SEC / CFTC Whistleblower Provisions
History and Purpose
The recent trend toward more expansive whistleblower protections and incentives had its roots in the massive corporate scandals of more than a decade ago: Enron, Arthur Anderson, WorldCom and Tyco. Public outrage over the greed and corruption exhibited by these companies led to the passage of the Sarbanes-Oxley Act in 2002 (known as SOX), which included whistleblower provisions to protect employees who reported corporate fraud from retaliation by their employers. Not surprisingly, the success of the federal False Claims Act (FCA) in recovering billions of dollars stolen from the government as a result of fraud and false claims has led to the enactment of additional whistleblower award provisions.
A wave of corporate whistleblower protections was introduced with the infusion of government funds into the private sector after the meltdown of the financial and housing markets. In 2008, the Troubled Asset Relief Program (TARP), also known as the “bailout”, involved a direct transfer of federal funds into major financial institutions. The government set up a hotline and website for the reporting of fraud by those receiving TARP funds, which fraud is generally actionable under the FCA.
In 2009, the “stimulus” or American Recovery and Reinvestment Act (ARRA), was passed to provide funds to revitalize the economy and create jobs. Section 1553 of ARRA, known as the McCaskill Amendment, is an anti-retaliation provision that protects whistleblowers who report fraud, waste or mismanagement of ARRA funds. Also in 2009, the Fraud Recovery and Enforcement Act (FERA) passed, which included changes and clarifications of the FCA.
In 2010, two additional pieces of legislation, each with whistleblower provisions, were enacted: health care reform, the Patient Protection and Affordable Care Act (PPACA, also pejoratively known as Obamacare); and financial reform, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). PPACA included changes to the FCA, and Dodd-Frank strengthened some existing whistleblower provisions (in SOX as well as the FCA) and added two new whistleblower incentive programs: one related to the SEC and the other for claims to the Commodities Futures Trading Commission (CFTC).
Dodd-Frank also created a specific whistleblower protection program for those working in the financial services industry, to encourage insiders to come forward with information related to fraudulent conduct in the sale or marketing of consumer financial products or services. This program does not include incentives or awards for reporting fraud in the financial services industry, but to the extent the fraud involves government funds, such as those provided by TARP, the provisions of the FCA apply
SEC and CFTC Whistleblower Provisions
After the Bernie Madoff scandal, and largely as a result of that scandal, Dodd-Frank created new Securities Whistleblower Incentives and Protection Law and Commodities Whistleblower Incentives and Protection Law. The preexisting SEC whistleblower program was ineffective; it was limited to insider trading complaints and awards were capped at 10%. No similar program applied to the commodities market. The new law provides that, for the voluntary provision of “original information” that leads to collected monetary sanctions of greater than one million dollars, the SEC or CFTC must make an award “in an aggregate amount equal to” not less than 10% and not more than 30% of such sanctions. After a lengthy comment period and much conflict, the SEC released final rules implementing the new SEC whistleblower program on May 25, 2011, and the CFTC released final rules implementing its whistleblower program on August 25, 2011.
Potential SEC whistleblowers include employees of public companies and their private affiliates and subsidiaries whose reports lead to the recovery of monetary sanctions in excess of one million dollars. The Act specifically excludes a number of categories of people, such as those who have a pre-existing duty to report to SEC, and lawyers, compliance and internal audit personnel in most instances.
Protected activities under the SEC whistleblower provisions include providing information about violations to the SEC; initiating, testifying in, assisting in any SEC investigation or action; or making disclosures under SOX or any laws, rules or regulations under the SEC’s jurisdiction, as long as whistleblower has a reasonable belief that the information relates to a possible securities law violation. Retaliation actions may be filed directly in federal court within 6 years after the date of the violation, or within 3 years after the date material facts were known or should have been known to the complainant, but in no event more than 10 years after the violation occurred. Available remedies for SEC whistleblowers include reinstatement with seniority; the recovery of up to double back pay, with interest; and attorneys’ fees and other related litigation expenses.
Whistleblower awards and protections in Dodd-Frank included in the Commodities Exchange Act (CEA), resemble, but do not mirror, those related to the SEC. For example, the CFTC program is not as limited as the SEC program in who can be a whistleblower. The CFTC whistleblower must sue in federal court for retaliation within two years after the retaliation. In addition, the remedies available for CFTC whistleblowers are not identical to those available for SEC whistleblowers. CFTC whistleblowers may obrain reinstatement, back pay and interest, compensation for special damages, litigation costs, expert witness fees, and reasonable attorneys’ fees.
While a whistleblower’s internal reporting to an entity’s whistleblower, compliance or legal system is not a required step before filing an SEC or CFTC whistleblower complaint, such reporting is a factor the SEC or CFTC may consider to increase the award available to a whistleblower. Conversely, interference with such internal systems may be considered to decrease an award.
To be eligible for an award, a claim on prescribed forms must be filed with the SEC or CFTC Whistleblower Office, after which the agency determines whether to prosecute fraud based upon the whistleblower’s information; the agency’s monetary recovery, if any, forms the basis for an award. The whistleblower is not a party to any lawsuit, as he or she would be under a False Claims Act. The SEC or CFTC determines the amount of the whistleblower’s award, within the available range. The final rules provide limited rights of appeal.