefits and costs related
to those rules on which we exercised discretion, and not on the overall
benefits and costs of the statutory regime for whistleblower incentives
and protections.
B. Benefits
We have sought to structure the definitions in Proposed Rule 21F-4
so as to encourage whistleblowers to provide the Commission with high-
quality information--tips indicating a high likelihood of a substantial
securities violation--that we might not otherwise have received in a
timely manner.
We have also sought to strike the right balance in defining terms
so as not to be overly restrictive or overly broad. Overly restrictive
definitions could render the program ineffective as only a small
fraction of potential tippers and complainants would qualify for
monetary rewards. By contrast, overly broad definitions could result in
inefficient use of the Investor Protection Fund--especially in cases in
which the Commission already possesses information sufficient to bring
a successful enforcement action. From an economic perspective of
enforcement, the primary value of the Whistleblower Program is reduced
economic cost of collecting necessary information early on and before
the Commission can obtain the information on its own. The primary
economic cost of the Program includes the out-of-pocket costs as well
as opportunity costs, which include losses due to fraud and costs of
enforcement. Consequently, the proposed definitions together should
provide benefits in that they create strong incentives, in the form of
eligibility for a monetary award, for whistleblowers to provide
information to the Commission or other authorities and to provide the
information early, rather than waiting to receive a request or inquiry
from a relevant authority.\106\ This may be a particular result of the
definition of ``voluntary submission of information'' in Proposed Rule
21F-4; that rule would deny eligibility for an award to a whistleblower
who has valuable information regarding potential violations of the
Federal securities laws if he has received a subpoena or other request
relating to the alleged violations in question--even if the subpoena or
request does not call for the production of the valuable information.
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\106\ As also noted above, the proposed definitions are
consistent with the legislative intent behind the Act. See S. Rep.
No. 111-176 at 110 (2010) (``The Whistleblower Program aims to
motivate those with inside knowledge to come forward and assist the
Government to identify and prosecute persons who have violated the
securities laws * * *'').
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The definition of ``information that leads to successful
enforcement'' in Proposed Rule 21F-4(c) may also have the benefit of
encouraging submission of high-quality information that is particularly
useful to successful enforcement actions. By requiring that the
whistleblower provide information that either ``significantly
contributed'' to the success of an action (if the whistleblower has
provided information that has led the Commission to begin investigating
that matter), or that ``would not otherwise have been obtained and was
essential to the success of the action'' (if the information related to
a matter already under examination or investigation), this proposed
definition should help to screen out less significant tips from
eligibility for awards, and as a result, lead to a more efficient use
of Commission resources and the Investor Protection Fund. Further, by
requiring this level of connection to the success of an action, the
proposed rule may have the benefit of encouraging whistleblowers to
provide more and better information. Similarly, the criterion contained
in Proposed Rule 21F-6(d), which allows the Commission to consider its
ability to enforce the securities laws, protect investors and encourage
high quality information as a criterion in determining the amount of an
award to be paid, may have the benefit of encouraging better quality
information, thus furthering effective enforcement and investor
protection.
As noted, the Commission recognizes that whistleblower awards, as
provided for by the statute, could potentially create incentives for
employees of companies to submit information regarding potential
violations to the Commission rather than to compliance personnel or
through compliance procedures.\107\ This in turn could undermine the
effectiveness of internal company compliance processes. We have sought
to address and mitigate that concern, in part, through the proposed
definition of ``Independent Knowledge'' in Proposed Rule 21F-4(b)(2).
While the restrictions in this definition would limit the pool of
eligible whistleblowers and thereby reduce the number of potentially
useful informants, the definition could have the benefit of limiting
potential interference with the integrity of corporate compliance
programs of companies, which could reduce the overall efficiency of
day-to-day compliance operations.
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\107\ See Rewarding Whistleblowers: The Costs and Benefits of an
Incentive-Based Compliance Strategy, Robert Howse and Ronald J.
Daniels, University of Pennsylvania Departmental Papers (School of
Law), 1995, page 527.
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As with the proposed definition of ``Independent Knowledge''
addressed above, the Commission believes that the procedures relating
to the timing of the submission of ``original information'' could
mitigate costs that the Whistleblower Program might impose on companies
and their compliance programs and procedures. Importantly, the proposed
procedures will allow a potential whistleblower to provide information
to legal or compliance personnel within his or her company, and wait
for up to 90 days, without compromising his or her eligibility for an
award under the Program. This would also allow a company a reasonable
period of time to investigate and respond to potential securities laws
violations (or at least begin an investigation) prior to reporting them
to the Commission or an appropriate regulator. Therefore, this approach
is consistent with the Commission's efforts to encourage companies to
create and implement strong corporate compliance programs.
One economic benefit of providing this grace period is that the
individual could be mistaken about securities laws, and the compliance
personnel would likely be better informed about whether certain conduct
constitutes a violation of securities laws. Without this grace period,
individuals, regardless of whether their judgments regarding certain
violations were correct, could be motivated to report a suspicious
finding as soon as possible. The overall effect could be an overflow of
noisy signals--that is, a large number of tips of varying quality--
causing the Commission to incur costs to process and validate the
information. Allowing for this proposed grace period, we believe,
provides a mechanism by which some of those erroneous cases may be
eliminated before reaching the Commission, without otherwise adversely
affecting the incentives on the part of potential whistleblowers.
The Commission also recognizes that whistleblower awards could
create incentives for attorneys or others to breach the attorney-client
privilege by submitting tips disclosing privileged communications. The
Commission has attempted to address this concern through the proposed
definition of ``Independent Knowledge,'' which excludes information
obtained through communications protected by the
[[Page 70517]]
attorney-client privilege. Thus, a whistleblower who submits such
information would not have provided the Commission with ``Original
Information'' and thus would not be eligible for an award. The benefit
of this proposed definition is that it helps preserve and protect the
integrity of the attorney-client privilege and removes financial
incentive encouraging individuals to breach the privilege.
Proposed Rule 21F-8 may have the benefit of encouraging cooperation
by whistleblowers, which should help the effectiveness and efficiency
of Commission enforcement. Similarly, we believe that Proposed Rule
21F-15, on balance, will have the same result. We recognize that there
is a cost associated with providing monetary awards to individuals who
have engaged in securities violations. Yet, these individuals
frequently have the most significant and relevant information that will
aid in detecting and prosecuting sophisticated securities fraud
schemes. By excluding from the award calculation any monetary sanctions
that the whistleblower is ordered to pay or that are ordered against
the entity whose liability is substantially derived from the
whistleblower's conduct, the proposed rules limit the awards to highly
culpable whistleblowers more than the awards to less culpable
whistleblowers.
Likewise, Proposed Rule 21F-16(b), by authorizing communications
between the Commission staff and a whistleblower without seeking
consent of the counsel of an entity with whom the whistleblower is
employed, is intended to have the benefit of encouraging whistleblowers
to communicate with the Commission without the fear that their
communications will lead to disclosure of their identity to their
employer.
The procedures contained in the Proposed Rules should result in
certain benefits. The Commission's objective in proposing these rules
is to devise an efficient mechanism to implement the statutory
whistleblower program that will allow the Commission to receive high-
quality information regarding securities law violation in a timely,
organized, useful manner. As an initial matter, the proposed procedures
regarding the submission of information and the required Forms are
designed to elicit from whistleblowers critical information regarding
the potential violations at issue. The proposed Forms that would be
required to provide clear and uniform guidance to whistleblowers
regarding the information that the Commission deems necessary to
investigate the potential violations and to determine eligibility for
awards under the program.
