[Federal Register Volume 76, Number 113 (Monday, June 13, 2011)]
[Rules and Regulations]
[Pages 34300-34384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-13382]
[[Page 34299]]
Vol. 76
Monday,
No. 113
June 13, 2011
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Securities Whistleblower Incentives and Protections; Final Rule
Federal Register / Vol. 76 , No. 113 / Monday, June 13, 2011 / Rules
and Regulations
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-64545; File No. S7-33-10]
RIN 3235-AK78
Securities Whistleblower Incentives and Protections
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Final rule.
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SUMMARY: The Commission is adopting rules and forms to implement
Section 21F of the Securities Exchange Act of 1934 (``Exchange Act'')
entitled ``Securities Whistleblower Incentives and Protection.'' 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 who provide the Commission
with information about possible securities violations.
DATES: Effective Date: August 12, 2011.
FOR FURTHER INFORMATION CONTACT: Sean X. McKessy, Securities and
Exchange Commission, Division of Enforcement, 100 F Street, NE.,
Washington, DC 20549, Tel. (202) 551-4790, Fax (703) 813-9322.
SUPPLEMENTARY INFORMATION: We are adopting new rules 21F-1 through 21F-
17, and new Forms TCR and WB-APP, under the Securities Exchange Act of
1934.
Table of Contents
I. Background and Summary
II. Description of the Rules
A. Rule 21F-1--General
B. Rule 21F-2--Definition of a Whistleblower
C. Rule 21F-3--Payment of Award
D. Rule 21F-4--Other Definitions
1. Voluntary Submission of Information
2. Original Information
3. Definition of Independent Knowledge
4. Definition of Independent Analysis
5. Rules 21F-4(b)(i) Through (vi)--Exclusions From Independent
Knowledge and Independent Analysis
(a) Attorney-client privilege and other attorney conduct
(b) Responsible Company Personnel, Compliance Processes and
Independent Public Accountants
(i) Proposed Rule 21F-4(b)(4)(iii)
(ii) Proposed Rules 21F-4(b)(iv) and (v)
(iii) Final Rules 21F-4(b)(4)(iii) and (v)
a. Rules 21F-4(b)(4)(iii)(A) Through (C)
b. Rule 21F-4(b)(4)(iii)(D)
c. Rule 21F-4(b)(4)(v)
(c) Conviction for Violations of Law
(d) Rule 21F-4(b)(4)(vi)--Information Obtained From Excluded
Persons
6. Original Source
7. Original Source; Additional Information
8. Original Source: Lookback
9. Information That Leads to a Successful Enforcement
10. Action
11. Monetary Sanctions
12. Appropriate Regulatory Agency
13. Appropriate Regulatory Authority
14. SRO
E. Rule 21F-5--Amount of Award
F. Rule 21F-6--Criteria for Determining Amount of Award
G. Rule 21F-7--Confidentiality of Submissions
H. Rule 21F-8--Eligibility
I. Rule 21F-9--Procedures for Submitting Original Information
J. Rule 21F-10--Procedures for Making a Claim Based on a
Successful Commission Action
K. Rule 21F-11--Procedure for Making a Claim Based on a
Successful Related Action
L. Rules 21F-12 & 13--Materials That May Be Used as the Basis
for an Award Determination and That May Comprise the Record on
Appeal; Right of Appeal
M. Rule 21F-14--Procedures Applicable to Payment of Awards
N. Rule 21F-15--No Amnesty
O. Rule 21F-16--Awards to Whistleblowers Who Engage in Culpable
Conduct
P. Rule 21F-17--Staff Communications With Whistleblowers
III. Paperwork Reduction Act
IV. Economic Analysis
V. Regulatory Flexibility Act Certification
VI. Statutory Authority
I. Background and Summary
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 the successful enforcement of an
action brought by the Commission that results in monetary sanctions
exceeding $1,000,000.
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\1\ Public Law 111-203, Sec. 922(a), 124 Stat 1841 (2010).
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On November 3, 2010, we proposed Regulation 21F to implement new
Section 21F.\2\ The rules contained in proposed Regulation 21F defined
certain terms critical to the operation of the whistleblower program,
outlined the procedures for applying for awards and the Commission's
procedures for making decisions on claims, and generally explained the
scope of the whistleblower program to the public and to potential
whistleblowers.
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\2\ Proposed Rules for Implementing the Whistleblower Provisions
of Section 21F of the Securities and Exchange Act of 1934, Release
No. 34-63237 (``Proposing Release'').
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We received more than 240 comment letters and approximately 1300
form letters on the proposal.\3\ Commenters included individuals,
whistleblower advocacy groups, public companies, corporate compliance
personnel, law firms and individual lawyers, academics, professional
associations, nonprofit organizations and audit firms. The comments
addressed a wide range of issues. Many commenters provided views on an
issue we highlighted in the proposing release--the interplay of the
whistleblower program and company internal compliance processes.
Commenters also expressed a range of views on other significant issues,
including the proposed exclusions from award eligibility for certain
categories of individuals or types of information, the availability of
awards to culpable whistleblowers, the procedures for submitting
information and making a claim for an award, and the application of the
statutory anti-retaliation provision.
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\3\ The public comments we received are available at http://www.sec.gov/comments/s7-33-10/s73310.shtml. In addition, to
facilitate public input on the Dodd-Frank Act, the Commission
provided a series of e-mail links, organized by topic, on its Web
site at http://www.sec.gov/spotlight/regreformcomments.shtml.
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As discussed in more detail below, we have carefully considered the
comments received on the proposed rules in fashioning the final rules
we adopt today. We have made a number of revisions and refinements to
the proposed rules. Taken together, we believe these changes will
better achieve the goals of the statutory whistleblower program and
advance effective enforcement of the Federal securities laws. The
revisions of each proposed rule are described in more detail throughout
this release, but the following are among the most significant:
Internal Compliance: A significant issue discussed in the
Proposing Release was the impact of the whistleblower program on
companies' internal compliance processes. While we did not propose a
requirement that whistleblowers report through internal
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compliance processes as a prerequisite to eligibility for an award, we
requested comment on this topic, and we included in the proposed rules
several other elements designed to encourage potential whistleblowers
to utilize internal compliance. Commenters were sharply divided on the
issues raised by this topic. After considering these different
viewpoints, we have determined not to include a requirement that
whistleblowers report violations internally, but we have made
additional changes to the rules to further incentivize whistleblowers
to utilize their companies' internal compliance and reporting systems
when appropriate.
[cir] With respect to the criteria for determining the amount of an
award, the final rules expressly provide: first, that a whistleblower's
voluntary participation in an entity's internal compliance and
reporting systems is a factor that can increase the amount of an award;
and, second, that a whistleblower's interference with internal
compliance and reporting is a factor that can decrease the amount of an
award.
[cir] The final rules contain a provision under which a
whistleblower can receive an award for reporting original information
to an entity's internal compliance and reporting systems, if the entity
reports information to the Commission that leads to a successful
Commission action. Under this provision, all the information provided
by the entity to the Commission will be attributed to the
whistleblower, which means that the whistleblower will get credit--and
potentially a greater award--for any additional information generated
by the entity in its investigation.
[cir] The final rule extends the time for a whistleblower to report
to the Commission after first reporting internally and still be treated
as if he or she had reported to the Commission at the earlier reporting
date. We proposed a ``lookback period'' of 90 days after the
whistleblower's internal report, but in response to comments, we are
extending this period to 120 days in the final rules.
Procedures for Submitting Information and Claims: The
proposed rules set forth a two-step process for submitting information,
which required the submission of two different forms. In response to
comments that urged us to streamline the procedures for submitting
information, we have adopted a simpler process, combining the two
proposed forms into a single Form TCR that would be submitted by a
whistleblower under penalty of perjury. With respect to the claims
application process, we have made one section of that form optional to
make the form less burdensome. We also describe in greater detail below
several other features of the process to assist whistleblowers that we
expect will become part of the Office of the Whistleblower's standard
practice.
Aggregation of smaller actions to meet the $1,000,000
threshold: The proposed rules stated that awards would be available
only when the Commission had successfully brought a single judicial or
administrative action in which it obtained monetary sanctions of more
than $1,000,000. In response to comments, we have provided in the final
rules that, for purposes of making an award, we will aggregate two or
more smaller actions that arise from the same nucleus of operative
facts. This will make whistleblower awards available in more cases.
Exclusions from award eligibility for certain persons and
information: The proposed rules set forth a number of exclusions from
eligibility for certain categories of persons and information. In
response to comments suggesting that some of these exclusions were
overly broad or unclear, we have revised a number of these provisions.
Most notably, the final rules provide greater clarity and specificity
about the scope of the exclusions applicable to senior officials within
an entity who learn information about misconduct in connection with the
entity's processes for identifying, reporting, and addressing possible
violations of law.
II. Description of the Rules
A. Rule 21F-1--General
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 Office of the Whistleblower administers
the whistleblower program. In addition, the 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. Rule 21F-2--Definition of a Whistleblower
a. Proposed Rule
As proposed, Rule 21F-2(a) defined 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.
Under the proposed rule, a company or another entity could not qualify
as a whistleblower.
Paragraph (b) of the proposed rule stated that the anti-retaliation
protections set forth in Section 21F(h)(1) of the Exchange Act would
apply irrespective of whether a whistleblower satisfied all the
procedures and conditions to qualify for an award under the
Commission's whistleblower program. Similarly, the protections against
retaliation applied to any individual who provided information to the
Commission about a potential violation of the securities laws.
Paragraph (c) of the proposed rule stated that, to be eligible 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.
b. Comments Received
Commenters advanced a number of suggestions to refine the
definition of ``whistleblower.'' Many commenters agreed that the
definition of ``whistleblower'' should not turn on whether a violation
of the securities laws is ultimately adjudged to have occurred,\4\ but
expressed differing opinions on our proposal to use the term
``potential violation.'' One commenter agreed that the whistleblower
definition should include the term ``potential violation'' because this
would allow broad application of the anti-retaliation measures in
Section 21F.\5\ Several other commenters recommended that the term
``potential violation'' should be coupled with a requirement that the
individual have a ``reasonable belief'' or ``good faith belief'' that
the information relates to a securities law violation.\6\ Some
commenters suggested instead of the term ``potential violation,'' we
should use the terms ``probable violation,'' ``likely violation,'' or
``claimed violation.'' \7\
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\4\ See, e.g., letters from Committee on Federal Regulation of
Securities, Section of Business Law, American Bar Association
(``ABA''); Project of Government Oversight (``POGO''); Jones Day;
Wells Fargo Advisors, LLC (``Wells Fargo''); and Society of
Corporate Governance Professionals.
\5\ See letter from POGO.
\6\ See, e.g., letters from Jones Day; Wells Fargo; and Morgan
Lewis. As discussed further below in the text, commenters asserted
that a ``reasonable belief'' or ``good faith'' standard is necessary
to prevent employees from making bad-faith allegations of
retaliation.
\7\ See, e.g., letters from ABA; Goodwin Procter.
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On other aspects of the definition of whistleblower, one commenter
recommended that we clarify that a ``violation of the securities laws''
relates only to the Federal securities laws and not to violations of
state or foreign
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securities laws.\8\ A few commenters recommended that a whistleblower
be limited to a person who provided information relating to a
``material'' violation of the securities laws.\9\
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\8\ See letter from ABA.
\9\ See, e.g., letters from ABA; and Society of Corporate
Secretaries and Governance Professionals (``Society of Corporate
Secretaries'').
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Two commenters disagreed with the proposed rule's limiting
whistleblower status to natural persons,\10\ suggesting that non-
governmental organizations and/or worker representatives, including
labor unions, should be permitted to bring claims.\11\
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\10\ See, e.g., joint letter from Voices for Corporate
Responsibility, Change to Win, National Employment Lawyers
Association, Government Accountability Project (``VOICES''); and
Mike G. McCluir.
\11\ See letter from VOICES.
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A number of commenters responded to our request for comment on
whether we should limit the definition of ``whistleblower'' to a person
who provides information regarding violations of the securities laws
``by another person''--some favoring this,\12\ others opposing it.\13\
Several of the commenters recommended that we limit the whistleblower
definition based on an individual's relative culpability for the
reported violation. For example, some commenters stated that the
definition of ``whistleblower'' should cover only individuals who
report violations by another person, and who did not participate in or
facilitate the violations.\14\
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\12\ See letters from Chris Barnard; Thompson Hine LLP; William
A. Jacobson, Angel Prado, and Yaozhi Ye (``Cornell Securities Law
Clinic''); Evolution Petroleum Corp.; Securities Industry and
Financial Markets Association (``SIFMA''); The Washington Legal
Foundation; Morgan Lewis; Continewity LLC; Davis Polk & Wardwell LLP
(``Davis Polk''); Oppenheimer Funds.
\13\ See, e.g., letters from Grohovsky, Vogel, and Lambert
(``Grohovsky Group''); Peter van Schaick.
\14\ See, e.g., joint letter from Americans for Limited
Government; Ryder Systems, Inc.; Financial Services Institute, Inc.;
U.S. Chamber of Commerce; Verizon; and White & Case, LLP (``Chamber
of Commerce Group'').
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Commenters made several suggestions relating specifically to the
scope of the anti-retaliation protections. Among other things,
commenters recommended that we expressly state in the rules that the
anti-retaliation provisions do not apply to an individual if (1) he
files a false, fraudulent, or bad faith and meritless submission; \15\
(2) he lacks a good faith or reasonable belief of a violation; \16\ or
(3) the submission does not evince a ``reasonable likelihood of a
violation of securities laws.'' \17\ Another commenter suggested the
anti-retaliation provisions should only apply to those who qualify for
an award.\18\
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\15\ See, e.g., letters from Connolly & Finkel; National
Association of Corporate Directors (``NACD''); Investment Company
Institute (``ICI''); Valspar; Auditing Standards Committee of the
Auditing Section of the American Accounting Association (``Auditing
Standards Committee''); U.S. Chamber of Commerce Center for Capital
Markets Competitiveness and the U.S. Chamber of Institute for Legal
Reform (``CCMC''); joint letter from General Electric Company,
Google, Inc., Honeywell, Inc., JPMorgan Chase & Co., Microsoft
Corporation and Northrop Grumman Corporation (``GE Group''); Jones
Day; TECO Energy. Two commenters suggested that the Commission
should consider ``whether it can apply additional sanctions'' to any
person who uses the whistleblower process in bad faith.'' See joint
letter from the Financial Services Roundtable and the American
Bankers Association (``Financial Services Roundtable''); letter from
TECO Energy.
\16\ See letters from Chris Barnard; Paul Hastings.
\17\ See letter from Goodwin Proctor.
\18\ See letter from NACD (commenting that not limiting anti-
retaliation protection to those who satisfy the conditions for an
award ``opens the door for employees to submit fake allegations that
may cause reputational harm to the company and/or unfairly embarrass
corporate employees and leadership'').
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Several commenters proposed that the anti-retaliation provisions
should categorically exempt a company's adverse action against an
employee based on factors other than whistleblower status,\19\ such as
engaging in culpable conduct,\20\ failing to comply with the reporting
requirements of a company's internal compliance programs,\21\ or
violating a professional obligation to hold information in
confidence.'' \22\ One commenter explained that, without a categorical
exemption, the broad anti-retaliation provisions of the statute could
prompt a ``wave of litigation'' alleging retaliation in such
circumstances.\23\
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\19\ See letters from Thompson Hine; Americans for Limited
Government (``ALG''); AT&T; Equal Employment Advisory Council
(``EEAC''); Connolly & Finkel; ICI; GE Group; Society of Corporate
Secretaries; Association of Corporate Counsel; Financial Services
Roundtable; Davis Polk; ABA; joint letter from Allstate Insurance
Company, American Institute of Certified Public Accountants,
American Insurance Association, Americans for Limited Government,
Association of Corporate Counsel, AT&T, Center for Business Ethics,
Dover Corporation, FedEx Corporation, Financial Services Institute,
Inc., Pharmaceutical Research and Manufacturers of America, Retail
Industry Leaders Association, Royal Caribbean Cruises Ltd, Ryder
Systems, Inc., UPS, U.S. Chamber of Commerce, U.S. Chamber of
Commerce Institute for Legal Reform, Verizon and White & Case, LLP
(``Allstate Group'').
