SEC Announces Final Rules Implementing The DoddFrank Whistleblower ProgramMay 26, 2011
Yesterday, the SEC announced the long-awaited final rules implementing the sweeping
whistleblower program included in the Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank”). While Dodd-Frank enacted a framework for the newwhistleblower program, it explicitly left it to the SEC to adopt specific rules and procedures for
implementing the program. In November 2010, the SEC released proposed rules and extensive
commentary and solicited comments, prompting a flurry of letters from business interests andwhistleblower advocates, especially over the question of whether the SEC should require thatwhistleblowers report wrongdoing through internal corporate compliance channels before
becoming eligible for bounties under the whistleblower program. The rules answer many of theuncertainties about the Dodd-Frank whistleblower program that have been lingering since theDodd-Frank Act was signed into law last summer.
THE DODD-FRANK WHISTLEBLOWER PROVISIONS
The whistleblower provisions of the Dodd-Frank Act, which amended both the Securities
Exchange Act of 1934 and the Commodity Exchange Act, are broad. They extend to people whoshare information with the Securities and Exchange Commission (“SEC”) or Commodity
Futures Trading Commission (“CFTC”) concerning any misconduct that falls within thejurisdiction of these agencies.1
The Dodd-Frank whistleblower provisions contemplate the SEC and/or CFTC providing cash
rewards for original information where such information leads to a judicial or administrative
action that results in monetary sanctions exceeding $1 million. Under these provisions,whistleblowers are eligible to receive between 10 and 30 percent of any penalty recovered in thejudicial or administrative action resulting in penalties exceeding $1 million. A key condition,
however, is that the tip is “derived from the independent knowledge or analysis of thewhistleblower” and was not known to the government from any other source. The SEC andCTFC have discretion to decide the exact amount of the award based on the “significance” ofthe information and the level of assistance provided by the whistleblower. Because the“significance” of the information in part drives the amount of a reward, the Act incentivizes
people to disclose the most serious conduct about which they have information. Dodd-Frankenables whistleblowers to report misconduct under the cloak of anonymity by reporting tips

1

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §§ 748, 922, 124 Stat. 1376,
1739–46, 1841–49 (2010).

Memorandum – May 26, 2011

through their lawyers and not disclosing their identities unless and until it has been confirmedthat they will receive an award.2
THE FINAL RULESOn May 25, 2011, the SEC adopted final rules to implement the Dodd-Frank whistleblower
program. The final rules are contained in a release (the “Release”) that is now posted on theSEC’s website, www.sec.gov.3
The new rules and the related commentary contained in the Release resolve a number of issues
that had been left in suspense pending the final SEC action. The rules provide thatwhistleblower status is predicated upon an individual or group of individuals (an organizationor other entity cannot have whistleblower status) possessing a reasonable belief that theinformation provided relates to a possible violation of the U.S. federal securities laws that hasoccurred, is ongoing, or is about to occur. The SEC rejected proposals by commentators that amateriality standard be imposed and instead the final rules contemplate that similar actions canbe aggregated to satisfy the $1 million monetary sanction requirement for recovery of awhistleblower award.
The final rules provide that a whistleblower will be protected by the anti-retaliation provisionsof the rules regardless of whether it is determined that the reported conduct constituted aviolation of the federal securities laws and regardless of whether the whistleblower is ultimately
determined to be entitled to an award under the program.
As enacted, Dodd-Frank extended eligibility for whistleblower rewards to a sweepingly broadclass of people. With some limited exceptions, the Act made anyone eligible for its bounty
program and anonymity protections. That meant that virtually anyone who had dealt with acompany ― including employees, suppliers, and customers in far-flung parts of the world ― wasa potential Dodd-Frank whistleblower. However, the SEC’s final rules exclude certain
individuals from receiving awards, including:Officers, directors, trustees, or partners of an entity, when those individuals learned of
information about the misconduct in question from another person or in connection
with the company’s processes for identifying potential illegal conduct.

Employees whose main job functions involve compliance or internal audit, or persons
who are employed by a firm hired to (a) perform audit or compliance functions or (b)investigate possible violations of the law.

2Id. Dodd-Frank also prohibits retaliation against an employee-whistleblower for providing information to theSEC or CFTC, and creates a federal cause of action under which an employee who has suffered retaliation can sue
his or her employer for reinstatement, back pay with interest and special damages. Id.

3Securities and Exchange Commission, Implementation of the Whistleblower Provisions of Section 21F of theSecurities Exchange Act of 1934, Release No. 34-64545, available at http://www.sec.gov/rules/final/2011/3464545.pdf.