In addition, the proposed requirement that whistleblowers must
complete Form WB-DEC, under penalty of perjury, will encourage
whistleblowers who wish to participate in the Whistleblower Program to
submit truthful information and discourage them from submitting false
information. As such, this procedure will allow the Commission to place
greater reliance on the accuracy of information it receives from
whistleblowers, which should allow the Commission to prioritize the
review and investigation of that information more effectively and
efficiently. The requirement should also mitigate the potential harm to
companies and individuals that may be caused by false or spurious
allegations of wrongdoing. In addition, the requirement that Form WB-
DEC be submitted within 30 days of submission of the Form TCR is
designed to provide staff with the opportunity to better evaluate the
TCR in light of the fact that it is joined by a sworn statement
regarding its accuracy. Accordingly, the Proposed Rules should result
in a decrease in the amount of Commission resources devoted to false or
unsubstantiated leads.\108\
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\108\ Dyck et al. (2009). The staff reviews and evaluates all
TCRs, regardless of whether they are accompanied by a whistleblower
declaration. However, because the declaration would aid in assessing
reliability, the staff may consider whether a whistleblower has
submitted a declaration in prioritizing the investigation of TCRs
and the allocation of the Division of Enforcement's limited
resources.
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Moreover, proposed Form WB-APP requires the submission of
information that is necessary for the Commission to determine award
eligibility. While requiring an additional form imposes a cost on
potential whistleblowers, determining the appropriate level of award
for each instance of qualified whistleblower is critical to successful
implementation of the whistleblower rule. The Commission needs to
collect pertinent information from the whistleblower to determine the
strength of his case. This information will need to be evaluated in
conjunction with the Commission's enforcement action to determine the
significance of the whistleblower's contribution.
In addition, the Commission has included procedural elements in the
proposed rules to provide a fair process for consideration of
whistleblower award claims, and, given the possibility of judicial
review, to provide a clearly defined record on appeal. These procedures
should also encourage greater participation in the program. While a
monetary reward is typically not the sole motivation for potential
whistleblowers, having a robust clearly described process for
determining grants of monetary rewards should help incentivize those
individuals who seek to benefit economically from providing information
to the Commission.
C. Costs
The Proposed Rules may impose certain costs on prospective
whistleblowers. As an initial matter, the procedures would require
potential whistleblowers to complete certain forms to establish
eligibility for an award under the Program. As noted above, the
Commission recognizes that it will take time and effort on the part of
whistleblowers to complete and submit the proposed forms. In addition,
any whistleblower wishing to submit one of the required forms in hard
copy would need to arrange for delivery and pay the postage or other
delivery costs.
It is also possible that the proposed procedures could discourage
some whistleblowers with valuable information from submitting their
information to the Commission. Some prospective whistleblowers could
find the procedures burdensome or confusing, and as a result, they
might elect not to provide information to the Commission. In these
Proposed Rules, the Commission has attempted to mitigate the potential
for burden or confusion in the procedures, but such costs cannot be
eliminated.
The 30-day time limit proposed for submitting a Form WB-DEC also
imposes costs on whistleblowers in that it would require them to act
within a certain period of time if they wish to be eligible for an
award under the Program. The Commission has proposed the 30-day time
limit based on a balance of those costs against the need to have the
WB-DEC submitted close enough in time with the submission through the
Electronic Data Collection System so that: (i) The Commission can track
and tie together each submission through the electronic system with the
related Form WB-DEC and (ii) the Commission will receive notice that a
submission through the electronic system is a submission under the
whistleblower program.
The proposed 90-day limit on submission of Form WB-DEC also would
impose costs on whistleblowers in that it requires them to act within a
certain period of time if they wish certain benefits under the Program.
The Commission has proposed the 90-day time limit based on a balance of
those costs against the concern that companies investigating
allegations of potential securities law violations will
[[Page 70518]]
view the time limit as the time they may wait before reporting
violations to the Commission. To be clear, the Commission does not
intend any time period in these Proposed Rules to inform companies on
time limits for reporting violations to the Commission.
In addition, the definitional and scope provisions described above
may also result in costs if they discourage potential whistleblowers
from coming forward. As discussed above, the proposed definitions of
``voluntary submission of information,'' ``independent knowledge,'' and
``information that leads to successful enforcement'' together would
result in heightening the standards for eligibility for an award. It is
possible that restrictions from eligibility could in some cases
discourage some whistleblowers from submitting potentially useful
information.
In particular, the proposed definition of ``voluntary submission of
information'' excludes from eligibility any whistleblower who has a
legal obligation to provide the information regarding potential
violations to the Commission. This element of the definition could
result in instances in which the Commission does not receive important
information regarding potential violations from a potential
whistleblower--that is, situations where a potential whistleblower has
a legal obligation to provide the information and does not, but he
would have if eligible for an award.
Similarly, other types of ineligibility created by our proposed
rules--for example, the provisions in Proposed Rule 21F-8 that exclude
from eligibility certain foreign officials or individuals who obtain
information from other categories of ineligible persons--may also cause
those persons not to come forward with information in their possession
about securities law violations. Although we have attempted to craft
these rules to strike a balance that is consistent with the purposes of
the statute, these provisions may result in some foregone opportunities
for effective enforcement action.
Request for Comments: We request comments and empirical data on all
aspects of this cost-benefit analysis, including identification and
quantification of any additional costs or benefits of, or suggested
alternatives to, the proposed rule.
VI. Consideration of Burden on Competition and Promotion of Competition
and Capital Formation
Section 23(a)(2) \109\ of the Securities Exchange Act of 1934
requires the Commission, in promulgating rules under the Exchange Act,
to consider the impact that any rule may have on competition and
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act. Further, Section 3(f) of the Exchange
Act \110\ requires the Commission, when engaging in rulemaking where it
is required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation.
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\109\ 15 U.S.C. 78w(a)(2).
\110\ 15 U.S.C. 78c(f).
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As with the cost-benefit analysis, we focus our consideration of
burden on competition and promotion of competition and capital
formation to the areas of these Proposed Rules over which the
Commission has exercised discretion and do not consider the elements of
the Whistleblower Program established by Congress.
In considering the impact on capital formation of our proposed
rules, we consider the extent to which they affect allocation of
capital and secondarily how they affect investors' choices of
investments and portfolio allocations. For issuers, this includes
considering the extent to which the rules foster an information
environment and market structures that lead to securities prices based
upon efficient allocation of capital. From this perspective, one of the
issues that may affect capital formation in the economy is investor
confidence in the sense of investors trusting in the fairness of
financial markets, of which their perception of the effectiveness and
comprehensiveness of the regulatory regime is an important part. If
investors fear theft, fraud, manipulation, insider trading, or
conflicted investment advice, their trust in the markets will be low,
both in the primary market for issuance or in the secondary market for
trading. This would increase the cost of raising capital, which would
impair capital formation--in the sense that it will be less than it
would or should be if rules against such abuses were in effect and
properly enforced and obeyed.