\20\ See letters from ALG; Allstate Group; Morgan Lewis; Davis
Polk; ABA.
\21\ See letters from Thompson Hine; see also letters from ALG;
Allstate Group; Connolly & Finkel; NACD; TECO Energy; Association of
Corporate Counsel.
\22\ See letter from the ABA.
\23\ See letter from ALG; see also letter from Allstate Group.
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Commenters made a series of other suggestions related to the scope
and enforceability of the anti-retaliation protections, including that
we should: (1) Clarify our authority to bring enforcement actions based
on retaliation; \24\ (2) provide that the anti-retaliation remedies may
not be waived by any agreement, policy, or condition of employment;
\25\ and (3) exclude from anti-retaliation protection employees whose
submissions are based on information that is either publicly
disseminated or which the employee should reasonably know is already
known to the company's board of directors or chief compliance officer,
a court, the Commission or another governmental entity.\26\
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\24\ Letter from Alex Hoover; see also letters from Bryan
Maloney; National Coordinating Committee for Multiemployer Plans
(``NCCMP'').
\25\ See letter from Kaiser Saurborn & Mair.
\26\ See letter from ABA.
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c. Final Rule
In response to the comments, we have made several changes to the
definition of whistleblower in Rule 21F-2(a) and the application of the
anti-retaliation provisions in Rule 21F-2(b) to more precisely track
the scope of Section 21F(h)(1). We are adopting Rule 21F-2(c) as
proposed, but have re-designated it as Rule 21F-2(a)(2).
With respect to the definition of whistleblower, we agree with
those commenters who suggested that the term ``potential violation''
may be imprecise, and thus in the final rule have changed this to
``possible violation'' that ``has occurred, is ongoing, or is about to
occur.'' We believe that this modification provides greater clarity
concerning when an individual who provides us with information about
possible violations, including possible future violations, of the
securities laws qualifies as a whistleblower. An individual would meet
the definition of whistleblower if he or she provides information about
a ``possible violation'' that ``is about to occur.''
Although some commenters recommended that we use the terms
``probable violation'' or ``likely violation,'' we have decided to use
the term ``possible violation.'' In our view, this requires that the
information should indicate a facially plausible relationship to some
securities law violation--frivolous submissions would not qualify for
whistleblower status. We believe that a higher standard requiring a
``probable'' or ``likely'' violation is unnecessary, and would make it
difficult for the staff to promptly assess whether to accord
whistleblower status to a submission.
In the final rule, the definition of whistleblower clarifies that
the submission must relate to a violation of
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the Federal securities laws, or a rule or regulation promulgated by the
Commission. An individual who submits information that relates only to
a state law or foreign law violation would not satisfy the
whistleblower definition.
The final rule also clarifies that, to qualify as a whistleblower
eligible for the award program and the heightened confidentiality
provisions of Section 21F(h)(2) of the Exchange Act, an individual must
submit his or her information to the Commission in accordance with the
procedures set forth in Rule 21F-9(a).\27\ Rule 21F-9(a) establishes
procedures for an individual to mail, fax, or electronically submit to
us information relating to a possible securities law violation. As
proposed, our definition could have been misconstrued to apply to any
individuals who provide us with information relating to a securities
law violation, including individuals whom we subpoena and law
enforcement personnel from other governmental authorities. This result
would have been outside the intended scope of Section 21F.
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\27\ The statutory definition of ``whistleblower'' in Section
21F(a)(6) of the Exchange Act provides that the Commission may
``establish by rule or regulation'' the ``manner'' in which an
individual provides the Commission information so as to qualify as a
whistleblower for purposes of the awards program.
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We have not added a requirement that the information relate to a
``material'' violation of the securities laws. We believe that, rather
than use a materiality threshold barrier that might limit the number of
submissions to us, it is preferable for individuals to provide us with
any information they possess about possible securities violations
(irrespective of whether it appears to relate to a material violation)
and for us to evaluate whether the information warrants action.\28\ To
the extent that commenters advanced this suggestion as a way to prevent
individuals from abusing the anti-retaliation protections afforded by
Section 21F(h) of the Exchange Act, we believe this issue is
sufficiently addressed by the revisions to Rule 21F-2(b), discussed
further below. To the extent that commenters suggested this approach as
a way to reduce frivolous submissions, we believe our use of the term
``possible violation'' sufficiently addresses this concern.
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\28\ We do not expect potential whistleblowers to make a fact-
dependent materiality assessment.
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We have decided not to extend the definition of whistleblower
beyond natural persons because we believe that this is consistent with
the statutory definition, which provides that a whistleblower must be
an ``individual.'' The ordinary meaning of ``individual'' is ``natural
person,'' \29\ and nothing in the statutory text or legislative history
suggests a different meaning here. Although one commenter identified a
reference to ``individuals'' in the False Claims Act to argue that the
term should be read to extend beyond natural persons, we note that the
False Claims Act otherwise repeatedly refers to whistleblowers as
``persons'' (which ordinarily extends beyond natural persons),\30\ and
we believe this explains the different result under that Act.\31\
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\29\ See, e.g., Jove Engineering, Inc. v. I.R.S., 92 F.3d 1539,
1550-51 (11th Cir. 1996) (quoting Black's Law Dictionary 773 (6th
ed. 1996), and Webster's New Collegiate Dictionary 581 (8th ed.
1979)).
\30\ Compare 31 U.S.C. 3730(e)(4)(B) with id. 3730(b)(1) (``A
person may bring a civil action * * *''), and id. 3730(b)(4)(B)(5)
(``When a person brings an action * * *'').
\31\ The ABA made several additional recommendations to clarify
and/or narrow the definition of whistleblower. See letter from ABA.
Specifically, the ABA recommended that we: (1) Exclude from the
definition individuals who provide information that is ``clearly
stale (e.g., flawed disclosure in a ten-year old proxy statement);
(2) require as part of the definition that the individual have a
non-speculative ``basis in fact or knowledge'' to support the
potential securities law violation; and (3) exclude from the
definition individuals who provide information that is ``either
publicly disseminated [already] or which the employee should
reasonably know is already known to the company's board of directors
or chief compliance officer, a court or the Commission or another
governmental entity.'' With respect to clearly stale information, we
believe that this is already addressed by the requirement that the
information relate to a ``possible violation,'' because we view this
term as encompassing a requirement that the violation must be
potentially actionable, which would preclude plainly stale
violations. Similarly, we believe that the ``possible violation''
requirement excludes submissions that have no ``basis in fact or
knowledge.'' Finally, rather than addressing in the threshold
definition of whistleblower information that is already publicly
known, we have addressed this issue in Rule 21F-4 in the definition
of ``original information.''
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We have modified proposed Rule 21F-2(b)'s anti-retaliation
protections, which are now in Rule 21F-2(b)(1). We are also adding Rule
21F-2(b)(2), which expressly states that the Commission may enforce the
anti-retaliation provisions of Section 21F(h)(1) of the Exchange Act
and any rules promulgated thereunder.
Rule 21F-2(b)(1) provides that, for purposes of the anti-
retaliation protections afforded by Section 21F of the Exchange Act, an
individual is a whistleblower if (i) he possesses a reasonable belief
that the information he is providing relates to a possible securities
law violation (or, where applicable, to a violation of the provisions
set forth in 18 U.S.C. 1514A(a)) that has occurred, is ongoing, or is
about to occur, and (ii) he reports that information in a manner
described in Section 21F(h)(1)(A).
With respect to the first prong of this standard, the employee must
possess a ``reasonable belief that the information he is providing
relates to a possible securities law violation (or, where applicable,
to a violation of the provisions set forth in 18 U.S.C. 1514A(a)) \32\
that has occurred, is ongoing, or is about to occur.'' The ``reasonable
belief'' standard requires that the employee hold a subjectively
genuine belief that the information demonstrates a possible violation,
and that this belief is one that a similarly situated employee might
reasonably possess.\33\ We believe that requiring a ``reasonable
belief'' on the part of a whistleblower seeking anti-retaliation
protection strikes the appropriate balance between encouraging
individuals to provide us with high-quality tips without fear of
retaliation, on the one hand, while not encouraging bad faith or
frivolous reports, or permitting abuse of the anti-retaliation
protections, on the other.\34\ This approach is consistent with the
approach followed by various courts that have construed the anti-
retaliation provisions of other Federal statutes, including the False
Claims Act,\35\ to
[[Page 34304]]
require that a whistleblower have a reasonable belief that he or she is
reporting a violation of that statute even where the statute does not
expressly require such a showing.\36\
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\32\ This parenthetical reflects the fact that the anti-
retaliation protection afforded by Section 21F(h)(1)(A)(iii)
includes not only reports of securities law violations, but also
various other violations of Federal law (e.g., 18 U.S.C. 1341, 1343,
1344, and 1348).
\33\ See, e.g., Livingston v. Wyeth, Inc., 520 F.3d 344, 352
(4th Cir. 2008); Clover v. Total Sys. Servs., Inc., 176 F.3d 1346,
1351 (11th Cir. 1999).
\34\ See, e.g., Parker v. B&O R. Co., 652 F.2d 1012, 1020 (DC
Cir. 1981) (holding, in Title VII retaliation case, that ``[t]he
employer is sufficiently protected against malicious accusations and
frivolous claims by a requirement that an employee seeking the
protection of the opposition clause demonstrate a good faith,
reasonable belief that the challenged practice violates Title
VII''); McDonnell v. Cisneros, 84 F.3d 256, 259 (7th Cir.1996)
(``There is nothing wrong with disciplining an employee for filing
frivolous complaints''); Hindsman v. Delta Airlines, 2010 DOL Ad.
Rev. Bd. 58 LEXIS at *10 (ARB Jun. 30, 2010) (interpreting the anti-
retaliation provisions of the Wendell H. Ford Aviation Investment
and Reform Act, which explicitly excludes frivolous complaints and
those brought in bad faith, as requiring a ``reasonable belief'' by
the whistleblower that the violation of the statute has occurred).
\35\ See Fanslow v. Chi. Mfg, Ctr., 384 F.3d 469, 480 (7th Cir.
2004) (noting that several circuits had held that the relevant
inquiry to determine whether an employee's actions are protected
under the False Claims Act is whether ``(1) the employee in good
faith believes, and (2) a reasonable employee in the same or similar
circumstances might believe, that the employer is committing fraud
against the government'') (citing Moore v. Cal. Inst. of Tech., Jet
Propulsion Lab, 275 F.3d 838, 845 (9th Cir. 2002); Wilkins v. St.
Louis, 314 F.3d 927, 933 (8th Cir. 2002), and McNeil v. Empl. Sec.
Dep't, 2002 Wash. App. LEXIS 1900, at *15-*16 (Wash. Ct. App. Aug.
9, 2002) (same)).
\36\ See, e.g., Calhoun v. United States Dep't of Labor (``US
DOL''), 576 F.3d 201, 212 (4th Cir. 2009) (anti-retaliation
provisions of the Surface Assistance Transportation Act); Knox v.
U.S. DOL, 232 Fed. App. 255, 258-59 (4th Cir. 2007) (Clean Air Act);
Williams v. U.S. DOL, 157 Fed. Appx. 575-76 (4th Cir. 2005) (Toxic
Substances Control Act, Solid Waste Disposal Act and Clean Air Act);
see also Vinnett v. Mitsubishi Power Systems, 2010 DOL Ad. Rev. Bd.
LEXIS 69 at *12 (ARB Jul. 27, 2010) (Energy Reorganization Act
requires ``reasonable belief'' of violation); Carter v. Electrical
District No. 2 of Pinal County, 1995 DOL Sec. Labor LEXIS 153 (July
26, 1995) (requiring reasonable belief under anti-retaliation
provisions of environmental statutes). Other anti-retaliation
provisions, such as the anti-retaliation provisions enacted by
Section 806 the Sarbanes-Oxley Act of 2002, expressly contain a
``reasonable belief'' standard. See 18 U.S.C. 1514A(a).
---------------------------------------------------------------------------
The second prong of the Rule 21F-2(b)(1) standard provides that,
for purposes of the anti-retaliation protections, an individual must
provide the information in a manner described in Section 21F(h)(1)(A).
This change to the rule reflects the fact that the statutory anti-
retaliation protections apply to three different categories of
whistleblowers, and the third category includes individuals who report
to persons or governmental authorities other than the Commission.
Specifically, Section 21F(h)(1)(A)(iii)--which incorporate the anti-
retaliation protections specified in Section 806 of the Sarbanes-Oxley
Act, 18 U.S.C. 1514A(a)(1)(C)--provides anti-retaliation protections
for employees of public companies, subsidiaries whose financial
information is included in the consolidated financial statements of
public companies, and nationally recognized statistical rating
organizations \37\ when these employees report to (i) A Federal
regulatory or law enforcement agency, (ii) any member of Congress or
committee of Congress, or (iii) a person with supervisory authority
over the employee or such other person working for the employer who has
authority to investigate, discover, or terminate misconduct. However,
the retaliation protections for internal reporting afforded by Section
21F(h)(1)(A) do not broadly apply to employees of entities other than
public companies.\38\
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\37\ The anti-retaliation protections afforded by Section 806 of
the Sarbanes-Oxley Act have also been read to cover employees of
agents or contractors of public companies in certain situations. See
Klopfenstein v. PCC Holdings Corp, 2006 DOL Ad. Rev. Bd. LEXIS 50
(ARB May 31, 2006) (employee of a private subsidiary of a public
company was covered under Section 806 where private subsidiary acted
at direction of public company in taking adverse action against
complainant); Lawson v. FMR LLC, 724 F. Supp. 2d 167, 169 (D. Mass.
2010) (employees of private investment advisers to investment
companies were covered by Section 806), on appeal, No. 10-2240 (1st
Cir.).
\38\ In a few limited situations--reporting by employees of
subsidiaries and NRSRO's covered by SOX Section 806, and by
employees whose reports were required or protected under SOX or the
Exchange Act, see Section 21F(h)(1)(A)(iii)--internal reporting is
expressly protected.
---------------------------------------------------------------------------
In addition, Rule 21F-2(b)(1)(iii) provides that the retaliation
protections apply to a whistleblower irrespective of whether the
whistleblower is ultimately entitled to an award. This provision of the
rule restates a result compelled by the text of Section 21F(h)(1),
which on its face provides retaliation protection to whistleblowers
irrespective of whether they actually collect an award.\39\
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\39\ Indeed, providing whistleblowers anti-retaliation
protection only if they ultimately receive an award could unduly
deter whistleblowers from coming forward with information. Under
that approach, a whistleblower would not be protected from
retaliation if he or she had provided accurate information about the
employer's violation, but for some reason no successful Commission
action was brought or the whistleblower was not awarded a payment.
---------------------------------------------------------------------------
Rule 21F-2(b)(2) states that Section 21F(h)(1) of the Exchange Act,
including any rules promulgated thereunder, shall be enforceable in an
action or proceeding brought by the Commission. Because the anti-
retaliation provisions are codified within the Exchange Act, we agree
with commenters that we have enforcement authority for violations of
Section 21F(h)(1) by employers who retaliate against employees for
making reports in accordance with Section 21F.\40\
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\40\ Section 21F(h)(1)(B).