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Employees of public accounting firms performing an engagement required by thesecurities laws, when the information relates to a violation by the client or the client’sofficers, directors, or employees.

There are two important limitations to these exclusions in the final rules:
These individuals are still eligible for a Dodd-Frank award if they have a reasonable
belief that disclosure to the SEC is necessary to prevent the company from engaging in
conduct that could cause substantial injury to investors, or if they have a reasonable
belief that the company is acting in a way that would interfere with an investigation of
the misconduct.

These individuals are eligible to report information as a whistleblower if 120 days havepassed since they escalated the information to their company’s audit committee,legal/compliance officer, or supervisor, or if 120 days have passed since they received
the information and the circumstances indicate that the audit committee,legal/compliance officer, or supervisor was already aware of the information.

In addition, individuals with a pre-existing contractual or legal duty to report their original
information to the SEC or to certain other authorities, or individuals who have such a duty
arising from a court or administrative order, are ineligible to receive an award under thewhistleblower program.
Despite the chorus of requests from companies over the last several months that the SEC adopt
rules requiring employees to report problems internally to management before qualifying forrewards under Dodd-Frank,4 the final rules do not require internal whistleblowing.
Nonetheless, the rules do try to encourage internal reporting in several ways:

4

Under the rules, a whistleblower who reports wrongdoing to the SEC within 120 days oflodging a complaint through internal corporate channels will be considered to haveprovided the information to the SEC as of the date of the original internal disclosure.

If a whistleblower reported original information internally before or at the same timethat the whistleblower reported it to the SEC, and the company later discloses to the SEC
the whistleblower’s information or the results of an investigation initiated by thewhistleblower’s information, and this information leads to a successful enforcement
action, the whistleblower will receive full credit for the information provided by thecompany and will be eligible for an award (even if the information the whistleblower

Earlier this month, a New York congressman proposed draft legislation that would amend the whistleblower
provisions of Dodd-Frank to require internal reporting as a prerequisite for an award. The proposal would also
require the SEC to notify a company that will be the subject of an enforcement action based on employee
whistleblower information before filing the action, thereby giving the company an opportunity to investigate andtake corrective action. The draft legislation would give the SEC discretion to grant an award of up to thirty percent
of monetary sanctions imposed in an enforcement action, but would remove the current requirement of an awardof at least ten percent. See Congressman Michael Grimm Legislative Proposal, Discussion Draft, available at
http://financialservices.house.gov/UploadedFiles/GRIMM_040_xml.pdf

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Memorandum – May 26, 2011

originally provided to the company would not have led, by itself, to a successful
enforcement action).
When deciding whether to increase the amount of a whistleblower’s award, the SEC willconsider whether the tipster reported through internal compliance channels and assisted in
any internal corporate investigation. Similarly, in reducing the amount of an award, theSEC will consider whether the whistleblower interfered with internal reporting systems or
made any false statements that hindered any investigation.

LOOKING AHEAD
The SEC’s final whistleblower rules will be effective 60 days after being submitted to Congressor published in the Federal Register, which has not yet occurred. But already, Dodd-Frank’sexpansive whistleblower program has imposed new challenges for companies that identify
wrongdoing within their ranks and that wish to position themselves for leniency in theresolution of the issues with regulators.
In announcing the new rules yesterday, the SEC chairwoman reported that Dodd-Frank’s
whistleblower provisions have already had a noticeable impact because “the quality of the tips
we have received has been better” since Dodd-Frank was enacted last summer. Indeed, the SEC
chairwoman added that she has “heard stories from our investigators about how
whistleblowers have saved us weeks of investigation time because of the specific, credible andtimely information they provided.”
Beyond enhancing internal compliance measures designed to identify misconduct, these newrules make it more important than ever before for companies to promptly investigate all claimsof wrongdoing and reinvigorate their internal whistleblower procedures. That way, companies
can maximize the opportunity, after remediating any problems, to self-report to regulators —all before a Dodd-Frank whistleblower gets to the government first.
***

This memorandum is for general informational purposes and should not be regarded as legal advice. Furthermore,
the information contained in this memorandum does not represent, and should not be regarded as, the view of anyparticular client of Simpson Thacher & Bartlett LLP. Please contact your relationship partner if we can be ofassistance regarding these important developments. The names and office locations of all of our partners, as well as
additional memoranda, can be obtained from our website, www.simpsonthacher.com.

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it arerendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication toany person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

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