|Copyright:||(c) 2010 Mondaq, Source: The Financial Times Limited|
|Source:||Financial Times Limited|
The new whistleblower program will be codified as Section 21F of the Securities Exchange Act of 1934. In a nutshell, it empowers the
Not only does Dodd-Frank’s whistleblower provision arm the
According to the legislation, whistleblower reports must provide “original information,” i.e., information that is: 1) derived from the whistleblower’s independent knowledge or analysis; 2) not known to the
Dodd-Frank also proscribes retaliation against whistleblowers and its protections in this regard exceed those provided under the Sarbanes-Oxley Act. Specifically, Dodd-Frank provides a new federal cause of action for persons alleging retaliation for protected whistleblower activity. The Sarbanes-Oxley Act protections require that initial retaliation claims be filed at the administrative level. However, under Dodd-Frank, those retaliated against can bring an action directly in federal district court and, if successful, are entitled to reinstatement, double back pay, attorneys fees and court costs.
Needless to say, the whistleblower provisions have huge implications for corporate compliance, the most significant being: 1) how to ensure that to the extent there is a violation of the securities laws, an internal whistleblower will take advantage of internal reporting mechanisms as opposed to bypassing such mechanisms and immediately going to the
THE PROPOSED RULE
Key Provisions of Regulation 21F
“Whistleblower” is limited to natural persons (although they may provide information alone or jointly with others) who provide information to the
“Original Information” means information based on the whistleblower’s independent knowledge or analysis, not already known to the
information protected by the attorney-client privilege or learned during the course of legal representation; information learned by independent auditors during an audit required by the securities laws if the information relates to a violation by the engagement client or its directors, officers or other employees. However, this exclusion would not apply to the client’s employees, even if they interact with the outside auditors; information learned by employees with a legal or contractual duty to report to governmental authorities, self-regulatory organizations or the PCAOB. For example, both a government contracting official who discovers and reports fraud in a government contract and an officer or employee of a city pension fund who discovers fraud in the management of the fund would not be entitled to whistleblower status; and information learned by a person with legal, compliance, audit, supervisory or other governance responsibilities for the entity. However, this exclusion comes with a caveat – the exclusion is not available if the entity does not disclose the information within a “reasonable time” or acts in “bad faith.” “Reasonable time” is dependent on the particular facts. “Bad faith” includes conducting sham internal investigations, failing to preserve evidence and interfering with witnesses. Significantly, and in a nod to the importance of internal reporting mechanisms, a whistleblower may still be deemed to have provided original information if the whistleblower initially reports the information through an internal corporate mechanism, and the date of submission to the
“Related Action” leading to a bounty must be based upon the same original information that led to the
“Voluntarily” means the information is provided when there is no formal or informal request, inquiry or demand from the
The proposed regulation does contain a few safeguards aimed to insure the integrity of whistleblowers. An anonymous whistleblower must be represented by counsel who must certify that the whistleblower’s identity has been verified. Information must be submitted under penalty of perjury.4 Whistleblowers cannot get immunity from
As noted earlier, tension exists between the whistleblower program and the encouragement of strong corporate governance programs. The
the intersection between proposed Rule 21F and established internal procedures for the receipt, investigation and response to complaints about potential violations of law; whether the definition of whistleblower should be limited to those who provide information about potential legal violations “by another person,” thereby excluding those who report their own potential violations; whether the 90-day deadline for submitting a potential violation to the
What can an impacted organization do now? First, take advantage of the
1 Prior to Dodd-Frank the
2 For example, in 2010
3 Use of the term “potential violation” is intentional to ensure the anti-retaliation provisions of Dodd-Frank apply irrespective of whether the whistleblower satisfies all conditions to qualify for an award and irrespective of an ultimate determination of whether the conduct reported constitutes a securities law violation.
4 The U.S. Attorney for the
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