---------------------------------------------------------------------------
With regard to the other significant comments made regarding the
anti-retaliation provisions in Rule 21F-2(b), for the reasons set forth
below we find that it is either inappropriate or unnecessary to make
the modifications that those commenters recommended. Regarding the
comments that we should categorically provide that employees who make
whistleblower reports to us may be disciplined for reasons independent
of their whistleblowing activities, we think this is unnecessary. By
its terms, the statute only prohibits adverse employment actions that
are taken ``because of'' any lawful act by the whistleblower to provide
information; adverse employment actions taken for other reasons are not
covered. Moreover, there is a well-established legal framework for
making this factual determination on a case-by case basis,\41\ and we
see no indication that Congress intended to depart from this framework
here.\42\
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\41\ This framework involves burden-shifting analysis. See, e.g,
Roadway Express, Inc. v. U.S. DOL, 495 F.3d 477, 481-82 (7th Cir.
2007); Scott v. Metropolitan Health Corp., 234 Fed Appx. 341, 346
(6th Cir. 2007) (applying burden shifting analysis to retaliation
claim under the False Claims Act). See generally McDonnell Douglas
Corp. v. Green, 411 U.S. 792 (1973). It provides that (1) the
employee must first make a prima facie case of retaliation (that is,
that he or she engaged in protected activity, has suffered an
adverse employment action, and that the action was causally
connected to the protected activity), (2) the burden then shifts to
the employer to articulate a legitimate, non-retaliatory reason for
its employment decision, after which (3) the burden shifts to the
employee to show that the proffered legitimate reason is in fact a
pretext and that the job action was the result of the defendant's
retaliatory animus. E.g., Collazo v. Bristol-Myers Squibb Mfg, Inc.,
617 F.3d 39, 46 (1st Cir. 2010) (citations and quotations omitted).
While anti-retaliation claims brought under the Sarbanes-Oxley Act
of 2002 (``SOX'') (unlike with Section 21F) are governed by a
slightly different framework, under that framework the determination
of whether an employee was disciplined for retaliatory or legitimate
reasons is likewise a fact-bound inquiry. SOX claims are governed by
the procedures applicable to whistleblower claims brought under the
Wendell H. Ford Aviation Investment and Reform Act for the 21st
Century. See 18 U.S.C. 1514A(b)(2). Under that statute, ``the
employee bears the initial burden of making a prima facie showing of
retaliatory discrimination because of a specific act''; once the
employee makes that showing, ``[t]he burden then shifts to the
employer to rebut the employee's prima facie case by demonstrating
by clear and convincing evidence that the employer would have taken
the same personnel action in the absence of protected activity.''
See Day v. Staples, Inc., 555 F.3d 42, 53 (1st Cir. 2009).
\42\ We note that where Congress intended to categorically
exclude from anti-retaliation protections of certain statutes those
employees who, without any direction from the employer,
deliberatively committed violations of those statutes, it has
expressly said so. See., e.g., 33 U.S.C. 1367(d) (excluding such
employees from anti-retaliation protections of Federal Water
Pollution Control Act); 15 U.S.C. 2622(e) (TOSCA); 42 U.S.C. 6971(d)
(Solid Waste Disposal Act); 42 U.S.C. 7622(g) (Clean Air Act); 42
U.S.C. 9610(d) (CERCLA); 42 U.S.C. 5851(g) (Energy Reorganization
Act).
---------------------------------------------------------------------------
With regard to the comment expressing concern that entities might
require employees to waive their anti-retaliation rights under Section
21F, we believe that possibility is foreclosed by the Exchange Act.
Specifically, because Section 21F is codified in the Exchange Act, it
is covered by Section 29(a) of the Exchange Act, which specifically
provides that ``[a]ny condition, stipulation, or provision binding any
person to waive compliance with any provision of this title or any rule
or regulation thereunder * * * shall be void.'' \43\ Thus, under
Section 29(a), employers may not require employees to waive or limit
their anti-retaliation rights under Section 21F.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78cc(a).
---------------------------------------------------------------------------
C. Rule 21F-3--Payment of Award
a. Proposed Rule
Paragraphs (a) and (b) of Proposed Rule 21F-3 summarized the
statutory
[[Page 34305]]
requirements for payment of an award based on a covered action or a
related action. Paragraph (a) stated that, subject to the eligibility
requirements in the Regulation, 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) described the circumstances under which
the Commission would also pay an award to the whistleblower based upon
monetary sanctions that are collected from a ``related action.''
Payment based on the ``related action'' would 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.
Paragraph (c) of Proposed Rule 21F-3 explained 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 stated that the Commission would deny an award to a
whistleblower if the Commission determined that the criteria for an
award are not satisfied or if the Commission was unable to obtain
sufficient and reliable information about the related action.
Paragraph (d) of Proposed Rule 21F-3 provided that the Commission
would 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 action pursuant to its
whistleblower award program under section 23 of the Commodity Exchange
Act.\44\ Proposed Rule 21F-3(d) also provided 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.
---------------------------------------------------------------------------
\44\ See 7 U.S.C. 26.
---------------------------------------------------------------------------
b. Comments Received
We received a few comments on the proposed rule's treatment of
related actions.
One commenter objected to paragraph (c) to the extent that it would
preclude a recovery in situations where the Commission is unable to
obtain sufficient and reliable information about the related action to
make a conclusive determination of the whistleblower's contribution to
the success of the related action, suggesting instead that the rule
include a mechanism for inter-agency coordination to allow the
Commission to understand the whistleblower's contribution to the
related action.\45\ Another commenter challenged paragraph (c) because
it would preclude an award for a whistleblower in situations where the
Department of Justice or another entity pursues a successful action
based on a whistleblower's tip that the Commission forwarded, but the
Commission does not bring an enforcement action.\46\
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\45\ See letter from VOICES.
\46\ See letter from Stuart D. Meissner, LLC.
---------------------------------------------------------------------------
With respect to proposed paragraph (d) and the overlap with CFTC
actions, one commenter commended the Commission for clarifying that the
Commission will not make an award in a related action if the CFTC has
already made an award to the whistleblower on that action,\47\ while
another acknowledged that there should not be double recoveries, but
stated that there should be no automatic rule that would bar rewards
because the interaction of the Commission and CFTC programs can be
adjudicated on a case-by-case basis.\48\
---------------------------------------------------------------------------
\47\ See letter from Society of Corporate Secretaries.
\48\ See letter from the National Whistleblowers Center
(``NWC'').
---------------------------------------------------------------------------
c. Final Rule
After reviewing the comments, we have decided to adopt Rule 21F-3
substantially as proposed.\49\ With respect to related actions, we do
not believe that inter-agency coordination can always ensure that the
Commission will obtain ``sufficient and reliable information'' about a
whistleblower's contribution to the success of a related action, and
thus we continue to believe that there is a need for paragraph
(b)(2).\50\ We have not modified the rule to permit a whistleblower to
recover in a related action absent a successful Commission action,
because the statute expressly requires a successful Commission action
before there can be a ``related action'' upon which a whistleblower may
recover.\51\
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\49\ In the final rule, we have grouped proposed paragraphs (b)-
(d) together under the heading ``related actions,'' and renumbered
these paragraphs (b)(1)-(b)(3), respectively. We have also changed
the term ``appropriate regulatory agency'' to ``appropriate
regulatory authority'' to more closely comport with the terms of
Section 21F and to clarify that our rules regarding payment for
awards in connection with related actions govern actions brought by
other agencies, not Commission actions. See discussion below under
Rule 21F-4(g).
\50\ In cases where the Commission coordinates closely with an
entity that ultimately brings a related action, we anticipate that
Commission staff will know and will be able to provide information
about the whistleblower's contribution to the coordinated efforts.
We have added a reference to new Rule 21F-12(a)(5) which provides
that neither the Commission nor the Claims Review Staff is permitted
to rely upon any information received from the entity that brought
the related action if the entity has precluded us from also sharing
that information with a claimant. The reference to Rule 21F-12(a)(5)
makes clear that if the Commission is unable to receive sufficient
and reliable information that is available for the claimant's
review, the Commission will deny the claimant's related-action award
request.
\51\ See Section 21F(a)(5) of the Exchange Act, 15 U.S.C. 78u-
6(a)(5) (related action must be ``based upon the original
information * * * that led to the successful enforcement of the
Commission action'').
---------------------------------------------------------------------------
With respect to the interrelation with CFTC actions, we are
adopting the rule substantially as proposed because it provides
claimants with a clear statement of how the Commission will address any
issues that arise where a claimant pursues either a double recovery or
a ``second bite at the apple'' by filing an application for an award on
a related action after having already pursued an award on the same
action under the CFTC's whistleblower awards program.\52\ Our Proposing
Release had included the qualification that the issue must have been
``necessary'' to the CFTC's determination, but we believe this
requirement would have introduced unwarranted disputes over whether a
particular issue was actually necessary. Therefore, we have made a
slight modification to provide that the CFTC need only have decided the
issue against the award claimant.
---------------------------------------------------------------------------
\52\ Several comment letters suggested that a qui tam action
under the False Claims Act, 31 U.S.C. 3729 et seq, could qualify as
a ``related action.'' See, e.g., letter from VOICES. This is not
correct. A qui tam action is not brought by the Attorney General of
the United States as is required under the definition of ``related
action'' in Section 21F(a)(5) of the Exchange Act. In a qui tam
action, the relator ``bring[s]'' the action ``in the name of the
Government,'' see Vermont Agency of Natural Resources v. United
States ex rel. Stevens, 529 U.S. 765, 769 (2000), and thereafter the
Attorney General may ``elect to intervene and proceed with the
action,'' 31 U.S.C. 3730(b)(2), 3730(b)(4). Moreover, given that
Congress has specifically provided a 15-30% award for successful qui
tam plaintiffs, see 31 U.S.C. 3730(d)(1)-(2), we do not believe
Congress intended Section 21F of the Exchange Act to permit
additional recovery for the same action above what it specified in
the False Claims Act.
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[[Page 34306]]
D. Rule 21F-4--Other Definitions
Although the statute defines several relevant terms, Rule 21F-4
defines other 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.
1. Rule 21F-4(a)--Voluntary submission of information
a. Proposed Rule
Under Section 21F(b)(1) of the Exchange Act,\53\ whistleblowers are
eligible for awards only when they ``voluntarily'' provide original
information about securities violations to the Commission. Proposed
Rule 21F-4(a)(1) defined a submission as made ``voluntarily'' if a
whistleblower provided the Commission with information before receiving
any 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 was
relevant. The proposed rule covered both formal and informal requests.
Thus under the proposed rule, a whistleblower's submission would not be
considered ``voluntary'' if the whistleblower was contacted by the
Commission or one of the other authorities first, whether or not the
whistleblower's response was compelled by subpoena or other applicable
law.
---------------------------------------------------------------------------
\53\ 15 U.S.C. 78u-6(b)(1).
---------------------------------------------------------------------------
As our Proposing Release explained, this approach was intended to
create a strong incentive for whistleblowers to come forward early with
information about possible violations of the Federal securities laws,
rather than wait to be approached by investigators. For the same
reasons, Proposed Rule 21F-4(a)(2) provided that a whistleblower's
submission of documents or information would not be deemed
``voluntary'' if the documents or information were within the scope of
a prior request, inquiry, or demand to the whistleblower's employer,
unless the employer failed to make production to the requesting
authority in a timely manner.
Proposed Rule 21F-4(a)(3) provided that a submission also would not
be considered ``voluntary'' if the whistleblower was under a pre-
existing legal or contractual duty to report the securities violations
to the Commission or to one of the other designated authorities.
b. Comments Received
Commenters had diverse perspectives on our proposal to require that
whistleblowers come forward before they receive either a formal or
informal request or demand from the Commission or one of the other
designated authorities about any matter relevant to their submission.
Some commenters believed that our proposed rule was too restrictive.
For example, one commenter urged that all information provided by a
whistleblower should be treated as ``voluntary'' until the
whistleblower is testifying under compulsion of a subpoena.\54\ Another
commenter suggested that persons who are first contacted by an
authority should remain eligible for awards if they provide information
about transactions or occurrences beyond the specific parameters of the
request.\55\ A third commenter expressed concern that our proposed rule
could have the effect of barring whistleblowers in cases where the
whistleblower's information is arguably ``relevant'' to a general
informational request from an authority, even though the authority is
not focused on the issue on which the whistleblower might report.\56\
---------------------------------------------------------------------------
\54\ See letter from NWC.
\55\ See letter from Bijan Amini.
\56\ See letter from Taxpayers Against Fraud (``TAF''). As an
example, this commenter pointed out that a request by a municipal
bond issuer for completed transaction documents from a Guaranteed
Investment Contract (``GIC'') provider could be interpreted to
preclude a ``voluntary'' submission of whistleblower allegations
that the GIC provider engaged in bid rigging.
---------------------------------------------------------------------------
Other commenters took the view that our proposed rule did not go
far enough in precluding whistleblower submissions from being treated
as ``voluntary.'' A number of commenters urged that our rules also
preclude an individual from making a ``voluntary'' submission after the
individual has been contacted for information in the course of a
company's internal investigation or other internal review.\57\ In
response to one specific request for comment, other commenters
advocated that we not treat a submission as ``voluntary'' if the
whistleblower was aware of a governmental or internal investigation at
the time of the submission, whether or not the whistleblower received a
request from the Commission or one of the other authorities.\58\
---------------------------------------------------------------------------
\57\ See letters from CCMC; Jones Day; and GE Group (arguing
that a person who is questioned by an employer about a matter should
not be permitted subsequently to become a whistleblower unless he or
she provided the employer substantially the same information in
response to the employer's questioning).
\58\ See letters from ABA, Wells Fargo, and the National Society
of Compliance Professionals (``NSCP'').
---------------------------------------------------------------------------
Our request for comment on whether a whistleblower's submission
should be deemed to be ``voluntary'' if the information was within the
scope of a previous request to the whistleblower's employer (Proposed
Rule 21F-4(a)(2)) also generated diverse reactions. Some commenters
urged that we eliminate this provision because it could have a sweeping
effect in cutting off large numbers of potential whistleblowers, in
particular in industry-wide investigations.\59\ Other commenters
supported the exclusion and suggested that it be expanded in various
ways.\60\
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\59\ See letters from Section on Corporation, Finance and
Securities Law of the District of Columbia Bar (``DC Bar''), Daniel
J. Hurson, Continewitty LLC.
\60\ See letters from SIFMA (urging elimination of the exception
that would permit an employee to make a voluntary submission if the
employer did not produce the documents or information in a timely
manner), Wells Fargo (same); NCSP (employee should be regarded as
having received a request to an employer if there is a reasonable
likelihood that the employee would have been contacted by the
employer in responding to the request); and the Institute of
Internal Auditors (should expand exclusion to other persons within
the scope of a request, such as contractors, agents, and service
providers).
---------------------------------------------------------------------------
Our proposed rule to preclude whistleblowers from acting
``voluntarily'' if they are under a pre-existing legal or contractual
duty to report the violations to the Commission or another authority
(Proposed Rule 21F-4(a)(3)) also generated varied comment. Some
commenters opposed the exclusion on the grounds that Section 21F(c)(2)
of the of the Exchange Act sets forth a specific list of persons whom
Congress deemed to be ineligible for awards, some as a result of their
pre-existing duties.\61\ These commenters urged that the Commission
should not expand these exclusions, as doing so would be inconsistent
with Congressional intent and would undermine the purposes of Section
21F.\62\ One of these commenters asserted, for example, that the
proposed rule could result in barring submissions from individual
employees if regulators require companies under their
[[Page 34307]]
jurisdiction to report violations of law, and could also preclude
submissions from some senior corporate managers who are obligated under
Federal procurement regulations to report violations of various Federal
criminal laws, False Claims Act violations and overpayments on
government contracts to agency inspectors general and to contracting
officers.\63\ This same commenter also expressed concern that the
Commission should not be in a position of having to decide whether
whistleblowers from within state or municipal corporations have pre-
existing obligations to report violations.