For reasons stated in the cost-benefit analysis, we believe the
Proposed Rules would result in an efficient and effective
implementation of the statutory whistleblower program. As such, we
believe the Proposed Rules would serve to reduce potential securities
law violations. As a result, investor reliance on the veracity of
issuer filings with the Commission may increase incrementally, which
would contribute to lowering the cost of raising capital generally.
Those provisions in the Proposed Rules that are designed to promote and
protect the use of corporate compliance programs would further the
requirements of the Sarbanes-Oxley Act of 2002 and other statutory
provisions that encourage or mandate such programs. Thus, we believe
that we have structured the Proposed Rules so as to improve investor
confidence in the market and therefore expect that the impact of the
Proposed Rules on the efficiency of capital formation will be positive.
The Commission does not believe the elements of the proposed rules
over which the Commission exercised discretion would impose any undue
burdens on competition. The relevant market for competition analysis
here is the market for securities issuers competing to raise capital
from investors. Because the proposed rules are expected to further
deterrence of financial fraud, there may be a general improvement in
the fairness of competition for capital from investors--and
consequently improvement in the ability of companies that abide by the
law to compete with companies that do not. To the extent that the
Proposed Rules impose costs on companies, many of these follow from the
statutory mandate to implement the Whistleblower Program generally and
are imposed on all companies. The Commission believes any costs
associated with compliance with the proposed rules, as structured,
would be limited and, therefore, would not impose undue burden on
competition.
Furthermore, the Proposed Rules are structured to encourage the
submission of high quality information regarding securities law
violations in a manner that is effective and efficient. As a result of
expected improvement in competition and expected increase in capital
formation, we believe the Proposed Rules should generally increase the
efficiency of the economy. In addition, the proposed rules should
increase the efficiency by which the Commission's Enforcement program
obtains information about potential securities law violations.
We request comment (including empirical data and other factual
support) on whether the Proposed
[[Page 70519]]
Rules, if adopted, would affect efficiency, competition, and capital
formation.
VII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA),\111\ the Commission solicits data to determine
whether the proposed rule constitutes a ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results or is likely
to result in:
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\111\ Pub. L. 104-121, tit.II, 110 Stat. 857 (1996).
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An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
Commentators should provide empirical data on (a) the potential
annual effect on the economy; (b) any increase in costs or prices for
consumers or individual industries; and (c) any potential effect on
competition, investment or innovation.
VIII. Regulatory Flexibility Act Certification
Section 603(a) of the Regulatory Flexibility Act \112\ requires the
Commission to undertake an initial regulatory flexibility analysis of
the proposed rule on small entities unless the Commission certifies
that the rule, if adopted, would not have a significant economic impact
on a substantial number of small entities.\113\
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\112\ 5 U.S.C. 603(a).
\113\ 5 U.S.C. 605(b).
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Small entity is defined in 5 U.S.C. 601(6) to mean ``small
business,'' ``small organization,'' and ``small governmental
jurisdiction'' as defined in 5 U.S.C. 601(3)--(5). The definition of
``small entity'' does not include individuals. The Proposed Rules apply
only to an individual, or individuals acting jointly, who provide
information to the Commission relating to the violation of the
securities laws. Companies and other entities are not eligible to
participate in the Program as whistleblowers. Consequently, the persons
that would be subject to the proposed rule are not ``small entities''
for purposes of the Regulatory Flexibility Act.
For the reasons stated above, the Commission certifies, pursuant to
5 U.S.C. 605(b), that the proposed rules and forms to implement the
whistleblower provisions of Section 21F of the Exchange Act would not
have a significant economic impact on a substantial number of small
entities.
IX. Statutory Authority
The Commission proposes the new rules and forms contained in this
document under the authority set forth in Sections 3(b), 21F and 23(a)
of the Exchange Act.
List of Subjects in 17 CFR Parts 240 and 249
Securities.
Text of the Proposed Rules
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations, is proposed to be amended as follows.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 240 is amended by adding the
following citation in numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78-i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4, 78p, 78q, 78s,
78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3,
80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350; and 12 U.S.C.
5221(e)(3), unless otherwise noted.
* * * * *
Section 240.21F is also issued under Pub. L. 111-203, Sec. 922(a),
124 Stat. 1841 (2010).
* * * * *
2. Add Sec. Sec. 240.21F-1 through 240.21F-16 to read as follows:
Sec.
* * * * *
240.21F 1-General.
240.21F 2-Definition of a Whistleblower.
240.21F 3-Payment of awards.
240.21F 4-Other Definitions.
240.21F 5-Amount of award.
240.21F 6-Criteria for determining amount of award.
240.21F 7-Confidentiality of submissions.
240.21F 8-Eligibility.
240.21F 9-Procedures for submitting original information.
240.21F 10-Procedures for making a claim for a whistleblower award
in SEC actions that result in monetary sanctions in excess of
$1,000,000.
240.21F 11-Procedures for determining awards based upon a related
action.
240.21F 12-Appeals.
240.21F 13-Procedures applicable to the payment of awards.
240.21F 14-No amnesty.
240.21F 15-Awards to whistleblowers who engage in culpable conduct.
240.21F 16-Staff communications with whistleblowers.
* * * * *
Sec. 240.21F-1 General.
Section 21F of the Securities Exchange Act of 1934 (``Exchange
Act'') (15 U.S.C. 78u-6), entitled ``Securities Whistleblower
Incentives and Protection,'' requires the Securities and Exchange
Commission (``Commission'') to pay awards, subject to certain
limitations and conditions, to whistleblowers who provide the
Commission with original information about violations of the Federal
securities laws. These rules describe the whistleblower program that
the Commission has established to implement the provisions of Section
21F, and explain the procedures you will need to follow in order to be
eligible for an award. You should read these procedures carefully
because the failure to take certain required steps within the time
frames described in these rules may disqualify you from receiving an
award for which you otherwise may be eligible. Unless expressly
provided for in these rules, no person is authorized to make any offer
or promise, or otherwise to bind the Commission with respect to the
payment of any award or the amount thereof. The Securities and Exchange
Commission's Whistleblower Office administers our whistleblower
program. Questions about the program or these rules should be directed
to the SEC Whistleblower Office, 100 F Street, NE., Washington, DC
20549.
Sec. 240.21F-2 Definition of a Whistleblower.
(a) You are a whistleblower if, alone or jointly with others, you
provide the Commission with information relating to a potential
violation of the securities laws. A whistleblower must be an
individual. A company or another entity is not eligible to be a
whistleblower.
(b) The retaliation protections afforded to whistleblowers by the
provisions of paragraph (h)(1) of Section 21F of the Exchange Act (15
U.S.C. 78u-6(h)(1)) apply irrespective of whether a whistleblower
satisfies the procedures and conditions to qualify for an award.
Moreover, for purposes of the anti-retaliation provision of paragraph
(h)(1)(A)(i) of Section 21F, 15 U.S.C. 78u-6(h)(1)(A)(i), the
requirement that a whistleblower provide ``information to the
Commission in accordance'' with Section 21F (15 U.S.C. 78u-6) is
satisfied if an individual provides information to the Commission that
relates to a potential violation of the securities laws.
(c) To be eligible for an award, however, a whistleblower must
submit original information to the Commission in accordance with the
procedures and conditions described in Sec. Sec. 240.21F-4,
[[Page 70520]]
240.21F-8, and 240.21F-9 of this chapter.
