Rob Vogel of Vogel, Slade & Goldstein Comments on SEC Proposed Rule

In December 2010, Rob Vogel of Vogel, Slade & Goldstein was part of a group that submitted a Comment on the SEC’s Proposed Rule for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934 (amended under Title IX of the Dodd-Frank bill). Under the new Whistleblower Provisions, a person who provides valuable information about securities law violations to the SEC can, under certain circumstances, receive a reward from the SEC ranging from 10 to 30 percent of the amount the SEC recovers in an enforcement action against the wrongdoer. The SEC issued a Proposed Rule implementing the Whistleblower Provisions in late 2010, and in response, attorney Rob Vogel and others met with SEC staff and submitted a Comment with a number of recommendations and suggestions. In a Final Rule published on May 25, 2011, the SEC extensively referred to the Comment on a wide range of issues and adopted virtually all of its recommendations.

In its Final Rule, the SEC lowered the eligibility standards for getting rewards under the Dodd-Frank whistleblower provisions, both for whistleblowers who provide information that leads the government to open a new investigation and for those who provide significant new information after the government has already opened an investigation. The Final Rule specifically took note of the Comment’s hypothetical scenario in which two people come forward with information: one with enough information to prompt the SEC to open an investigation but not provide a roadmap to the case, and the other with a “roadmap” where the SEC, having already begun to investigate, does not consider the new information “essential to the success of the action.” Under the earlier proposed version of the Rule, the SEC would have considered neither person to be a “whistleblower” eligible for a reward. Under the Final Rule, however, either whistleblower would be eligible. A whistleblower will be eligible for a reward if the information is “specific, credible and timely” enough to cause the SEC to launch a new investigation or a new branch of an existing investigation; or, if an investigation is already open, the new information makes a “significant” contribution to the success of the action.

The SEC also cited the Comment’s view when it rejected industry requests to require potential whistleblowers to report misconduct through internal company compliance mechanisms before turning to the SEC. The Comment pointed out that many potential whistleblowers, if required first to report misconduct to internal compliance, will simply opt not to report the misconduct at all — especially if they work for companies where it is widely understood that the compliance department does not protect internal whistleblowers or is “an arm of a corrupt management team.”

In its Final Rule, as recommended by the Comment, the SEC lengthened a window (from 90 to 120 days) for a whistleblower to report misconduct to the SEC after a whistleblower first reports the misconduct to internal company compliance officials. The longer window gives the whistleblower more time to see whether, in fact, the company is trying to rectify the misconduct.

Finally, in response to suggestions in the Comment, the Final Rule simplifies and streamlines the mechanisms through which whistleblowers can establish their eligibility for an SEC reward and, ultimately, if the SEC has successfully pursued an enforcement action, claim such an award.