---------------------------------------------------------------------------
\61\ Section 21F(c)(2), 15 U.S.C. 78u-6(c)(2), sets forth four
categories of individuals who are ineligible for whistleblower
awards. These include employees of the Commission and of certain
other authorities, persons who are convicted of a criminal violation
in relation to action for which they would otherwise be eligible for
an award, auditors in cases where a submission would be contrary to
the requirements of Section 10A of the Exchange Act, and persons who
fail to submit information in the form required by the Commission's
rules.
\62\ See letters from NWC; Stuart D. Meissner, LLC; NCCMP; DC
Bar; and Daniel J. Hurson.
\63\ See letter from the DC Bar, citing 73 FR 67064 (December
2008).
---------------------------------------------------------------------------
Other commenters favored the ``legal duty'' exclusion and
recommended that its reach be clarified and extended. In particular,
these commenters suggested that the exclusion should be applied to
various categories of individuals in the corporate context. Several
commenters urged that we not consider submissions to be ``voluntary''
in circumstances where an employee or an outside service provider has a
duty to report misconduct to a company.\64\ Another commenter suggested
that a company's principal financial officer, principal executive
officer, senior management, audit committee, and board of directors
should be viewed as having a legal duty to report violations to the
government because of the officer certification requirements of Section
302 of the Sarbanes-Oxley Act, and the provisions regarding reporting
of illegal acts under Section 10A of the Exchange Act.\65\
---------------------------------------------------------------------------
\64\ See letters from NSCP and from Financial Services
Roundtable.
\65\ 15 U.S.C. 78j-1; see letter from the Cornell Securities Law
Clinic.
---------------------------------------------------------------------------
Our request for comment concerning whether the ``legal duty''
limitation on voluntary submissions should apply to all government
employees prompted a number of responses. Some commenters appeared to
take the view that government employees who are involved in law
enforcement or the regulation of business or financial services should
be deemed to have a legal duty to report violations.\66\ Other
commenters indicated that government employees should be viewed as
having a duty to report violations that they uncover in the course of
their official duties.\67\
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\66\ See letters from Patrick Burns, ICI, Auditing Standards
Committee, and TRACE International, Inc.
\67\ See letters from the NACD and Grohovsky Group. See also
letter from the Institute of Internal Auditors (``a general
preclusion of government employees would be appropriate.'').
---------------------------------------------------------------------------
Finally, most commenters who responded to our request for comment
on whether the list of other authorities in the rule should include
foreign authorities stated that foreign authorities should be
included.\68\ Two commenters argued against this approach. One of these
emphasized that the Commission cannot be assured that all foreign
authorities will share information they may obtain concerning possible
violations of U.S. securities laws, and that it would be difficult for
the Commission in many instances to determine whether an individual
owed a legal duty under foreign law to report a violation to a foreign
authority.\69\ Another similarly argued that the fact that a
whistleblower received a request from a foreign authority would not
compel the whistleblower to provide the information to the
Commission.\70\
---------------------------------------------------------------------------
\68\ See letters from Auditing Standards Committee; NSCP;
Continewity, LLC; Society of Corporate Secretaries; Institute of
Internal Auditors.
\69\ See letter from Georg Merkl.
\70\ See letter from VOICES.
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c. Final Rule
After considering the comments, we have decided to adopt the rule
with certain modifications. Although we continue to believe that a
requirement that the whistleblower come forward before being contacted
by government investigators is both good policy and consistent with
existing case law from related areas,\71\ we agree with the concerns
expressed by some commenters that our proposed rule might have the
unintended result of deterring high-quality submissions as a threshold
matter based on an overly-broad construction of the concept of
voluntariness. In response to this concern, we have made several
changes to the final rule.
---------------------------------------------------------------------------
\71\ Cf. 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) (rejecting argument that information provided beyond
that required by subpoena is voluntary for purposes of False Claims
Act); 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).
---------------------------------------------------------------------------
As adopted, paragraph (1) of Rule 21F-4(a) now provides that a
submission of information is deemed to have been made ``voluntarily''
if the whistleblower makes his or her submission before a request,
inquiry, or demand that relates to the subject matter of the submission
is directed to the whistleblower or anyone representing the
whistleblower (such as an attorney) (i) By the Commission; (ii) in
connection with an investigation, inspection, or examination by the
Public Company Accounting Oversight Board (``PCAOB'') or any self-
regulatory organization; \72\ or (iii) in connection with an
investigation by Congress, any other authority of the Federal
government, or a state Attorney General or securities regulatory
authority.
---------------------------------------------------------------------------
\72\ The term ``self-regulatory organization'' is defined in
Rule 21F-4(h).
---------------------------------------------------------------------------
Thus, rather than apply to all information requests of any kind, as
was proposed, our final rule narrows the types of requests that that
may preclude a later whistleblower submission from being treated as
``voluntary.'' All requests from the Commission are still covered, as
we believe that a whistleblower award should not be available to an
individual who makes a submission after first being questioned about a
matter (or otherwise requested to provide information) by the
Commission staff acting pursuant to any of our investigative or
regulatory authorities. Only an investigative request made by one of
the other designated authorities will trigger application of the rule,
except that a request made in connection with an examination or
inspection, as well as an investigative request, by staff of the PCAOB
or a self-regulatory organization will also render a whistleblower's
subsequent submission relating to the same subject matter not
``voluntary.'' This provision recognizes the important relationship
that frequently exists between examinations and enforcement
investigations, as well as our regulatory oversight of the PCAOB and
self-regulatory organizations. However, the rule only precludes a
whistleblower from making a ``voluntary'' submission if a previous
request, as described, was directed to the whistleblower or to his or
her personal representative. For example, an examination request
directed to a broker-dealer or an investment adviser would not
automatically foreclose whistleblower submissions related to the
subject matter of the exam from all employees of the entity. However,
if a firm employee were interviewed by examiners, the employee could
not later make a ``voluntary'' submission related to the subject matter
of the interview.\73\
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\73\ As is further discussed below, individuals who wait to make
their submission until after a request is directed to their employer
will not face an easy path to an award. We expect to scrutinize all
of the attendant circumstances carefully in determining whether such
submissions ``significantly contributed'' to a successful
enforcement action under Rule 21F-4(c)(2) in view of the previous
request to the employer on the same or related subject matter.
---------------------------------------------------------------------------
We have also narrowed the list of authorities set forth in the rule
by limiting state and local authorities to state Attorneys General and
state securities regulatory authorities.
[[Page 34308]]
Accordingly, whistleblowers will have the opportunity to submit
information to the Commission ``voluntarily'' even after they receive
requests from other state and local authorities. This change recognizes
the fact that the Commission less regularly receives information
through cooperative arrangements with state and local authorities other
than state Attorneys General and state securities regulatory
authorities.\74\
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\74\ We have also determined not to expand the list of
authorities in Rule 21F-4(a) to include foreign authorities. Foreign
authorities operate under different legal regimes, with different
standards. Further, as some commenters pointed out, whether and
under what circumstances the Commission may receive information
obtained by a foreign authority is more uncertain than is the case
of other Federal authorities, and state Attorneys General or
securities regulators. In addition, we may have limited ability to
evaluate the scope of a request from a foreign authority to an
individual, and whether it relates to the subject matter of the
individual's whistleblower submission. We note, however, that in
cases where we request the assistance of a foreign authority to
obtain documents or information through a memorandum of
understanding, and the foreign authority sends a corresponding
request to one of its country's residents, we will treat the request
as coming from us for purposes of our rule, with the result that a
subsequent whistleblower submission on the same subject matter from
the foreign resident will not be treated as ``voluntary.''
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As adopted, our rule retains the provision (now placed in a newly-
designated paragraph (2)) that a whistleblower who receives a request,
inquiry, or demand as described in paragraph (1) first will not be able
to make a subsequent ``voluntary'' submission of information that
relates to the subject matter of the request, inquiry, or demand, even
if a response is not compelled by subpoena or other applicable law.\75\
We believe that this approach strikes an appropriate balance between,
on the one hand, permitting any submission to be considered
``voluntary'' as long as it is not compelled, and, on the other hand,
precluding a submission from being treated as ``voluntary'' whenever a
whistleblower may have become ``aware of'' an investigation or other
inquiry covered by the rule, regardless of whether the relevant
authority contacted the whistleblower for information. A standard based
on the receipt of a subpoena would go too far in permitting individuals
to claim whistleblower awards even after being directly asked about
conduct by staff of the Commission or other authorities. We do not
believe either that Congress intended this result, or that it is
suggested by existing law.\76\ Conversely, a rule that prohibited a
whistleblower from acting ``voluntarily'' any time the whistleblower
became aware of an investigation or other inquiry covered by the rule
is overly inclusive because the subject of the inquiry may not be clear
to potential whistleblowers with valuable information or these
potential whistleblowers may not be known to the Commission.
Accordingly, such an interpretation of ``voluntary'' is likely to have
a negative impact on our Enforcement program by reducing the
opportunities for us to receive high-quality, valuable information in
many circumstances.\77\ Such a rule would create the difficult problem
of determining whether a whistleblower was actually aware of an
investigation or other inquiry before he or she came forward.
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\75\ One commenter asked us to clarify that, after a
whistleblower makes an initial voluntary submission, if the staff
subsequently contacts the whistleblower and requests additional
information, any information so provided will be eligible for an
award. See letter from Stuart D. Meissner, LLC. While we agree that
this should ordinarily be the case with respect to routine follow-up
communications with most whistleblowers, there may be circumstances
where the whistleblower's additional provision of information would
not be deemed voluntary. For example, if the whistleblower only
provides us with more detailed information pursuant to a cooperation
agreement with the Department of Justice, we would not view the
whistleblower as having ``voluntarily'' provided all of the
subsequent information. In addition, potential whistleblowers are
cautioned that Rule 21F-8(b) requires, as a condition of award
eligibility, that a whistleblower provide the staff with all
additional information in the whistleblower's possession that is
related to the subject matter of the whistleblower's submission in a
complete and truthful manner.
\76\ One commenter expressed concern that many employees are
required to sign confidentiality agreements that may prevent them
from providing information to the Commission without a subpoena. See
letter from David Sanford. We caution employers that, as adopted,
Rule 21F-17(a) provides that no person may take any action to impede
a whistleblower from communicating directly with the Commission
about a possible securities law violation, including by enforcing or
threatening to enforce a confidentiality agreement. Further, Section
21F(h)(1)(A) of the Exchange Act prohibits any form of retaliation
by an employer against a whistleblower because of any lawful act
done by the whistleblower in providing information to the Commission
in accordance with Section 21F. 15 U.S.C. 78u-6(h)(1)(A)(i).
\77\ For example, an individual who becomes aware of an
investigation and who has valuable information or documents to offer
may not, in the ordinary course, be approached by investigators.
This is particularly likely to be the case if the individual is not
directly or indirectly involved in the conduct under investigation.
We do not believe that it would be appropriate to adopt a definition
of ``voluntary'' that might prevent such individuals from coming
forward and assisting our staff as whistleblowers.
---------------------------------------------------------------------------
For similar reasons, we reject the suggestion of some commenters
that a whistleblower should not be permitted to make a ``voluntary''
submission after being contacted for information in the course of an
internal investigation. Elsewhere in our rules, we have attempted to
create strong incentives for employees to continue to utilize their
employers' internal compliance and other processes for receiving and
addressing reports of possible violations of law. If a whistleblower
took any steps to undermine the integrity of such systems or processes,
we will consider that conduct as a factor that may decrease the amount
of any award.\78\ However, a principal purpose of Section 21F is to
promote effective enforcement of the Federal securities laws by
providing incentives for persons with knowledge of misconduct to come
forward and share their information with the Commission. Although we
acknowledge that internal investigations can be an important component
of corporate compliance, and although there are existing incentives for
companies to self-report violations,\79\ providing information to
persons conducting an internal investigation, or simply being contacted
by them, may not, without more, achieve the statutory purpose of
getting high-quality, original information about securities violations
directly into the hands of Commission staff.
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\78\ See Rule 21F-6(b)(3).
\79\ See 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,
Exchange Act Release No. 44969 (Oct. 23, 2001); U.S. Sentencing
Guidelines Sec. 8C2.5.
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As noted, paragraph (1) of Rule 21F-4(a) provides that a
whistleblower submission will not be deemed ``voluntary'' if made after
we or another of the designated authorities have already contacted the
whistleblower (or his or her representative) with an investigative or
other covered request, inquiry, or demand that ``relates to the subject
matter'' of the submission. This language is intended to provide
clearer guidance than use of the word ``relevant'' in the proposed
rule. The determination of whether an inquiry ``relates to the subject
matter'' of a whistleblower's submission will depend on the nature and
scope of the inquiry and on the facts and circumstances of each case.
Generally speaking, however, we will consider this test to be met--and
therefore the whistleblower's submission not to be ``voluntary''--even
if the submission provides more information than was specifically
requested, if it only describes additional instances of the same or
similar conduct, provides additional details, or describes other
conduct that is closely related as part of a single scheme. For
example, if our staff sends an individual an investigative request
relating to a possible fraudulent accounting practice, we would
ordinarily not expect to treat as ``voluntary'' for purposes of Rule
21F-
[[Page 34309]]
4(a) a subsequent whistleblower submission from the same individual
that describes additional instances of the same practice, or a
different but related practice as part of an overall earnings
manipulation scheme.\80\ However, the individual could still make a
``voluntary'' submission that described other, unrelated violations
(e.g., Foreign Corrupt Practices Act violations).\81\
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\80\ This is a separate analysis from the question of whether
information will be deemed to have ``led to'' a successful
Commission enforcement action. As is discussed below, even after we
have commenced an investigation or an examination, a whistleblower
who voluntarily submits original information may be eligible for an
award if the information significantly contributes to the success of
our action. See Rule 21F-4(c)(2).
\81\ We have also added to paragraph (2) a statement that a
whistleblower's submission of information to the Commission will be
considered ``voluntary'' if the whistleblower voluntarily provided
the same information to one of the other authorities identified in
the rule prior to receiving a request, inquiry, or demand from the
Commission. This language is intended to respond to comments that,
as proposed, our rule could have had the unintended consequence of
precluding a submission from being considered as ``voluntary'' in
circumstances where the whistleblower provided the information to
another authority, the other authority referred the matter to the
Commission, and our staff contacted the whistleblower before he or
she had the opportunity to file a whistleblower submission with us.
See letter from Grohovsky Group.
---------------------------------------------------------------------------
In further consideration of the views expressed that our proposed
rule was overly-broad, and could result in precluding too many
potential whistleblowers (e.g., in industry-wide investigations), we
have decided not to adopt a rule that would treat a request to an
employer as directed as well to all employees whose documents or
information fall within the scope of the request. (This provision was
found in paragraph (2) of Proposed Rule 21F-4(a), and is not part of
final Rule 21F-4(a).) \82\ As a commenter stated, establishing this
requirement as a threshold barrier to submissions could effectively
``shut down'' our whistleblower program because ``any relevant
documents or information would almost certainly be covered by an even
marginally comprehensive investigative request.'' \83\ Thus, only a
request that is directed to the individual involved (or to his or her
representative) will preclude that individual from subsequently making
a ``voluntary'' submission of the requested information or closely
related information. We note, however, that as part of our
determination of whether a submission leads to a successful enforcement
action under Rule 21F-4(c), we expect to evaluate whether a previous
request to the whistleblower's employer obtained substantially the same
information, or would have obtained the information but for any action
of the whistleblower in not providing the information to his or her
employer. In such circumstances, we ordinarily would not expect to
treat the whistleblower's submission as having ``significantly
contributed'' to the success of our action for purposes of Rule 21F-
4(c)(2).
---------------------------------------------------------------------------
\82\ This would include requests that are directed to a specific
office or function of an employer where the whistleblower works.
\83\ See letter from DC Bar.