Sec. 240.21F-3 Payment of awards.
(a) Subject to the eligibility requirements described in Sec. Sec.
240.21F-2 and 240.21F-8 of this chapter, and to Sec. 240.21F-14 of
this chapter, the Commission will pay an award or awards to one or more
whistleblowers who:
(1) Voluntarily provide the Commission
(2) With original information
(3) That leads to the successful enforcement by the Commission of a
Federal court or administrative action
(4) In which the Commission obtains monetary sanctions totaling
more than $1,000,000.
Note to paragraph (a): The terms voluntarily, original
information, leads to successful enforcement, action, and monetary
sanctions are defined in Sec. 240.21F-4 of this chapter.
(b) The Commission will also pay an award based on amounts
collected in certain ``related actions.'' A related action is a
judicial or administrative action that is brought by:
(1) The Attorney General of the United States;
(2) An appropriate regulatory agency;
(3) A self-regulatory organization; or
(4) A state attorney general in a criminal case, and is based on
the same original information that the whistleblower voluntarily
provided to the Commission, and that led the Commission to obtain
monetary sanctions totaling more than $1,000,000. The terms appropriate
regulatory agency and self-regulatory organization are defined in Sec.
240.21F-4 of this chapter.
(c) In order for the Commission to make an award in connection with
a related action, the Commission must determine that the same original
information that the whistleblower gave to the Commission also led to
the successful enforcement of the related action under the same
criteria described in these rules for awards made in connection with
Commission actions. The Commission may seek assistance and confirmation
from the authority bringing the related action in making this
determination. If the Commission determines that the criteria for an
award are not satisfied, or if the Commission is unable to obtain
sufficient and reliable information about the related action to make a
conclusive determination, the Commission will deny an award in
connection with the related action. Additional procedures apply to the
payment of awards in related actions. These are described in Sec.
240.21F-11 and Sec. 240.21F-13.
(d) The Commission will not make an award to you for a related
action if you have already been granted an award by the Commodity
Futures Trading Commission (``CFTC'') for that same action pursuant to
its whistleblower award program under section 23 of the Commodity
Exchange Act, 7 U.S.C. 26. Similarly, if the CFTC has previously denied
an award to you in a related action, you will be collaterally estopped
from relitigating any issues before the Commission that were necessary
to the CFTC's denial.
Sec. 240.21F-4 Other Definitions.
(a) Voluntary submission of information. (1) Your submission of
information is made voluntarily within the meaning of Sec. 240.21F of
this chapter if you provide the Commission with the information before
you or anyone representing you (such as an attorney) receives any
request, inquiry, or demand from the Commission, the Congress, any
other Federal, State, or local authority, any self-regulatory
organization, or the Public Company Accounting Oversight Board about a
matter to which the information in your submission is relevant. If the
Commission or any of these other authorities make a request, inquiry,
or demand to you or your representative first, your submission will not
be considered voluntary, and you will not be eligible for an award,
even if your response is not compelled by subpoena or other applicable
law.
(2) For purposes of this paragraph, you will be considered to have
received a request, inquiry or demand if documents or information from
you are within the scope of a request, inquiry, or demand that your
employer receives unless, after receiving the documents or information
from you, your employer fails to provide your documents or information
to the requesting authority in a timely manner.
(3) In addition, your submission will not be considered voluntary
if you are under a pre-existing legal or contractual duty to report the
securities violations that are the subject of your original information
to the Commission or to any of the other authorities described in
paragraph (1) of this section.
(b) Original information. (1) In order for your whistleblower
submission to be considered original information, it must be:
(i) Derived from your independent knowledge or independent
analysis;
(ii) Not already known to the Commission from any other source,
unless you are the original source of the information;
(iii) Not exclusively derived from an allegation made in a judicial
or administrative hearing, in a governmental report, hearing, audit, or
investigation, or from the news media, unless you are a source of the
information; and
(iv) Provided to the Commission for the first time after July 21,
2010 (the date of enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act).
(2) Independent knowledge means factual information in your
possession that is not derived from publicly available sources. You may
gain independent knowledge from your experiences, communications and
observations in your business or social interactions.
(3) Independent analysis means your own analysis, whether done
alone or in combination with others. Analysis means your examination
and evaluation of information that may be generally available, but
which reveals information that is not generally known or available to
the public.
(4) The Commission will not consider information to be derived from
your independent knowledge or independent analysis if you obtained the
knowledge or the information upon which your analysis is based:
(i) Through a communication that was subject to the attorney-client
privilege, unless disclosure of that information is otherwise permitted
by Sec. 205.3(d)(2) of this chapter, the applicable state attorney
conduct rules, or otherwise;
(ii) As a result of the legal representation of a client on whose
behalf your services, or the services of your employer or firm, have
been retained, and you seek to use the information to make a
whistleblower submission for your own benefit, unless disclosure is
authorized by Sec. 205.3(d)(2) of this chapter, the applicable state
attorney conduct rules, or otherwise;
(iii) Through the performance of an engagement required under the
securities laws by an independent public accountant, if that
information relates to a violation by the engagement client or the
client's directors, officers or other employees;
(iv) Because you were a person with legal, compliance, audit,
supervisory, or governance responsibilities for an entity, and the
information was communicated to you with the reasonable expectation
that you would take steps to cause the entity to respond appropriately
to the violation, unless the entity did not disclose the information to
the Commission within a
[[Page 70521]]
reasonable time or proceeded in bad faith; or
(v) Otherwise from or through an entity's legal, compliance, audit
or other similar functions or processes for identifying, reporting and
addressing potential non-compliance with law, unless the entity did not
disclose the information to the Commission within a reasonable time or
proceeded in bad faith;
(vi) By a means or in a manner that violates applicable Federal or
State criminal law; or
(vii) From any of the individuals described in paragraphs
(b)(4)(i)-(vi) of this section.
(5) The Commission will consider you to be an original source of
the same information that we obtain from another source if the
information satisfies the definition of original information and the
other source obtained the information from you or your representative.
In order to be considered an original source of information that the
Commission receives from Congress, any other Federal, State, or local
authority, any self-regulatory organization, or the Public Company
Accounting Oversight Board, you must have voluntarily given such
authorities the information within the meaning of these rules. You must
establish your status as the original source of information to the
Commission's satisfaction. In determining whether you are the original
source of information, the Commission may seek assistance and
confirmation, from one of the other authorities described above, or
from another entity (including your employer), in the event that you
claim to be the original source of information that an authority or
another entity provided to the Commission.
(6) If the Commission already knows some information about a matter
from other sources at the time you make your submission, and you are
not an original source of that information under paragraph (b)(5) of
this section, the Commission will consider you an original source of
any information you provide that is derived from your independent
knowledge or analysis and that materially adds to the information that
the Commission already possesses.
(7) If you provide information to Congress, any other Federal,
State, or local authority, any self-regulatory organization, the Public
Company Accounting Oversight Board, or to any of the persons described
in paragraphs (b)(4)(iv) and (v) of this section, and you, within 90
days, submit the same information to the Commission pursuant to Sec.