---------------------------------------------------------------------------
We have also decided to revise our proposed requirement that a
submission will not be considered ``voluntary'' if the whistleblower is
under a pre-existing legal or contractual duty to report the
information to the Commission or to any of the other authorities
designated in the rule. As adopted, Rule 21F-4(a)(3) provides that a
whistleblower cannot ``voluntarily'' submit information if the
whistleblower is required to report his or her original information to
the Commission as a result of a pre-existing legal duty,\84\ a
contractual duty that is owed to the Commission or to one of the other
authorities set forth in paragraph (1), or a duty that arises out of a
judicial or administrative order.
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\84\ Although in certain circumstances auditors have pre-
existing legal duties to report information about securities law
violations to the Commission, for purposes of these rules, an
auditor's eligibility for a whistleblower award will not be
addressed under this rule, but will be addressed under Rules 21F-
4(b)(4)(iii) and (v) and Rule 8(c)(4).
---------------------------------------------------------------------------
Unlike in the proposed rule, the final rule provides that a duty to
report information only to an authority other than the Commission does
not result in exclusion of the whistleblower.\85\ We have narrowed the
reach of this provision out of concern that, as proposed, it was
potentially vague and overbroad. Without a clearer and more specific
description of the types of duties owed to these other authorities that
might preclude a submission, the proposed rule could have the
unintended consequence of discouraging some meritorious whistleblowers.
In addition, we have adopted exclusions for specific types of
individuals based on the definition of ``independent knowledge'' under
Rule 21F-4(b)(4). Consistent with our approach of applying potential
threshold exclusions narrowly, we intend this exclusion to govern only
in cases where a whistleblower has an individual duty to report to the
Commission, and not in cases where the duty belongs to the
whistleblower's employer.
---------------------------------------------------------------------------
\85\ As noted above, some commenters objected to the proposed
rule on the grounds that Congress expressly only declared certain
categories of whistleblowers to be ineligible as a result of their
pre-existing legal duties. However, Congress did not define the term
``voluntarily'' as used in Section 21F, instead leaving it to the
Commission to interpret this term and others in a manner that
furthers the statutory purposes. See Section 21F(j), 15 U.S.C. 78u-
6(j).
---------------------------------------------------------------------------
Although this determination of ``voluntariness'' turns on whether
the whistleblower is under a duty to report information to the
Commission, the duty to report to the Commission can arise from a
contract with either the Commission or with one of the other
authorities identified in the rule. Thus, the rule would not consider
as ``voluntary'' disclosures made by an individual who has entered into
a cooperation or similar agreement with another authority, such as the
Department of Justice, which requires the individual to cooperate with
or provide information to the Commission, or more generally to
government agencies. Further, the requirement that the contractual duty
be owed to the Commission or to one of the other authorities means that
whistleblowers will not be precluded from award eligibility if they are
subject to a contractual duty to report information to the Commission
because of an agreement with a third party. In other words, submissions
from such whistleblowers will be treated as ``voluntary,'' assuming
that the other requirements of this rule are satisfied. This
clarification responds to the concerns of some commenters that
employers should not be able to preclude their employees from
whistleblower eligibility by generally requiring all employees to enter
into agreements that they will report evidence of securities violations
directly to the Commission.\86\
---------------------------------------------------------------------------
\86\ See letters from Stuart D. Meissner and Georg Merkl.
---------------------------------------------------------------------------
The rule also provides that a whistleblower submission will not be
treated as ``voluntary'' if the whistleblower had a duty arising out of
a judicial or administrative order to report the information to the
Commission. This language covers persons such as independent monitors
or consultants who may be appointed or retained as a result of
Commission or other proceedings with a requirement that they report
their findings, conclusions, or other information to the Commission.
Finally, this rule will not apply to an employee or a third party
who has a duty of some kind to report misconduct to a company, as we
believe that a wholesale exclusion of whistleblower submissions in such
cases would not effectuate the purposes of Section 21F.
[[Page 34310]]
2. Rule 21F-4(b)--Original Information
As proposed, Rule 21F-4(b)(1) tracked the definition of ``original
information'' found in Section 21F(a)(3) of the Exchange Act, with the
added requirement that the information must be provided to the
Commission for the first time after the date of enactment of Dodd-
Frank. We are adopting the rule as proposed.
a. Proposed Rule
Our proposed rule defined ``original information'' to mean
information that is: (i) Derived from the independent knowledge or
independent analysis of the whistleblower; (ii) not already known to
the Commission from any other source, unless the whistleblower is 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 the whistleblower is a source of the information; \87\
and (iv) provided to the Commission for the first time after July 21,
2010 (the date of the enactment of Dodd-Frank). The first three
requirements recited the definition of ``original information'' found
in Section 21F(a)(3) of the Exchange Act. The fourth requirement made
clear that awards would be considered only for original information
submitted after the enactment of Section 21F.
---------------------------------------------------------------------------
\87\ In our Proposing Release we stated that we will interpret
the term ``judicial or administrative hearing'' to include hearings
in arbitration proceedings. See Proposing Release note 19. One
commenter expressed concern that this interpretation would prevent a
plaintiff in arbitration from making a whistleblower submission on
the basis of his allegations and the evidence adduced at the
hearing. See letter from Stuart D. Meissner, LLC. However, in that
instance, the plaintiff would qualify as the source of the
allegations, and nothing in the definition of ``original
information'' would preclude the plaintiff from using evidence
adduced at the hearing to support his or her submission to the
Commission. Rather, our inclusion of arbitration hearings within the
scope of the rule would preclude others who are involved with the
arbitration--such as the reporter, or an arbitrator--from using the
plaintiff's allegations to make a whistleblower submission for their
own benefit.
---------------------------------------------------------------------------
Some of the elements of this definition--specifically,
``independent knowledge,'' independent analysis,'' and ``original
source''--are defined in other proposed rules, and are separately
discussed below.
b. Comments Received
Some commenters urged that our definition of ``original
information'' be broadened in various ways. One commenter suggested
that ``original information'' should include information that was
provided to the Commission before the enactment of Dodd-Frank if the
information leads to an enforcement action after the date of
enactment.\88\ Another commenter offered that ``original information''
should include information an employee reports to his or her company
and that is later reported to the Commission by the company.\89\
Similarly, another commenter expressed concern that, because ``original
information'' must be information that is ``not already known'' to the
Commission, the definition appeared to exclude subsequent
whistleblowers who provide additional helpful information.\90\ This
commenter urged that we not automatically exclude subsequent
whistleblowers, but instead make an appropriate award allocation among
the individuals involved.
---------------------------------------------------------------------------
\88\ See letter from Bijan Amin; see also pre-proposal letter
from James Hill.
\89\ See letter from Hunton & Williams LLP.
\90\ See letter from DC Bar.
---------------------------------------------------------------------------
Other commenters believed that our definition of ``original
information'' should be narrowed to exclude certain information from
consideration for an award. Two commenters suggested that our rule
exclude information beyond the statute of limitations period for
actions to recover penalties.\91\ One of these commenters also urged
that ``original information'' should not include information about a
violation that has already been addressed by the entity that is alleged
to have violated the securities laws.\92\
---------------------------------------------------------------------------
\91\ See letters from ICI and SIFMA.
\92\ See letter from ICI.
---------------------------------------------------------------------------
Another commenter expressed concern that, as proposed, ``original
information'' would not clearly exclude information a whistleblower
receives as a result of an investigation by a securities exchange or
other self-regulatory organization, a foreign regulator, or information
received in connection with internal investigations or civil or
criminal proceedings.\93\ This commenter urged that the rule be
modified to exclude information derived from any investigative or
enforcement activity or proceeding, and not merely the types of
proceedings set forth in the statute (i.e., ``an allegation made in a
judicial or administrative hearing, in a governmental report, hearing,
audit, or investigation'').
---------------------------------------------------------------------------
\93\ See letter from ABA.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting Rule 21F-4(b)(1) as
proposed. Congress enacted Section 21F in order to provide new
incentives for individuals with knowledge of securities violations to
report those violations to the Commission. We believe that applying
Section 21F prospectively--for new information provided to the
Commission after the statute's enactment and not to information
previously submitted--is most consistent with Congressional intent and
with the language of the statute.\94\ Similarly, we do not believe that
it would be consistent with Congressional intent for our rules to
categorically exclude through the definition of ``original
information'' tips about violations that may arguably be beyond an
applicable statute of limitations or that a company may have addressed
through remedial action. Rather, considerations such as these are
better addressed through our exercise of discretion in determining
whether to open an investigation, whether to bring an enforcement
action, and the nature and scope of any action filed and relief
granted.
---------------------------------------------------------------------------
\94\ Section 924(b) of Dodd-Frank provides that ``Information
provided to the Commission in writing by a whistleblower shall not
lose the status of original information * * *, if the information is
provided by the whistleblower after the effective date of this
subtitle.''
---------------------------------------------------------------------------
In other respects, we believe that our final rules substantially
address the issues raised by the commenters. For example, under Rules
21F-4(b)(5) and (6) an individual can be considered the original source
of information provided to the Commission by another source (including
the individual's employer), or of information that ``materially adds''
to information already in our possession. Further, Rule 21F-4(c), as
adopted, provides that a whistleblower may be eligible for an award
based upon information that the whistleblower reports through a
company's internal legal and compliance procedures if the company
subsequently provides the information to the Commission. In addition,
Rule 21F-4(c) provides that, even after an investigation has commenced,
a whistleblower can be eligible for award consideration if he or she
provides original information that significantly contributes to the
success of the Commission's action. Thus, our rules will permit awards
to subsequent whistleblowers in appropriate circumstances.
Similarly, we believe that several provisions in our rules will
ordinarily operate to exclude whistleblowers whose only source of
original information is an existing investigation or proceeding.
Information that is exclusively derived from a governmental
investigation is expressly excluded from the definition of ``original
information'' under Section 21F(a)(3) of the Exchange Act and our Rule
21F-
[[Page 34311]]
4(b)(1)(iii). A whistleblower who learns about possible violations only
through a company's internal investigation will ordinarily be excluded
from claiming ``independent knowledge'' by operation of either the
exclusions from ``independent knowledge'' set forth in Rules 21F-
4(b)(4)(i), (ii), and (iii) (relating to attorneys, auditors, and other
persons who may be involved in the conduct of internal investigations),
or by Rule 21F-4(b)(4)(vi) (excluding information learned from such
individuals). To the extent that information about an investigation or
proceeding is publicly available, it is excluded from consideration as
``independent knowledge'' under Rule 21F-4(b)(2).\95\
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\95\ Further, Form TCR, to be used for whistleblower
submissions, requires the whistleblower to state, under penalty of
perjury, how he or she obtained the information that is the subject
of the submission. A truthful answer that the whistleblower obtained
the information from an investigation by a securities exchange or a
self-regulatory organization--if the staff were not already aware of
the investigation--would likely lead the staff to contact the other
authority directly for additional information. In these
circumstances, where information is obtained through the normal
cooperative arrangements between the Commission and other
regulators, the whistleblower's submission would not be deemed to
have caused the opening of an investigation, or to have
significantly contributed to the success of any action, such as to
make the whistleblower eligible for an award under Rule 21F-4(c).
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3. Rule 21F-4(b)(2)--Independent Knowledge
Proposed Rule 21F-4(b)(2) defined ``independent knowledge,'' one of
the constituent elements of ``original information,'' as factual
information not derived from publicly available sources. We are
adopting the rule as proposed.
a. Proposed Rule
Under our proposed rule, ``independent knowledge'' was defined to
mean factual information in the whistleblower's possession that is not
derived from publicly available sources. As we explained in our
Proposing Release, 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). Further, as proposed, the definition of
``independent knowledge'' did not require that a whistleblower have
direct, first-hand knowledge of possible violations. Instead, knowledge
could be obtained from any of the whistleblower's experiences,
observations, or communications (subject to the exclusion for knowledge
obtained from public sources, and subject further to the exclusions set
forth in Rule 21F-4(b)(4)).
b. Comments Received
Several commenters supported our proposed definition of
``independent knowledge.'' \96\ Others were critical of the definition
for different reasons. Some commenters criticized our exclusion of
information derived from publicly available sources, and urged that
awards be available for tips that are based upon various kinds of
public information.\97\ One of these commenters argued that, because
Section 21F does not contain an express exclusion for all information
derived from publicly available sources, the only public information
that can be excluded from award consideration is information that is
derived from the sources that are set forth in Section 21F(a)(3)(C)--
i.e., a judicial or administrative hearing, a government report,
hearing, audit, or investigation, or the news media.\98\ This commenter
stated that this interpretation would be consistent with the
application of the ``public disclosure bar'' of the False Claims Act,
31 U.S.C. Sec. 3730(e)(4)). Similarly, this commenter argued that our
proposal to exclude publicly-available information from the definition
of ``independent knowledge'' was unsupportable because the statute only
excludes claims based upon information that is ``already known to the
Commission.'' \99\
---------------------------------------------------------------------------
\96\ See Letters from Institute of Internal Auditors, Patrick
Burns, Auditing Standards Committee, Georg Merkl.
\97\ See Letters from the VOICES, Wanda Bond, Michael Lawrence,
and TAF; see also pre-proposal letter from Robin McLeish.
\98\ See letter from TAF; see also letter from VOICES.
\99\ Section 21F(a)(3)(B), 15 U.S.C. 78u-6(a)(3)(B). See letter
from TAF.
---------------------------------------------------------------------------
We requested comment on whether it is appropriate to consider
knowledge that is not direct, first-hand knowledge as ``independent
knowledge'' In response, one commenter urged that we limit
``independent knowledge'' to first-hand knowledge of the
whistleblower.\100\ This commenter expressed concerned about the
reliability of second-hand information, and the potential that our rule
could harm companies by creating an incentive for whistleblowers to
report unsubstantiated rumors and other unreliable information. This
commenter also suggested that the absence of a first-hand knowledge
requirement would encourage circumvention of the statute by permitting
persons who are ineligible for awards to give information to third
persons in order to enable them to become whistleblowers.
---------------------------------------------------------------------------
\100\ See letter from ABA.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting Rule 21F-4(b)(2) as
proposed. Accordingly, ``independent knowledge'' means any factual
information in the whistleblower's possession that is not derived from
publicly available sources. Congress primarily intended our
whistleblower program ``* * * to motivate those with inside knowledge
to come forward and assist the Government to identify and prosecute
persons who have violated the securities laws * * *.'' \101\ It is
consistent with this purpose to require that ``independent knowledge''
be derived from a whistleblower's own experiences, observations, or
communications, and not from information that is available to the
general public.\102\
---------------------------------------------------------------------------
\101\ S. Rep. No. 111-176 at 110 (2010).
\102\ However, publicly available information can be included as
part of a submission of ``independent analysis'' under Rule 21F-
4(b)(3). See discussion below.
---------------------------------------------------------------------------
The objection that our rule should permit submissions based upon
public information as long as the information is not derived from a
judicial or administrative hearing, a governmental report, hearing,
audit, or investigation, or from the news media is not supported by the
plain language of Section 21F. The definition of ``original
information'' found in Section 21F(a)(3) requires both that the
information be derived from the whistleblower's independent knowledge
or analysis (Section 21F(a)(3)(A)), and that it also not be exclusively
derived from an allegation in one of these fora (Section 21F(a)(3)(C)).
If ``independent knowledge'' were interpreted to mean merely that the
information could not be derived from one of the sources specified in
Section 21F(a)(3)(C), then the separate requirement that the
whistleblower also have ``independent knowledge'' would have no
meaning.\103\
---------------------------------------------------------------------------
\103\ The ``public disclosure bar'' of the False Claims Act
operates differently. There, ``independent knowledge'' is not a
separate requirement, but instead is one element of an exception to
the rule that otherwise requires a court to dismiss an action if
substantially the same allegations or transactions were publicly
disclosed in certain specified fora, such as a Federal hearing in
which the Government is a party, a Federal government report or
investigation, or the news media. 31 U.S.C. 3730(e)(4).