240.21F-9 of this chapter, as you must do in order for you to be
eligible to be considered for an award, then, for purposes of
evaluating your claim to an award under Sec. Sec. 240.21F-10 and
240.21F-11 of this chapter, the Commission will consider that you
provided information as of the date of your original disclosure, report
or submission to one of these other authorities or persons. You must
establish the effective date of any prior disclosure, report, or
submission, to the Commission's satisfaction. The Commission may seek
assistance and confirmation from the other authority or person in
making this determination.
(c) Information that leads to successful enforcement. The
Commission will consider that you provided original information that
led to the successful enforcement of a judicial or administrative
action in the following circumstances:
(1) If you gave the Commission original information that caused the
staff to commence an examination, open an investigation, reopen an
investigation that the Commission had closed, or to inquire concerning
new or different conduct as part of a current examination or
investigation, and your information significantly contributed to the
success of the action; or
(2) If you gave the Commission original information about conduct
that was already under examination or investigation by the Commission,
Congress, any other Federal, State, or local authority, any self-
regulatory organization, or the Public Company Accounting Oversight
Board (except in cases where you were an original source of this
information as defined in paragraph (b)(4) of this section), and your
information would not otherwise have been obtained and was essential to
the success of the action.
(d) Action means a single captioned judicial or administrative
proceeding.
(e) Monetary sanctions means any money, including penalties,
disgorgement, and interest, ordered to be paid and any money deposited
into a disgorgement fund or other fund pursuant to Section 308(b) of
the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7246(b), as a result of a
Commission action or a related action.
(f) Appropriate regulatory agency means the Commission, the
Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office
of Thrift Supervision, and any other agencies that may be defined as
appropriate regulatory agencies under Section 3(a)(34) of the Exchange
Act (15 U.S.C. 78c(a)(34)).
(g) Self-regulatory organization means any national securities
exchange, registered securities association, registered clearing
agency, the Municipal Securities Rulemaking Board, and any other
organizations that may be defined as self-regulatory organizations
under Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)).
Sec. 240.21F-5 Amount of award.
(a) If all of the conditions are met for a whistleblower award in
connection with a Commission action or a related action, the Commission
will then decide the amount of the award pursuant to the procedures set
forth in Sec. Sec. 240.21F-10 and 240.21F-11 of this chapter. The
amount will be at least 10 percent and no more than 30 percent of the
monetary sanctions that the Commission and the other authorities are
able to collect. The percentage awarded in connection with a Commission
action may differ from the percentage awarded in connection with a
related action.
(b) If the Commission makes awards to more than one whistleblower
in connection with the same action or related action, the Commission
will determine an individual percentage award for each whistleblower,
but in no event will the total amount awarded to all whistleblowers as
a group be less than 10 percent or greater than 30 percent of the
amount the Commission or the other authorities collect.
Sec. 240.21F-6 Criteria for determining amount of award.
In determining the amount of an award, the Commission will take
into consideration:
(a) The significance of the information provided by a whistleblower
to the success of the Commission action or related action;
(b) The degree of assistance provided by the whistleblower and any
legal representative of the whistleblower in the Commission action or
related action;
(c) The programmatic interest of the Commission 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
(d) Whether the award otherwise enhances the Commission's ability
to enforce the Federal securities laws, protect investors, and
encourage the submission of high quality information from
whistleblowers.
Sec. 240.21F-7 Confidentiality of submissions.
(a) The law requires that the Commission not disclose information
that could reasonably be expected to reveal the identity of a
whistleblower,
[[Page 70522]]
except that the Commission may disclose such information in the
following circumstances:
(1) When disclosure is required to a defendant or respondent in
connection with a Federal court or administrative action that the
Commission files or in another public action or proceeding that is
filed by an authority to which we provide the information, as described
below;
(2) When the Commission determines that it is necessary to
accomplish the purposes of the Exchange Act and to protect investors,
it may provide your information to the Department of Justice, an
appropriate regulatory agency, a self regulatory organization, a state
attorney general in connection with a criminal investigation, any
appropriate state regulatory authority, the Public Company Accounting
Oversight Board, or foreign securities and law enforcement authorities.
Each of these entities other than foreign securities and law
enforcement authorities is subject to the confidentiality requirements
set forth in Section 21F(h) of the Exchange Act, 15 U.S.C. 78u-6(h).
The Commission may determine what assurances of confidentiality it
deems appropriate in providing such information to foreign securities
and law enforcement authorities.
(3) The Commission may make disclosures in accordance with the
Privacy Act of 1974 (5 U.S.C. 552a).
(b) You may submit information to the Commission anonymously. If
you do so, however, you must also do the following:
(1) You must have an attorney represent you in connection with both
your submission of information and your claim for an award, and your
attorney's name and contact information must be provided to the
Commission at the time you submit your information;
(2) You and your attorney must follow the procedures set forth in
Sec. 240.21F-9 of this chapter for submitting original information
anonymously; and
(3) Before the Commission will pay any award to you, you must
disclose your identity and your identity must be verified as set forth
in Sec. 240.21F-10 of this chapter.
Sec. 240.21F-8 Eligibility.
(a) To be eligible for a whistleblower award, you must give the
Commission information in the form and manner that the Commission
requires. The procedures for submitting information and making a claim
for an award are described in Sec. 240.21F-9 to Sec. 240.21F-11 of
this chapter. You should read these procedures carefully because you
need to follow them in order to be eligible for an award, except that
the Commission may, in its sole discretion, waive any of these
procedures based upon a showing of extraordinary circumstances.
(b) In addition to any forms required by these rules, the
Commission may also require that you provide certain additional
information. If requested by Commission staff, you may be required to:
(1) Provide explanations and other assistance in order that the
staff may evaluate and use the information that you submitted;
(2) Provide all additional information in your possession that is
related to the subject matter of your submission in a complete and
truthful manner, through follow-up meetings, or in other forms that our
staff may agree to;
(3) Provide testimony or other evidence acceptable to the staff
relating to whether you are eligible, or otherwise satisfy any of the
conditions, for an award; and
(4) Enter into a confidentiality agreement in a form acceptable to
the Whistleblower Office, including a provision that a violation may
lead to your ineligibility to receive an award.
(c) You are not eligible to be considered for an award if you do
not satisfy the requirements of paragraphs (a) and (b) of this section.
In addition, you are not eligible if:
(1) You are, or were at the time you acquired original information,
a member, officer, or employee of the Department of Justice, an
appropriate regulatory agency, a self-regulatory organization, the
Public Company Accounting Oversight Board, or any law enforcement
organization;
(2) You are, or were at the time you acquired original information,
a member, officer, or employee of a foreign government, any political
subdivision, department, agency, or instrumentality of a foreign
government, or any other foreign financial regulatory authority as that
term is defined in Section 3(a)(52) of the Exchange Act (15 U.S.C.
78c(a)(52));
(3) You are convicted of a criminal violation that is related to
the Commission action or to a related action (as defined in Sec.
240.21F-4 of this chapter) for which you otherwise could receive an
award;
(4) You obtained the information that you gave the Commission
through an audit of a company's financial statements, and making a
whistleblower submission would be contrary to the requirements of
Section 10A of the Exchange Act (15 U.S,C. 78j-1)); or
(5) You acquired the information you gave the Commission from any
of the individuals described in paragraphs (c)(1), (2), (3), or (4) of
this section;
(6) You are the spouse, parent, child, or sibling of a member or
employee of the Commission, or you reside in the same household as a
member or employee of the Commission; or
(7) In your whistleblower submission, your other dealings with the
Commission, or your dealings with another authority in connection with
a related action, you knowingly and willfully make any false,
fictitious, or fraudulent statement or representation, or use any false
writing or document, knowing that it contains any false, fictitious, or
fraudulent statement or entry.
Sec. 240.21F-9 Procedures for submitting original information.
The submission of original information to the Commission is a two-
step process:
(a) First, you will need to submit your information to us. You may
submit your information:
(1) Online, through the Commission's Electronic Data Collection
System, or;
(2) By completing Form TCR (Tip, Complaint or Referral) (referenced
in Sec. 249.1800 of this chapter) and mailing or faxing the form to
the SEC Whistleblower Office, 100 F Street, NE., Washington, DC 20549-
XXXX, Fax (202) XXX-XXXX.
(b) Second, in addition to submitting your information pursuant to
paragraph (a) of this section, you will also need to complete and
provide to the Commission a Form WB-DEC, Declaration Concerning
Original Information Provided Pursuant to Sec. 21F of the Securities
Exchange Act of 1934, signed under penalty of perjury. Your Form WB-DEC
must be submitted as follows:
(1) If you submit your information online, your FORM WB-DEC
(referenced in Sec. 249.1801 of this chapter) must be submitted
either:
(i) Electronically (in accordance with the instructions set forth
on the Commission's Web site); or
(ii) By mailing or faxing the signed form to the SEC Whistleblower
Office. Your Form WB-DEC (referenced in Sec. 249.1801 of this chapter)
must be received within thirty (30) days of the Commission's receipt of
your information in the Electronic Data Collection System.
(2) If you submit a Form TCR (referenced in Sec. 249.1800 of this
chapter), your Form WB-DEC (referenced in Sec. 249.1801 of this
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chapter) must be submitted by mail or fax at the same time as the Form
TCR.
(c) Notwithstanding paragraph (b) of this section, if you submitted
your original information to the Commission anonymously, then you must
provide your attorney with the completed and signed Form WB-DEC
(referenced in Sec. 249.1801 of this chapter). In addition, your
attorney must also provide the Commission with a separate Form WB-DEC
certifying that he or she has verified your identity, has reviewed the
form for completeness and accuracy, and will retain the signed original
of your Form WB-DEC in his or her records. Such certification must be
submitted in the manner described in paragraph (b) of this section.
(d) If you submitted original information in writing to the
Commission after July 21, 2010 (the date of enactment of the Dodd-Frank
Wall Street Reform and Consumer Protection Act) but before the
effective date of these rules, you will be eligible for an award only
if:
(1) In the event that you provided the original information to the
Commission in a format or manner other than that described in paragraph
(a) of this section, you either submit your information online through
the Commission's Electronic Data Collection System or complete Form TCR
(referenced in Sec. 249.1800 of this chapter) within one hundred
twenty (120) days of the effective date of these rules and otherwise
follow the procedures set forth in paragraph (b) of this section; or
(2) In the event that you provided the original information to the
Commission in the format or manner described in paragraph (a) of this
section you submit a Form WB-DEC (referenced in Sec. 249.1801 of this
chapter) within one hundred twenty (120) days of the effective date of
this section in the manner set forth in paragraph (b) of this section.
Sec. 240.21F-10 Procedures for making a claim for a whistleblower
award in SEC actions that result in monetary sanctions in excess of
$1,000,000.
(a) Whenever a Commission action results in monetary sanctions
totaling more than $1,000,000, the Whistleblower Office will cause to
be published on the Commission's Web site a ``Notice of Covered
Action.'' Such Notice will be published subsequent to the entry of a
final judgment or order that alone, or collectively with other
judgments or orders previously entered in the Commission action,
exceeds $1,000,000; or, in the absence of such judgment or order,
within thirty (30) days of the deposit of monetary sanctions exceeding
$1,000,000 into a disgorgement or other fund pursuant to Section 308(b)
of the Sarbanes-Oxley Act of 2002. A claimant will have sixty (60) days
from the date of the Notice of Covered Action to file a claim for an
award based on that action, or the claim will be barred.
(b) To file a claim for a whistleblower award, you must file Form
WB-APP, Application for Award for Original Information Provided
Pursuant to Sec. 21F of the Securities Exchange Act of 1934
(referenced in Sec. 249.1802 of this chapter). You must sign this form
as the claimant and submit it to the Whistleblower Office by mail or
fax. All claim forms, including any attachments, must be received by
the Whistleblower Office within sixty (60) calendar days of the date of
the Notice of Covered Action in order to be considered for an award.
(c) If you provided your original information to the Commission
anonymously, you must disclose your identity on the Form WB-APP
(referenced in Sec. 249.1802 of this chapter), and your identity must
be verified in a form and manner that is acceptable to the
Whistleblower Office prior to the payment of any award.
(d) Once the time for filing any appeals of the Commission's
judicial or administrative action has expired, or where an appeal has
been filed, after all appeals in the action have been concluded, the
Whistleblower Office and designated staff (``Claims Review Staff'')
will evaluate all timely whistleblower award claims submitted on Form
WB-APP (referenced in Sec. 249.1802 of this chapter) in accordance
with the criteria set forth in these rules. In connection with this
process, the Whistleblower Office may require that you provide
additional information relating to your eligibility for an award or
satisfaction of any of the conditions for an award, as set forth in
Sec. 240.21F-(8)(b) of this chapter. Following that evaluation, the
Whistleblower Office will send you a Preliminary Determination setting
forth a preliminary assessment as to whether the claim should be
allowed or denied and, if allowed, setting forth the proposed award
percentage amount.
(e) You may contest the Preliminary Determination made by the
Claims Review Staff by submitting a written response to the
Whistleblower Office setting forth the grounds for your objection to
either the denial of an award or the proposed amount of an award. You
may also include documentation or other evidentiary support for the
grounds advanced in your response.
(1) Before determining whether to contest a Preliminary
Determination, you may:
(i) Within thirty (30) days of the date of the Preliminary
Determination, request that the Whistleblower Office make available for
your review the materials that formed the basis of the Claims Review
Staff's Preliminary Determination. The Whistleblower Office will make
these materials available to you subject to any redactions necessary to
comply with any statutory restrictions or protect the Commission's law
enforcement and regulatory functions. The Whistleblower Office may also
require you to sign a confidentiality agreement, as set forth in Sec.
240.21F-(8)(b) of this chapter, prior to providing these materials.
(ii) Within thirty (30) calendar days of the date of the
Preliminary Determination, request a meeting with the Whistleblower
Office; however, such meetings are not required and the office may in
its sole discretion decline the request.
(2) If you decide to contest the Preliminary Determination, you
must submit your written response and supporting materials within
thirty (30) calendar days of the date of the Preliminary Determination,
or if a request to review materials is made pursuant to paragraph
(e)(1) of this section, then within thirty (30) calendar days of the
Whistleblower Office making those materials available for your review.
(f) If you fail to submit a timely response pursuant to paragraph
(e) of this section, then the Preliminary Determination will become the
Final Order of the Commission (except where the Preliminary
Determination recommended an award, in which case the Preliminary
Determination will be deemed a Proposed Final Determination for
purposes of paragraph (h) of this section). Your failure to submit a
timely response contesting a Preliminary Determination will constitute
a failure to exhaust administrative remedies, and you will be
prohibited from pursuing an appeal pursuant to Sec. 240.21F-12 of this
chapter.