---------------------------------------------------------------------------
The same analysis applies to the suggestion that ``independent
knowledge'' cannot exclude publicly-available information and can only
exclude information that is ``not known to the Commission'' from any
other
[[Page 34312]]
source. The requirement of ``independent knowledge'' is set forth in
Section 21F(a)(3)(A) of the Exchange Act, and is distinct from the
requirement in Section 21F(a)(3)(B) that information be not already
known to the Commission. In other words, both tests must be met
separately as part of the determination of whether information
qualifies as ``original information.''
While we thus exclude information derived from publicly available
sources from the definition of ``independent knowledge,'' we do not
believe that ``independent knowledge'' should be further limited to
direct, first-hand knowledge. Such an approach could prevent the
Commission from receiving valuable information about possible
violations from whistleblowers who are not themselves involved in the
conduct at issue, but who learn about it through their observations,
relationships, or personal diligence.\104\ Our final rules provide
that, in order to be considered eligible for an award, a whistleblower
must provide information that is sufficiently specific, credible, and
timely that it causes the staff to open an investigation, or
significantly contributes to the success of an enforcement action.\105\
We believe that commenters' concerns about whistleblowers providing
wholly speculative or unsubstantiated information is most effectively
addressed in connection with these determinations rather than by
requiring first-hand knowledge as a threshold limitation for
whistleblower submissions.\106\
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\104\ Further, as discussed in our Proposing Release, Congress
recently amended the ``public disclosure bar'' provisions of the
False Claims Act, replacing the requirement that a qui tam plaintiff
have ``direct and independent knowledge'' of information with one
requiring only ``knowledge that is independent and materially adds
to the publicly-disclosed allegations or transactions * * *'' 31
U.S.C. 3130(e)(4), Public Law 111-148 Sec. 10104(h)(2), 124 Stat.
901 (Mar. 23, 2010). Courts 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). Although, as noted in our Proposing Release, we do not
believe that False Claims Act interpretations and precedent are
necessarily authoritative for purposes of Section 21F, we note that
Congress recently amended the False Claims Act to eliminate the
requirement of first-hand knowledge.
\105\ See Rule 21F-4(c), discussed below.
\106\ We have addressed commenters' concern about possible
collusion through our revised Rule 21F-8(c)(6).
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4. Rule 21F-4(b)(3)--Definition of Independent Analysis
a. Proposed Rule
Under Proposed Rule 21F-4(b)(3), ``analysis'' was defined to mean
the whistleblower's own examination and evaluation of information that
may be generally available, but which reveals information that is not
generally known or available to the public. Analysis was defined as
``independent'' if it was the whistleblower's own analysis, whether
done alone or in combination with others. As was explained in our
Proposing Release, this definition was intended to recognize 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.
b. Comments Received
Although we received few responses to our request for comment on
suggested alternative definitions of ``independent analysis,'' \107\
most commenters who addressed the proposed rule appeared to agree with
the rule's fundamental premise that ``independent analysis''
anticipates that the whistleblower will apply his or her own evaluation
and insight to information that may be derived from publicly available
sources.\108\ Two commenters suggested we clarify that ``independent
analysis'' can be based on public sources, including the sources
described in Section 21F(a)(3)(C) and Proposed Rule 21F-
4(b)(1)(iii).\109\ One commenter criticized our proposed definition of
``independent analysis'' on the ground that the requirement that
analysis reveal information that is ``not generally known or
available'' would preclude an award to a whistleblower who caused us to
focus on publicly available information of which we were not otherwise
aware.\110\ Another commenter urged that ``independent analysis'' be
restricted to analysis of the whistleblower's own ``independent
knowledge,'' defined by the commenter to be limited to first-hand
knowledge, along with other purely objective facts such as share price
or trading volume.\111\
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\107\ See letters from Wanda Bond, Auditing Standards Committee,
and Kurt S. Schulzke.
\108\ See letters from Wanda Bond, Auditing Standards Committee,
Kurt S. Schulzke, POGO (referencing the importance of whistleblowers
``who often perform original analysis based on publicly available
sources'').
\109\ See letters from POGO and VOICES.
\110\ See letter from TAF.
\111\ See letter from ABA.
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c. Final Rule
After considering the comments, we are adopting Rule 21F-4(b)(3) as
proposed, with a slight modification to clarify that ``independent
analysis'' can be based upon the whistleblower's evaluation of publicly
available sources.\112\ Thus, as adopted, Rule 21F-4(b)(3) defines
``analysis'' to mean the whistleblower's own examination and evaluation
of information that may be publicly available, but which reveals
information that is not generally known or available to the public.
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\112\ This would include public information that may be derived
from the sources identified in Section 21F(a)(3)(C) and Rule 21F-
4(b)(1)(iii); i.e., a judicial or administrative hearing, a
government report, hearing, audit, or investigation, or the news
media.
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We believe that ``independent analysis'' requires that the
whistleblower do more than merely point the staff to disparate publicly
available information that the whistleblower has assembled, whether or
not the staff was previously ``aware of'' the information.
``Independent analysis'' requires that the whistleblower bring to the
public information some additional evaluation, assessment, or insight.
As with other elements of the definition of ``original
information,'' we anticipate that whether ``independent analysis''
provided to the Commission may be eligible for award consideration will
primarily depend (assuming all other requirements are met) on an
evaluation of whether the analysis is of such high quality that it
either causes the staff to open an investigation, or significantly
contributes to a successful enforcement action, as set forth in Rule
21F-4(c). This analysis is discussed further below.
For reasons similar to those discussed above with respect to the
definition of ``independent knowledge,'' we also do not believe it
would be consistent with the purposes of Section 21F to restrict
``independent analysis'' to analysis based upon facts of which the
whistleblower has direct, first-hand knowledge. Such an interpretation
would preclude award consideration even for highly-probative, expert
analysis of data that may suggest an important new avenue of inquiry,
or otherwise materially advance an existing investigation. We do not
believe that Congress intended this result.
5. Rules 21F-4(b)(4)(i) through (vi)--Exclusions From Independent
Knowledge and Independent Analysis
Proposed Rules 21F-4(b)(4)(i) through (vii) described circumstances
under
[[Page 34313]]
which we would not consider a whistleblower's submission to be derived
from independent knowledge or independent analysis. We are adopting a
number of these exclusions, but with significant revisions in response
to comments that we received.\113\ These comments and the resulting
modifications to the rules are discussed below with respect to the
specific exclusions. In this section, we briefly address the exclusions
as a whole.
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\113\ We have also added the phrase ``in any of the following
circumstances'' in the opening clause of Rule 21F-4(b)(4) in order
to make clear that information is excluded from being considered as
``independent knowledge'' or ``independent analysis'' if any one of
the exclusions apply.
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a. Proposed Rules
As proposed, Rule 21F-4(b)(4) provided that the Commission would
not credit a whistleblower with ``independent knowledge'' or
``independent analysis'' where the whistleblower obtained the
knowledge, or the information upon which the whistleblower's analysis
was based, under certain circumstances. These included information that
was: (1) Subject to attorney-client privilege or otherwise obtained in
connection with the legal representation of a person or entity
(proposed Rules 21F-4(b)(4)(i) and (ii)); (2) obtained through the
performance of an engagement required under the securities laws by an
independent public accountant, if the information related to a
violation by the engagement client, or the client's officers,
directors, or employees (proposed Rule 21F-4(b)(4)(iii)); (3)
communicated to a person with legal, compliance, audit, supervisory, or
governance responsibilities for an entity with the reasonable
expectation that he or she would cause the entity to respond
appropriately (proposed Rule 21F-4(b)(4)(iv)); (4) otherwise obtained
through an entity's legal, compliance, audit, or similar functions or
processes for identifying, reporting, and addressing potential non-
compliance with law (proposed Rule 21F-4(b)(4)(v)); (5) obtained in
violation of Federal or state criminal law (proposed Rule 21F-
4(b)(4)(vi)); and (6) obtained from any of the persons excluded by Rule
21F-4(b)(4). Certain of these exclusions were subject to exceptions
that are discussed below in connection with the specific rules.
b. Comments Received
Some commenters generally criticized our approach of defining
exclusions from ``independent knowledge'' and ``independent analysis.''
These commenters argued that Section 21F does not permit any exclusions
from award eligibility other than those expressly provided for in
Section 21F(c)(2). They also expressed concern that the proposed
exclusions were vague and uncertain, and therefore would discourage
potential whistleblowers from taking the personal and professional
risks associated with coming forward. These commenters also believed
that the exclusions would operate to disqualify broad categories of
individuals who are most likely to have information about
misconduct.\114\
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\114\ See letters from TAF and NWC; see also letter from Stuart
D. Meissner, LLC.
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In our Proposing Release, we requested comment on whether we should
extend the exclusions from ``independent knowledge'' and ``independent
analysis'' to other professionals (in addition to attorneys and
independent public accountants) who may obtain information about
possible securities violations in the course of their work for clients.
A number of commenters urged that we do so. These commenters emphasized
that boards and companies frequently retain outside consultants to
advise them on matters such as compensation, business strategies, risk,
and the effectiveness of their ethics and compliance programs. These
commenters expressed concern that permitting such outside advisers and
consultants to become whistleblowers will harm the free flow of candid
advice and information that is necessary to these relationships.\115\
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\115\ See letters from NACD (advocating excluding individuals
hired by boards of directors for purposes of advice and
consultation); the Ethisphere Institute (exclusions should extend to
external advisers who evaluate corporate ethics and compliance
programs); GE Group (should exclude professionals that have
relationships of trust and confidence with companies, including
investment bankers, financial advisers, compensation consultants,
and other consultants); TRACE International, Inc. (noting particular
role of outside experts in FCPA compliance efforts, and advocating
that exclusions include professionals who are regularly engaged by
companies to assist with auditing, creating and implementing robust
anti-bribery compliance programs and internal controls, including
professionals who perform due diligence on third party relationships
as required by the securities laws).
---------------------------------------------------------------------------
c. Final Rules
After considering the comments, we have made several changes to the
exclusions set forth in Rules 21F-4(b)(4)(i) through (vii), which we
have renumbered as Rules 21F-4(b)(4)(i) through (vi). We have
determined not to extend the exclusions to other outside professionals.
We believe that the exclusions, as modified, are reasonable in
scope and consistent with effective enforcement of the securities
laws.\116\ The exclusions generally apply to narrow categories of
individuals whose knowledge does not, in our view, constitute
``independent knowledge or analysis of a whistleblower,'' because the
information or analysis was acquired by an individual: (1) On behalf of
a third party operating in a sensitive legal, compliance, or governance
role (exclusions (i), (ii) and (iii)(A)-(C)); or (2) in the performance
of an engagement required by the Federal securities laws (exclusion
(iii)(D)); or (3) by illegal means (exclusion (iv)). Only when one of
the exceptions to these exclusions set forth in the rules applies
should information acquired in these situations constitute independent
knowledge or analysis of the whistleblower.
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\116\ Section 21F does not define the terms ``independent
knowledge'' or ``independent analysis,'' but Section 21F(j)
authorizes the Commission to issue rules ``to implement the
provisions of [Section 21F] consistent with the purposes of [Section
21F].'' A substantial purpose of Section 21F is to promote effective
enforcement of the securities laws.
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We believe this result is consistent with the purpose of promoting
effective enforcement of the securities laws. Consultation with
attorneys can improve compliance on the part of entities and
individuals.\117\ The
[[Page 34314]]
recommended exclusions for certain company officials and third parties
who assist companies in investigations of possible violations of law
are narrowly focused, and promote the goal of ensuring that the persons
most responsible for an entity's conduct and compliance with law are
not incentivized to promote their own self-interest at the possible
expense of the entity's ability to detect, address, and self-report
violations. The exclusion for auditors performing engagements required
by the securities laws reflects the fact that these individuals occupy
a special position under the securities laws to perform a critical role
for investors. Further, as adopted, our rule permits such individuals
to become whistleblowers under certain circumstances.\118\
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\117\ A number of comments asserted that, in addition to the
attorney-client privilege, any information received in breach of
other confidential relationships recognized by common-law
evidentiary privileges should be excluded from the definition of
independent knowledge. See, e.g., joint letter from Alcoa Inc.,
Celanese Corporation, Citigroup, Ingersoll-Rand plc, Intel
Corporation, Johnson & Johnson, JPMorgan Chase & Co., Kraft Foods
Inc., Pfizer Inc., Prudential Insurance Company America, and Tyco
International Ltd. (``Alcoa Group''); Auditing Standards Committee;
TRACE International, Inc. But see letter from NWC (opposing any
exclusion for privileged information). Those commenters generally
took the position that these relationships have historically been
recognized as deserving protection based on public policy
considerations, and creating a monetary incentive for those holding
this sort of privileged information to divulge it to us is contrary
to those public policy considerations. We have determined to exclude
(subject to the exceptions set forth in these rules) only
information received in breach of the attorney-client privilege, not
the other confidential relationships recognized at common-law.
Although we recognize the significant public policies underlying all
of these confidential relationships, we believe that for purposes of
the whistleblower program the attorney-client privilege stands apart
because of the significance of attorney-client communications for
achieving compliance with the Federal securities laws. We will
continue to address assertions of other evidentiary privileges
through our normal investigative and litigation processes. See e.g.,
SEC Division of Enforcement Manual Sec. 3.3.1. In addition,
contrary to the suggestion from a number of commenters, see, e.g.,
letter from PricewaterhouseCoopers, LLP (``PwC''), we are not
excluding information that is received in breach of state-law
confidentiality requirements, such as those imposed on auditors,
because to do so could inhibit important Federal-law enforcement
interests.
\118\ See Rule 21F-4(b)(4)(vi). The exclusions for information
obtained in violation of Federal or state criminal law and for
information obtained from excluded sources are discussed below.
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Finally, although we recognize the important role that outside
advisers and consultants play in many aspects of corporate policy and
decision-making, we believe that additional exclusions for such
professionals would too broadly preclude individuals with possible
inside knowledge of violations from coming forward to assist the
Commission in identifying and prosecuting persons who have violated the
securities laws.
(a) Attorney-Client Privilege and Other Attorney Conduct
a. Proposed Rule
As proposed, Rule 21F-4(b)(4)(i) excluded from the definition of
``independent knowledge'' or ``independent analysis'' information that
was obtained through a communication that is subject to the attorney-
client privilege. In addition, Proposed Rule 21F-4(b)(4)(ii) excluded
from the definition of ``independent knowledge'' or ``independent
analysis'' information that a potential whistleblower obtained as the
result of the legal representation of a client on whose behalf the
whistleblower's services, or the services of his or her employer or
firm had been retained, unless the disclosure had been authorized as
stated above. Neither of these exclusions applied where an attorney is
permitted to disclose otherwise privileged information; for example, if
the privilege has been waived or if the disclosure is permissible
pursuant to the Commission's attorney conduct rules \119\ or applicable
state statutes or bar rules governing the ethical behavior of
attorneys.\120\
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\119\ 17 CFR 205.3(d)(2). This Commission Rule permits attorneys
representing issuers of securities to reveal to the Commission
``confidential information related to the representation to the
extent the attorney reasonably believes necessary'' (1) to prevent
the issuer from committing a material violation that is likely to
cause substantial injury to the financial interest or property of
the issuer or investors; (2) to prevent the issuer, in a Commission
investigation or administrative proceeding, from committing perjury,
suborning perjury, or committing any act that is likely to
perpetrate a fraud upon the Commission; or (3) to rectify the
consequences of a material violation by the issuer that caused, or
may cause, substantial injury to the financial interest or property
of the issuer or investors in the furtherance of which the
attorney's services were used.
\120\ E.g., California Evidence Code Sec. 956 (``There is no
privilege under this article if the services of the lawyer were
sought or obtained to enable or aid anyone to commit or plan to
commit a crime or plan to commit a crime or fraud.'').