(g) If you submit a timely response pursuant to paragraph (e) of
this section, then the Claims Review Staff will consider the issues and
grounds advanced in your response, along with any supporting
documentation you provided, and will make its Proposed Final
Determination.
(h) The Whistleblower Office will then notify the Commission of
each Proposed Final Determination. Within thirty 30 days thereafter,
any Commissioner may request that the
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Proposed Final Determination be reviewed by the Commission. If no
Commissioner requests such a review within the 30-day period, then the
Proposed Final Determination will become the Final Order of the
Commission. In the event a Commissioner requests a review, the
Commission will review the record that the staff relied upon in making
its determinations, including your previous submissions to the
Whistleblower Office, and issue its Final Order.
(i) The Office of the Secretary of the SEC will provide you with
the Final Order of the Commission.
Sec. 240.21F-11 Procedures for determining awards based upon a
related action.
(a) If you are eligible to receive an award following a Commission
action that results in monetary sanctions totaling more than
$1,000,000, you also may be eligible to receive an award based on the
monetary sanctions that are collected from a related action (as defined
in Sec. 240.21F-3 of this chapter).
(b) You must also use Form WB-APP (referenced in Sec. 249.1802 of
this chapter) to submit a claim for an award in a related action. You
must sign this form as the claimant and submit it to the Whistleblower
Office by mail or fax as follows:
(1) If a final order imposing monetary sanctions has been entered
in a related action at the time you submit your claim for an award in
connection with a Commission action, you must submit your claim for an
award in that related action on the same Form WB-APP (referenced in
Sec. 249.1802 of this chapter) that you use for the Commission action.
(2) If a final order imposing monetary sanctions in a related
action has not been entered at the time you submit your claim for an
award in connection with a Commission action, you must submit your
claim on Form WB-APP (referenced in Sec. 249.1802 of this chapter)
within sixty (60) days of the issuance of a final order imposing
sanctions in the related action.
(c) The Whistleblower Office may request additional information
from you in connection with your claim for an award in a related action
to demonstrate that you directly (or through the Commission)
voluntarily provided the governmental agency, regulatory authority or
self-regulatory organization the same original information that led to
the Commission's successful covered action, and that this information
led to the successful enforcement of the related action. The
Whistleblower Office may, in its discretion, seek assistance and
confirmation from the other agency in making this determination.
(d) Once the time for filing any appeals of the final judgment or
order in a related action has expired, or if an appeal has been filed,
after all appeals in the action have been concluded, the Claims Review
Staff will evaluate all timely whistleblower award claims submitted on
Form WB-APP (referenced in Sec. 249.1802 of this chapter) in
connection with the related action. The evaluation will be undertaken
pursuant to the criteria set forth in these rules. In connection with
this process, the Whistleblower Office may require that you provide
additional information relating to your eligibility for an award or
satisfaction of any of the conditions for an award, as set forth in
Sec. 240.21F-(8)(b) of this chapter. Following this evaluation, the
Whistleblower Office will send you a Preliminary Determination setting
forth a preliminary assessment as to whether the claim should be
allowed or denied and, if allowed, setting forth the proposed award
percentage amount.
(e) You may contest the Preliminary Determination made by the
Claims Review Staff by submitting a written response to the
Whistleblower Office setting forth the grounds for your objection to
either the denial of an award or the proposed amount of an award. You
may also include documentation or other evidentiary support for the
grounds advanced in your response.
(1) Before determining whether to contest a Preliminary
Determination, you may:
(i) Within thirty (30) days of the date of the Preliminary
Determination, request that the Whistleblower Office make available for
your review the materials that formed the basis of the Claims Review
Staff's Preliminary Determination. The Whistleblower Office will make
these materials available to you subject to any redactions necessary to
comply with any statutory restrictions or protect the Commission's law
enforcement and regulatory functions. The Whistleblower Office may also
require you to sign a confidentiality agreement, as set forth in Sec.
240.21F-(8)(b) of this chapter, prior to providing these materials.
(ii) Within thirty (30) calendar days of the date of the
Preliminary Determination, request a meeting with the Whistleblower
Office; however, such meetings are not required and the office may in
its sole discretion decline the request.
(2) If you decide to contest the Preliminary Determination, you
must submit your written response and supporting materials within
thirty (30) calendar days of the date of the Preliminary Determination,
or if a request to review materials is made pursuant to paragraph
(e)(1)(i) of this section, then within thirty (30) calendar days of the
Whistleblower Office making those materials available for your review.
(f) If you fail to submit a timely response pursuant to paragraph
(e) of this section, then the Preliminary Determination will become the
Final Order of the Commission (except where the Preliminary
Determination recommended an award, in which case the Preliminary
Determination will be deemed a Proposed Final Determination for
purposes of paragraph (h) of this section). Your failure to submit a
timely response contesting a Preliminary Determination will constitute
a failure to exhaust administrative remedies, and you will be
prohibited from pursuing an appeal pursuant to Sec. 240.21F-12 of this
chapter.
(g) If you submit a timely response pursuant to paragraph (e) of
this section, then the Claims Review Staff will consider the issues and
grounds that you advanced in your response, along with any supporting
documentation you provided, and will make its Proposed Final
Determination.
(h) The Whistleblower Office will then notify the Commission of
each Proposed Final Determination. Within thirty (30) days thereafter,
any Commissioner may request that the Proposed Final Determination be
reviewed by the Commission. If no Commissioner requests such a review
within the 30-day period, then the Proposed Final Determination will
become the Final Order of the Commission. In the event a Commissioner
requests a review, the Commission will review the record that the staff
relied upon in making its determinations, including your previous
submissions to the Whistleblower Office, and issue its Final Order.
(i) The Office of the Secretary of the SEC will provide you with
the Final Order of the Commission.
Sec. 240.21F-12 Appeals.
(a) Section 21F of the Exchange Act, 15 U.S.C. 78u-6, commits
determinations of whether, to whom, and in what amount to make awards
to the Commission's discretion. A determination of whether or to whom
to make an award may be appealed within 30 days after the Commission
issues its final decision to the United States Court of Appeals for the
District of Columbia Circuit, or to the circuit where the aggrieved
person resides or has his
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principal place of business. Where the Commission followed the
statutory mandate that it award not less than 10 percent and not more
than 30 percent of the monetary sanctions collected in the Commission
or related action, the Commission's determination regarding the amount
of an award (including the allocation of an award as between multiple
whistleblowers) is not appealable.
(b) The record on appeal shall consist of the Whistleblower
Office's Preliminary Determination, any materials submitted by the
claimant or claimants (including the claimant's Form TCR (referenced in
Sec. 249.1800 of this chapter) or any electronic submission made by
the whistleblower, the Forms WB-DEC (referenced in Sec. 249.1801 of
this chapter) and WB-APP (referenced in Sec. 249.1802 of this
chapter), and materials filed in response to the Preliminary
Determination), and any other materials that supported the Final Order
of the Commission, with the exception of internal deliberative process
materials that are prepared exclusively to assist the Commission in
deciding the claim (including the staff's Draft Final Determination in
the event that the Commissioners reviewed the claim and issued the
Final Order).