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The proposed exclusions in 21F-4(b)(4)(i) and (ii) recognized the
prominent role that attorneys play in all aspects of practice before
the Commission and the special duties they owe to clients. We observed
that compliance with the Federal securities laws is promoted when
individuals, corporate officers, and others consult with counsel about
possible violations, and the attorney-client privilege furthers such
consultation.\121\ This important benefit could be undermined if the
whistleblower award program created monetary incentives for counsel to
disclose information about possible securities violations in violation
of their ethical duties to maintain client confidentiality.\122\
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\121\ See Upjohn Co. v. U.S., 449 U.S. 383, 389 (1981) (``[The
attorney-client privilege's] purpose is to encourage full and frank
communication between attorneys and their clients and thereby
promote broader public interests in the observance of law and
administration of justice.'').
\122\ United States of America ex rel Fair Laboratory Practices
Associates v. Quest Diagnostics, Inc., 2011 WL 1330542 (S.D.N.Y.
Apr. 5, 2011) (emphasizing ``the great Federal interest in
preserving the sanctity of the attorney-client relationship,'' the
court dismissed a False Claims Act qui tam action brought by a
partnership where the suit was based on attorney-client privileged
information that one of the relator's partners, an attorney,
disclosed in violation of New York's attorney ethics laws).
---------------------------------------------------------------------------
The proposed exceptions for information obtained through privileged
attorney-client communications and for information obtained in the
legal representation of others did not apply, however, where the
attorney is already permitted to disclose the substance of a
communication that would otherwise be privileged. This included, 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.\123\
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\123\ See Model Rules of Professional Conduct 1.6(b), 1.13(c).
Model Rule 1.6(b), variants of which have been adopted by nearly
every state in the country and the District of Columbia, permits the
disclosure of information relating to the representation of a
client, among other things, where the lawyer reasonably believes the
disclosure is necessary (1) to prevent reasonably certain death or
substantial bodily harm; (2) to prevent the client from committing a
crime or fraud that is reasonably certain to result in substantial
injury to the financial interests or property of another and in
furtherance of which the client has used or is using the lawyer's
services; and (3) to prevent, mitigate or rectify substantial injury
to the financial interests or property of another that is reasonably
certain to result or has resulted from the client's commission of a
crime or fraud in furtherance of which the client has used the
lawyer's services. See Model Rule 1.6(b)(1)-(3). Model Rule 1.13(c)
provides that where an attorney reports violations of law to the
highest authority within an organization, and ``despite the lawyer's
efforts * * * the highest authority that can act on behalf of the
organization insists upon or fails to address in a timely and
appropriate manner an action, or a refusal to act, that is clearly a
violation of law, and (2) the lawyer reasonably believes that the
violation is reasonably certain to result in substantial injury to
the organization,'' the lawyer may reveal information relating to
the representation., notwithstanding Rule 1.6, but only to the
extent ``the lawyer reasonably believes necessary to prevent
substantial injury to the organization.''
---------------------------------------------------------------------------
The exclusions did not preclude an individual who has independent
knowledge of facts indicating possible 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.
b. Comments Received
The Commission received a number of comments related to the
exclusions set forth in Proposed Rules 21F-4(b)(4)(i) and (ii). Most
commenters were generally supportive of the exclusions for the reasons
that we identified in our proposing release.\124\ A few commenters,
however, asserted that the exclusions are unnecessary, and that instead
we should rely upon judicial decisions and state bar opinions to decide
on a case-by-case basis whether we could use information that would
otherwise be covered by the proposed exclusions.\125\
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\124\ See, e.g., letters from NSCP; Grohovsky Group.
\125\ See, e.g., letters from TAF; Stuart D. Meissner, LLC.
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Many commenters who were generally supportive of the exclusions
suggested modifications.\126\ Several commenters recommended that the
exclusions expressly apply to all information coming from
[[Page 34315]]
communications subject to the attorney-client privilege, whether or not
the whistleblower was an attorney, because non-attorneys are often in
possession of information that is subject to the privilege.\127\ Other
commenters wanted us to modify the rules to ensure that we are not
receiving privileged information.\128\ For example, one commenter
requested that the rule explicitly state that we are not seeking
privileged information, and, that if such information is provided to
us, we will not argue that the privilege was waived.\129\ Other
commenters recommended that the rule should exclude all information
coming from communications with attorneys, even if the privilege had
been waived.\130\
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\126\ See, e.g., letters from M.J. O'Loughlin; joint letter from
Apache, Cardinal Health, Goodyear, HP, Merck, Microsoft, Proctor &
Gamble, TRW, United Technologies (``Apache Group''); Financial
Services Roundtable; and GE Group; Arent Fox LLP; CCMC.
\127\ See letters from Apache Group; Financial Services
Roundtable; and GE Group.
\128\ See, e.g., letters from Arent Fox LLP; CCMC.
\129\ See letter from Apache Group.
\130\ See letter from NACD. See also letter from Eric Dixon,
LLC.
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One commenter recommended that we narrow the scope of the
exclusions so that, if the privileged information relates to an
entity's wrong-doing and the entity does not appropriately handle the
information, a whistleblower will be eligible for an award if he
submits it to us.\131\
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\131\ Letter from the Institute of Internal Auditors.
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c. Final Rule
After reviewing the comments, we are adopting proposed Rules 21F-
4(b)(4)(i) and (ii) with several modifications.\132\
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\132\ In addition, we made several stylistic changes to Rules
21F-4(b)(4)(i) and (ii) that do not affect the substance of either
provision. We have replaced ``authorized'' with ``permitted'' in
stating that attorney-client privileged information, or information
learned from the legal representation of a client, may qualify as
independent knowledge if its disclosure ``would otherwise be
permitted by an attorney.'' See letter from M.J. O'Loughlin. We have
also moved the phrase ``If you obtained the information'' from
Proposed Rule 21F-4(b)(4) into both Rules 21F-4(b)(4)(i) and
(b)(4)(ii).
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First, we have modified the language to clarify that both
exclusions apply to non-attorneys. Thus, if an attorney in possession
of the information would be precluded from receiving an award based on
his or her submission of the information to us, a non-attorney who
learns this information through a confidential attorney-client
communication would be similarly disqualified. Correspondingly, if an
attorney could submit the information to us under the same
circumstances consistent with applicable state bar rules (e.g., based
on waiver of the privilege or a crime-fraud exception), then a non-
attorney would similarly be eligible for an award for disclosing the
information.
Second, we have modified Rule 21F-4(b)(4)(ii) to clarify that it
applies to attorneys who work in-house for an entity and provide legal
services (e.g., attorneys in an entity's general counsel's office). The
proposing rule may have been unclear about whether in-house attorneys
would be covered by Rule 21F-4(b)(4)(ii) because language in the rule
stated that the individual's services, or the services of his or her
employer or firm, need to ``have been retained.'' Additional ambiguity
was created by proposed Rule 21F-(4)(b)(4)(iv), which would have
created a separate exclusion for individuals who have ``legal''
responsibilities for an entity. The changes to the final rule clarify
our intention that all attorneys--whether specifically retained or
working in-house--are eligible for awards only to the extent that their
disclosures to us are consistent with their ethical obligations and our
Rule 205.3.
With regard to the comments that we ensure that whistleblowers are
not providing us with privileged information, we believe that Rules
21F-4(b)(4)(i) and (ii) sufficiently address this concern because these
rules make clear that we will not reward attorneys or others for
providing us with information that could not otherwise be provided to
us consistent with an attorney's ethical obligations and Rule
205.3.\133\ While some comments suggested expanding \134\ or narrowing
\135\ the exclusions in Rules 21F(B)(4)(i) and (ii), we believe that
the final rule strikes the right balance because these exclusions are
consistent with the public policy judgments that have been made as to
when the benefits of permitting disclosure are justified
notwithstanding any potential harm to the attorney-client relationship.
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\133\ We have, however, modified Form TCR to ask whether the
whistleblower's submission relates to an entity of which the
whistleblower is or was a ``counsel.'' See Form TCR, Item D5a. In
addition, we modified Item 8 on proposed form TCR to ask the
whistleblower to identify with particularity any information
submitted by the whistleblower that was obtained from an attorney or
in a communication where an attorney was present. These questions
will enhance the staff's ability to identify the risk of receiving
privileged information and provide an appropriate way to balance the
Commission's interest in receiving information with the policy goal
of protecting the privilege. In addition, knowing this information
may allow the staff to quickly segregate potentially privileged
information for more detailed review and consideration.
\134\ See, e.g., letter from NACD (suggesting that Rule 21F-
4(b)(4)(i) exclude all information coming from communications with
attorneys, even if the privilege had been waived).
\135\ See, e.g., letter from Institute of Internal Auditors
(suggesting the exclusion for information subject to the attorney-
client privilege should be conditioned on the company in question
having investigated and reported the violation in question, so that
if the entity does not appropriately handle the information, an
individual should be able to report the violation and participate in
any whistleblower award).
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Nor do we agree with the comments suggesting that the exclusions
are unnecessary because even if we receive attorney-client privileged
information we can thereafter rely upon judicial opinions and ethics
decisions to determine whether we can use it.\136\ In our view, the
exclusions send a clear, important signal to attorneys, clients, and
others that there will be no prospect of financial benefit for
submitting information in violation of an attorney's ethical
obligations.
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\136\ See letters from TAF; NSCP.
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(b) Responsible Company Personnel, Compliance Processes, and
Independent Public Accountants
As proposed, Rule 21F-4(b)(4)(iii) excluded independent public
accountants who obtained information through an engagement required
under the Federal securities laws in certain circumstances. Proposed
Rules 21F-4(b)(4)(iv) and (v) provided that certain responsible company
officials and others who learned information through or in relation to
a company's processes for identifying and addressing possible
violations of law would not be able to use that information as the
basis for a whistleblower submission, subject to certain exceptions set
forth in the rules. We have made substantial changes to the proposed
rules. As modified, we are adopting these provisions as Rules 21F-
4(b)(4)(iii) and (v).
(i) Proposed Rule 21F-4(b)(4)(iii)
a. Proposed Rule
Proposed Rule 21F-4(b)(4)(iii) excluded from the definition of
``independent knowledge'' or ``independent analysis'' information that
was obtained through the performance of an engagement required under
the securities laws by an independent public accountant, if that
information related to a violation by the engagement client or the
client's directors, officers or other employees. This proposed
exclusion would have applied only if the information related to a
violation by the engagement client or the client's directors, officers
or other employees.
b. Comments Received
We received many comments related to this rule. Several commenters
submitted substantially similar comments about the proposed rule.\137\
Generally these commenters recommended expanding the statutory
[[Page 34316]]
exclusion to disqualify submissions that identified violations in
connection with the firm's own conduct,\138\ as well as through the
performance of non-audit services for audit clients,\139\ and audit or
other services for non-public clients.\140\ These commenters cited to
duties of confidence and reporting requirements to which independent
public accountants are subject under state law and professional conduct
codes, the importance of candor in the audit relationship, and
practical problems associated with permitting employees of accounting
firms to become whistleblowers in some relationship contexts but not in
others.
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\137\ Letters from PwC; Ernst & Young; KPMG; the Center for
Audit Quality.
\138\ Letters from PwC; Ernst & Young; KPMG.
\139\ Letters from PwC; Deloitte & Touche, LLP (``Deloitte'');
KPMG.
\140\ Letters from PwC; Deloitte; KPMG.
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One commenter urged that the exclusion for independent public
accountants should also extend to information obtained by internal
company personnel in connection with their role supporting an
independent public accountant conducting an audit required under the
securities laws.'' \141\
---------------------------------------------------------------------------
\141\ Letter from ABA.
---------------------------------------------------------------------------
One commenter similarly urged that the exclusion be extended to all
employees who provide information at the request of auditors (both
independent and internal) and observed that under the proposed rule
company accountants providing information at the request of external
auditors will still be considered to have ``independent knowledge and
`independent analysis.'' \142\
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\142\ Letter from NACD.
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Another commenter expressed the view that independent public
accountants (as well as attorneys) should be permitted to become
whistleblowers, but with certain limitations.\143\ This commenter
pointed out that a junior member of the team may not be able to effect
change within a client if the senior members are unwilling to oppose
management. According to this commenter, auditors and attorneys should
be required to report violations internally first, have the ability to
do so anonymously, and then be permitted to make a whistleblower
submission to the Commission 75 days after making an internal report
(but not later than 90 days after their report) if the entity does not
respond appropriately.
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\143\ Letter from DC Bar.
---------------------------------------------------------------------------
One commenter was concerned about circumstances where an
independent public accounting firm might violate its duties to report
under Exchange Act Section 10A.\144\ This commenter argued that
proposed Rule 21F-4(b)(4)(iii) should be revised to permit
whistleblowing when information about illegal acts is not reported to
the Commission by the client or the public accounting firm within the
time periods specified in Section 10A.
---------------------------------------------------------------------------
\144\ Letter from TAF.
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Finally, as noted above, a number of commenters strongly objected
in principle to all of our efforts to create exclusions from
independent knowledge that are not expressly set forth in Section 21F,
including those for independent public accountants.\145\
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\145\ Letters from NWC; NCCMP; Stewart D. Meissner, LLC; TAF.
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(ii) Proposed Rules 21F-4(b)(4)(iv) and (v)
a. Proposed Rules
Proposed Rule 21F-4(b)(4)(iv) excluded from the definitions of
``independent knowledge'' and ``independent analysis'' information
obtained by a person with legal, compliance, audit, supervisory, or
governance responsibilities for an entity if the information was
communicated to that person with the reasonable expectation that he or
she would take appropriate steps to cause the entity to respond to the
violation. Proposed Rule 21F-4(b)(4)(v) excluded information that was
otherwise 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. Each rule
was subject to an exception that made the exclusion inapplicable if the
entity did not disclose the information to the Commission in a
reasonable time, or proceeded in bad faith.
As we explained in our Proposing Release, the rationale for these
proposed exclusions was our interest in not implementing Section 21F in
a way that created incentives for responsible persons who are informed
of wrongdoing, or others who obtain information through an entity's
legal, audit, compliance, and similar functions, to circumvent or
undermine the proper operation of the entity's internal processes for
responding to violations of law. We were concerned about 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, we proposed that these exclusions would no longer apply
if the entity did not disclose the information to the Commission within
a reasonable time or proceeded in bad faith, thereby making an
individual who knew this information eligible to become a whistleblower
based upon his or her ``independent knowledge'' of the violations.
b. Comments Received
We received many comments expressing sharply different views on
these rules. Several commenters expressed strong opposition to the
proposed rules. Among other things, these commenters said that the
proposed rules would preclude submissions from large numbers of
individuals who were in the best position to know about misconduct at
companies; that such deference to internal compliance processes is not
warranted; that compliance and audit officials may be subject to
retaliation, in particular in cases where senior management is
implicated in wrongdoing; that the proposed rules were overly broad in
their potential application to all supervisors and all employees who
had any exposure to compliance and related processes even if the
employee had other sources of knowledge; and that the exceptions to the
proposed rules suffered from a lack of clarity that would make them
unworkable in practice and would strongly discourage potential
whistleblowers.\146\
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\146\ See letters from NWC; Stuart D. Meissner, LLC; Daniel J.
Hurson; TAF; POGO; and Mark Thomas.
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Other commenters generally supported these exclusions in concept,
but offered numerous and varied suggestions for expanding, clarifying,
or modifying the proposed rules. For example, some recommended
broadening the exclusions to encompass other categories of employees,
or clarifying that the proposed rules would cover specific functions,
including operations, finance, technology, credit, risk, and similar
internal control functions; product management or other personnel
responsible for independent valuations of positions at financial
services firms; persons who perform the designated functions at
subsidiaries or other units of an entity; persons involved in processes
relating to required officer certifications and management disclosures
under Sections 302, 404, and 906 of the Sarbanes-Oxley Act; and persons
performing or supporting an internal audit function, including those
individuals who may perform the functions of internal audit but whose
job titles and responsibilities may differ.\147\
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\147\ See letters from ABA; SIFMA; Davis Polk; NSCP; and NACD.