Sec. 240.21F-13 Procedures applicable to the payment of awards.
(a) Any award made pursuant to these rules will be paid from the
Securities and Exchange Commission Investor Protection Fund (the
``Fund'').
(b) A recipient of a whistleblower award is entitled to payment on
the award only to the extent that a monetary sanction is collected in
the Commission action or in a related action upon which the award is
based.
(c) Payment of a whistleblower award for a monetary sanction
collected in a Commission action or related action shall be made
following the later of:
(1) The date on which the monetary sanction is collected; or
(2) The completion of the appeals process for all whistleblower
award claims arising from:
(i) The Notice of Covered Action, in the case of any payment of an
award for a monetary sanction collected in a Commission action; or
(ii) The related action, in the case of any payment of an award for
a monetary sanction collected in a related action.
(d) If there are insufficient amounts available in the Fund to pay
the entire amount of an award payment within a reasonable period of
time from the time for payment specified by paragraph (c) of this
section, then subject to the following terms, the balance of the
payment shall be paid when amounts become available in the Fund, as
follows:
(1) Where multiple whistleblowers are owed payments from the Fund
based on awards that do not arise from the same Notice of Covered
Action (or related action), priority in making these payments will be
determined based upon the date that the collections for which the
whistleblowers are owed payments occurred. If two or more of these
collections occur on the same date, those whistleblowers owed payments
based on these collections will be paid on a pro rata basis until
sufficient amounts become available in the Fund to pay their entire
payments.
(2) Where multiple whistleblowers are owed payments from the Fund
based on awards that arise from the same Notice of Covered Action (or
related action), they will share the same payment priority and will be
paid on a pro rata basis until sufficient amounts become available in
the Fund to pay their entire payments.
Sec. 240.21F-14 No amnesty.
The Securities Whistleblower Incentives and Protection provisions
do not provide amnesty to individuals who provide information to the
Commission. The fact that you may become a whistleblower and assist in
Commission investigations and enforcement actions does not preclude the
Commission from bringing an action against you based upon your own
conduct in connection with violations of the Federal securities laws.
If such an action is determined to be appropriate, however, the
Commission will take your cooperation into consideration in accordance
with its Policy Statement Concerning Cooperation by Individuals in
[SEC] Investigations and Related Enforcement Actions (17 CFR 202.12).
Sec. 240.21F-15 Awards to whistleblowers who engage in culpable
conduct.
In determining whether the required $1,000,000 threshold has been
satisfied (this threshold is further explained in Sec. 240.21F-10 of
this chapter) for purposes of making any award, the Commission will not
take into account any monetary sanctions that the whistleblower is
ordered to pay, or that are ordered against any entity whose liability
is based substantially on conduct that the whistleblower directed,
planned, or initiated. Similarly, if the Commission determines that a
whistleblower is eligible for an award, any amounts that the
whistleblower or such an entity pay in sanctions as a result of the
action or related actions will not be included within the calculation
of the amounts collected for purposes of making payments.
Sec. 240.21F-16 Staff communications with whistleblowers.
(a) No person may take any action to impede a whistleblower from
communicating directly with the Commission staff about a potential
securities law violation, including enforcing, or threatening to
enforce, a confidentiality agreement (other than agreements dealing
with information covered by Sec. 240.21F-4(b)(4)(i) and (ii) of this
chapter related to the legal representation of a client) with respect
to such communications.
(b) If you are a whistleblower who is a director, officer, member,
agent, or employee of an entity that has counsel, and you have
initiated communication with the Commission relating to a potential
securities law violation, the staff is authorized to communicate
directly with you regarding the subject of your communication without
seeking the consent of the entity's counsel.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
3. The authority citation for Part 249 is amended by adding the
following citations in numerical order to read as follows:
Authority: 15 U.S.C. 78a, et seq. and 7201 et seq.; and 18
U.S.C. 1350, unless otherwise noted.
* * * * *
Section 249.1800 is also issued under Pub. L. 111.203, Sec.
922(a), 124 Stat 1841 (2010).
Section 249.1801 is also issued under Pub. L. 111.203, Sec.
922(a), 124 Stat 1841 (2010).
Section 249.1802 is also issued under Pub. L. 111.203, Sec.
922(a), 124 Stat 1841 (2010).
* * * * *
4. Add Subpart S to read as follows:
Subpart S--Whistleblower Forms
Sec.
249.1800 Form TCR, Tip, Complaint or Referral
249.1801 Form WB-DEC, Declaration of Original Information Submitted
Pursuant to Section 21F of the Securities Exchange Act of 1934
249.1802 Form WB-APP, Application for Award for Original Information
Submitted Pursuant to Section 21F of the Securities Exchange Act of
1934.
Sec. 249.1800 Form TCR, Tip, Complaint or Referral.
This form may be used by anyone wishing to provide the SEC with
information concerning a violation of the Federal securities laws. The
information provided may be disclosed to Federal, state, local, or
foreign agencies responsible for investigating, prosecuting, enforcing,
or implementing
[[Page 70526]]
the Federal securities laws, rules, or regulations consistent with the
confidentiality requirements set forth in Section 21F(h)(2) of the
Exchange Act, 15 U.S.C. 78u-6(h)(2), and Sec. 240.21F-7 of this
chapter.
Sec. 249.1801 Form WB-DEC, Declaration of Original Information
Submitted Pursuant to Section 21F of the Securities Exchange Act of
1934.
This form must be used by persons who provide the SEC with
information concerning a violation of the Federal securities laws and
who wish to be considered for a whistleblower award pursuant to the
SEC's whistleblower program. The information provided will enable the
Commission to determine your eligibility for payment of an award
pursuant to Section 21F of the Securities Exchange Act of 1934, 15
U.S.C. 78u-6. This information may be disclosed to Federal, state,
local, or foreign agencies responsible for investigating, prosecuting,
enforcing, or implementing the Federal securities laws, rules, or
regulations consistent with the confidentiality requirements set forth
in Section 21F(h)(2) of the Exchange Act, 15 U.S.C. 78u-6(h)(2), and
Sec. 240.21F-7 of this chapter. Furnishing the information is
voluntary, but a decision not to do so may result in you not being
eligible for award consideration.
Sec. 249.1802 Form WB-APP, Application for Award for Original
Information Submitted Pursuant to Section 21F of the Securities
Exchange Act of 1934.
This form must be used by persons making a claim for a
whistleblower award in connection with information provided to the SEC
or to another agency in a related action. The information provided will
enable the Commission to determine your eligibility for payment of an
award pursuant to Section 21F of the Securities Exchange Act of 1934,
15 U.S.C. 78u-6. This information may be disclosed to Federal, state,
local, or foreign agencies responsible for investigating, prosecuting,
enforcing, or implementing the Federal securities laws, rules, or
regulations consistent with the confidentiality requirements set forth
in Section 21F(h)(2) of the Exchange Act, 15 U.S.C. 78u-6(h)(2) and
Sec. 240.21F-7 of this chapter. Furnishing the information is
voluntary, but a decision not to do so may result in you not being
eligible for award consideration.
Note: The following Forms will not appear in the Code of Federal
Regulations.
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By the Commission.
Dated: November 3, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-28186 Filed 11-16-10; 8:45 am]
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