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[[Page 34317]]
Commenters also offered different views on the exceptions to the
proposed rules permitting use of the excluded information if the entity
failed to disclose the information to the Commission within a
reasonable time or acted in bad faith. A number of commenters argued
against the exceptions and in favor of an absolute preclusion of
persons in the designated categories from becoming whistleblowers.
These commenters generally took the view that the persons described in
Proposed Rules 21F-4(b)(4)(iv) and (v) should promote a culture of
compliance and should be required to utilize internal procedures and
systems to address and report instances of noncompliance in all
circumstances.\148\ Certain other commenters recommended that our rules
provide that persons who have a legal, compliance, or similar function
in a company would be ineligible for an award unless they have first
reported the information to an entity's chief legal officer, chief
compliance officer, or a member of the board of directors.\149\
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\148\ See letters from Davis Polk; Jones Day; National
Association of Criminal Defense Lawyers; Paul, Hastings, Janofsky &
Walker LLP (``Paul Hastings''); Financial Services Roundtable; Alcoa
Group; Michael Davis; Les M. Taeger; AT&T Inc.; Eric Dixon, LLC;
Valspar; joint letter from Joseph Murphy, Esq., Donna Boehme, Esq.,
Rebecca Walker, Esq. (``Murphy''); Ethisphere Institute.
\149\ See joint letter from U.S. Chamber of Commerce, Americans
for Limited Government, Ryder Systems, Inc. Financial Services
Institute, Inc., Verizon, White & Case, LLP (``Chamber of Commerce
Group''); letters from AT&T; National Association of Criminal
Defense Lawyers and Apache Group; see also letter from DC Bar
(suggesting that individuals in these categories be required to
report violations internally first and wait 75 days for the entity
to respond appropriately before they are eligible to become
whistleblowers).
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A number of commenters took issue with the ``reasonable time''
language in Proposed Rules 21F-4(b)(4)(iv) and (v) and suggested
alternative approaches for determining when persons described in the
rules might be permitted to make whistleblower submissions.\150\ Many
of these commenters argued that the ``reasonable time'' standard would,
in practice, require companies to disclose all allegations of
wrongdoing, regardless of considerations such as the materiality or
credibility of the allegations, or the results of the company's
investigation. Others pointed out that, because the standard lacked
clarity, it would be difficult for persons in these categories to
determine whether the company had disclosed the violation and whether
it had done so within a ``reasonable time.'' Some commenters
recommended that we define a ``reasonable time'' as some fixed period;
e.g., 90-180 days.\151\
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\150\ See letters from ABA (eliminate ``reasonable time''
standard and only permit use of information in the event of bad
faith); Society of Corporate Secretaries (same); DC Bar (require
individuals in these categories to report violations internally
first and wait 75 days for the entity to respond appropriately
before they are eligible to become whistleblowers.); Cleary Gottlieb
Steen & Hamilton LLP (replace ``reasonable time'' with ``reasonable
and appropriately substantiated basis for believing that the company
has failed to remediate the alleged problem or has acted in bad
faith''); Apache Group (permit compliance personnel to become
whistleblowers if company failed to investigate and remediate,
including consideration of whether to self-report, within a
reasonable time); Chamber of Commerce Group (permit personnel in
these categories to use information only after reporting internally,
and if company failed to disclose information concerning
substantiated violations in a reasonable time).
\151\ See letters from Patrick Burns, NACD, John G. Connolly,
Auditing Standards Committee, Financial Services Roundtable.
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Finally, commenters from diverse perspectives shared the view that
aspects of the proposed rules were vague and open to subjective
interpretations. Some believed that the lack of clarity could have the
effect of discouraging potential whistleblowers because they would not
want to risk their livelihoods and reputations in the face of
uncertainty concerning whether they might be eligible for an
award.\152\ However, others suggested that vagueness would encourage
persons in the categories designated in the proposed rules to make
their own subjective determinations (for example, of whether a
``reasonable time'' had passed), and would therefore prove disruptive
to internal compliance mechanisms.\153\
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\152\ See letters from TAF, DC Bar, Daniel J. Hurson, Stuart D.
Meissner LLC.
\153\ See letters from ABA, Financial Services Roundtable,
Society of Corporate Secretaries, Protiviti, Alcoa Group.
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(iii) Final Rules 21F-4(b)(4)(iii) and (v)
After considering the comments, we are adopting the proposed rules
with substantial modifications. These provisions have been combined and
are now set forth in Rules 21F-4(b)(4)(iii) and (v).
As adopted, Rules 21F-4(b)(4)(iii)(A) through (C) address
responsible company personnel with compliance-related responsibilities.
Rule 21F-4(b)(4)(iii)(D) (in conjunction with Rule 21F-8(c)(4),
discussed below) addresses independent public accountants.\154\ Rule
21F-4(b)(4)(v) sets forth exceptions that apply to these exclusions.
These rules are discussed separately below.
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\154\ We are addressing independent public accountants through
the rules noted above instead of adopting proposed Rule 21F-
4(b)(4)(iii). Paragraph (D) of Rule 21F-4(b)(4)(iii), discussed
below, excludes from the definition of independent knowledge or
analysis information that an accountant learns because of his work
on an engagement required under the Federal securities laws unless
certain enumerated exceptions apply. Rule 21F-8(c)(4) makes a
whistleblower ineligible from being considered for an award if the
information is gained through an audit of financial statements
required under the securities laws and the submission is ``contrary
to the requirements of Section 10A * * * '' as provided for in
Section 21F(c)(2)(C) (15 U.S.C. 78u-6(c)(2)(C)). After considering
the competing views of commenters, we believe these provisions,
taken together, strike a balance between the statute's goal of
encouraging high quality submissions by whistleblowers and a policy
of preventing auditors from getting a windfall from performing their
duties.
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a. Rules 21F-4(b)(4)(iii)(A) Through (C)
As discussed above, we believe there are good policy reasons to
exclude information from consideration as ``independent knowledge'' or
``independent analysis'' in the hands of certain persons, and in
certain circumstances, where its use in a whistleblower submission
might undermine the proper operation of internal compliance systems. At
the same time, we do not think it serves the purposes of Section 21F to
apply this principle in a manner that creates expansive new exclusions
for broad categories of company personnel (e.g., any supervisor, or any
employee involved in control functions or in processes related to
required CEO and CFO certifications). Instead, we believe that the
better approach, and one consistent with Congressional intent, is to
adopt more tailored exclusions for ``core'' persons and processes
related to internal compliance mechanisms, and to enhance the
incentives for employees to report wrongdoing through their company's
established internal procedures.\155\
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\155\ With respect to enhanced incentives, as discussed below,
we are adopting a rule that creates additional opportunities for
employees to obtain whistleblower awards by reporting information
through a company's internal whistleblower, legal, or compliance
mechanisms before or at the same time that they file a whistleblower
submission with us. See Rule 21F-4(c).
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In addition, we agree with the commenters who stated that greater
clarity in these rules will assist both whistleblowers and companies.
For this reason, we have identified by title or function specific
categories of personnel to whom the rules apply.
Thus, as adopted, Rules 21F-4(b)(4)(iii)(A) through (C) describe
three categories of persons whom we will not treat as having
``independent knowledge'' or ``independent analysis'' for purposes of a
whistleblower submission, unless one of the exceptions listed in
paragraph (b)(4)(vi) applies.\156\ The first category, set forth
[[Page 34318]]
in paragraph (A), is officers, directors, trustees, or partners of an
entity if they obtained the information because another person informed
them of allegations of misconduct, or they learned the information in
connection with the entity's processes for identifying, reporting, and
addressing potential non-compliance with law. The term ``officer'' is
defined in Rule 3b-2 under the Exchange Act,\157\ and means ``a
president, vice president, secretary, treasurer or principal financial
officer, and any person routinely performing corresponding functions
with respect to any organization whether incorporated or
unincorporated.'' For example, a managing member of a limited liability
company who performs these types of functions would ordinarily fall
within this rule.
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\156\ Rule 21F-4(b)(4)(iii) only applies to the extent that an
individual is not subject to any of the exclusions set forth in
Rules 21F-4(b)(4)(i) or (ii). Thus, for example, if a company
officer receives a report that is covered by attorney-client
privilege, paragraph (i) would govern use of the information for
purposes of our rules.
\157\ 17 CFR 240.3b-2.
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This provision combines and modifies several concepts that were
previously included in Proposed Rules 21F-4(b)(4)(iv) and (v). As
noted, we have identified with greater specificity the persons who are
covered by the rule. Further, instead of making the exclusion
applicable when information is communicated to one of these persons
``with the reasonable expectation that [the recipient] would take steps
to cause the entity to respond appropriately to the violation,'' the
rule applies whenever one of the designated persons is ``informed * * *
of allegations of misconduct.'' Thus, when an officer or one of the
other designated persons receives a report of possible illegal conduct,
the rule applies without the recipient having to evaluate the
``expectations'' of the person who made the report.\158\ We have also
narrowed the scope of the proposed rule by removing non-officer
supervisors from the list of designated persons. We agree with those
commenters who stated that including all supervisors at any level would
create too sweeping an exclusion of persons who may be in a key
position to learn about misconduct, and that such an exclusion would
not further the purposes of Section 21F.\159\
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\158\ See letter from ABA (noting problem of requiring the
recipient of information to ascertain the ``reasonable expectation''
of the person who reported the information).
\159\ See letter from TAF.
---------------------------------------------------------------------------
Paragraph (A) does not preclude officers and the other designated
persons from obtaining an award for a whistleblower submission in all
circumstances. As noted, the rule applies when someone else informs a
person in the designated categories about allegations of misconduct, or
the designated individual learns the information in connection with the
entity's processes for identifying, reporting, and addressing potential
non-compliance with law.\160\ Examples include learning about a
violation because an employee reports misconduct to the designated
person, being informed of an allegation of misconduct that came into
the company's hotline, or learning of a report from the company's
auditors regarding a potential illegal act. Paragraph (A) is not
intended to establish a general bar against officers, directors, and
other designated persons becoming whistleblowers any time they observe
possible violations at a company or other entity. For example,
paragraph (A) does not prevent an officer from becoming eligible for a
whistleblower award if the officer discovers information indicating
that other members of senior management are engaged in a securities law
violation.
---------------------------------------------------------------------------
\160\ The phrase ``in connection with the entity's processes for
identifying, reporting, and addressing potential non-compliance with
law'' requires that the officer, director, or other designated
individual learn the information through official responsibilities
that relate to such processes.
---------------------------------------------------------------------------
The second category of persons that Rule 21F-4(b)(4)(iii) excludes
from the definitions of ``independent knowledge'' and ``independent
analysis,'' as set forth in paragraph (B), are employees whose
principal duties involve compliance or internal audit responsibilities,
as well as employees of outside firms that are retained to perform
compliance or internal audit work for an entity. For example, a
compliance officer is subject to the rule whether he or she learns
about possible violations in the course of a compliance review or
another employee reports the information to the compliance officer.
Unlike the proposed rule, the rule does not include a company's lawyers
in either of paragraphs (A) or (B), because lawyers are subject to
professional obligations in their dealings with clients, and these are
specifically addressed in Rules 21F-4(B)(4)(i) and (ii).\161\
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\161\ See letter from SIFMA.
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Paragraph (C) of Rule 21F-4(b)(4)(iii) excludes information learned
by employees or other persons associated with firms that are retained
to conduct an internal investigation or inquiry into possible
violations of law in circumstances (as noted above), where the
information is not already excluded under Rules 21F-4(b)(4)(i) or (ii).
b. Rule 21F-4(b)(4)(iii)(D)
Paragraph (D) of Rule 21F-4(b)(4)(iii) excludes information that is
learned by employees of, or other persons associated with, a public
accounting firm through an audit or other engagement required under the
Federal securities laws, if that information relates to a violation by
the engagement client or the client's directors, officers, or other
employees. It only applies to those engagements which are not covered
by Rule 21F-8(c)(4).
Similar to other provisions under Rule 21F-4(b)(4), we are adopting
this new paragraph based on our concern about creating incentives for
independent public accountants to seek a personal financial benefit by
``front running'' the firm's proper handling of information obtained
through engagements required under the Federal securities laws.
Examples include engagements for broker dealer annual audits pursuant
to Rule 17a-5 under the Exchange Act \162\ and compliance with the
custody rule by advisors.\163\
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\162\ See Sec. 240.17a-5.
\163\ See Sec. 275.206(4)-2.
---------------------------------------------------------------------------
Paragraph (D), however, does not limit an individual from making a
specific and credible submission alleging that the public accounting
firm violated the Federal securities laws or professional
standards.\164\ If a whistleblower makes such an allegation, and if
that submission leads to a successful action against the engagement
client, its officers, or employees, then the whistleblower can obtain
an award for that action as well. Moreover, this exclusion does not
apply whenever the facts and circumstances fall within the scope of
exceptions contained in Rule 21F-4(b)(4)(v).
---------------------------------------------------------------------------
\164\ See infra discussion of Rule 21F-8(c)(4).
---------------------------------------------------------------------------
c. Rule 21F-4(b)(4)(v)
Rule 21F-4(b)(4)(v) sets forth exceptions to the application of
Rule 21F-4(b)(4)(iii). If any one of these circumstances is present, a
person in one of the designated categories under Rule 21F-4(b)(4)(iii)
may be eligible for a whistleblower award using information that is
otherwise excluded to that individual by operation of Rule 21F-
4(b)(4)(iii).
The first exception to the operation of Rule 21F-4(b)(4)(iii)
applies when the designated person has a reasonable basis to believe
that disclosure of the information to the Commission is necessary to
prevent the relevant entity from engaging in conduct that is likely to
cause substantial injury to the financial interest or property of the
entity or investors.\165\ For purposes of
[[Page 34319]]
Rule 21F-4(b)(4)(v), in order for a whistleblower to claim a reasonable
belief that disclosure of information to the Commission is necessary to
prevent the relevant entity from committing substantial harm, we expect
that in most cases the whistleblower will need to demonstrate that
responsible management or governance personnel at the entity were aware
of the imminent violation and were not taking steps to prevent it. In
short, the whistleblower must have a reasonable basis for believing
that the entity is about to engage in conduct that is likely to cause
substantial injury to the financial interests of the entity or
investors, and that notification to the Commission is necessary to
prevent the entity from engaging in that conduct. In such cases, we
believe it is in the public interest to accept whistleblower
submissions and to reward whistleblowers--whether they are officers,
directors, auditors, or similar responsible personnel--who give us
information that allows us to take enforcement action to prevent
substantial injury to the entity or to investors.
---------------------------------------------------------------------------
\165\ This provision is similar to the standard that governs the
circumstances in which an attorney appearing and practicing before
the Commission in the representation of an issuer may reveal
confidential information related to the representation without the
issuer's consent. See 17 CFR 205.3(d). However, we have not included
a requirement of a ``material violation,'' as is found in the
attorney conduct rule. As most whistleblowers under this provision
will not be attorneys, we have decided not to require that they make
legal judgments about whether a material violation has occurred, but
simply consider whether they have a reasonable basis to believe that
a report to the Commission is necessary to prevent conduct that is
likely to cause substantial injury to the financial interest or
property of the entity or investors.
---------------------------------------------------------------------------
The second exception to the operation of Rule 21F-4(b)(4)(iii)
applies when the designated person has a reasonable basis to believe
that the entity is engaging in conduct that will impede an
investigation of the misconduct. Our proposed rule included a similar
exception for the entity's ``bad faith,'' and the language, as adopted,
is intended to make this standard clearer. Thus, for example, an
officer or other individual covered by Rule 21F-4(b)(4)(iii) is not
subject to the exclusion of that paragraph if he or she has a
reasonable basis to believe that the entity is destroying documents,
improperly influencing witnesses, or engaging in other improper conduct
that may hinder our investigation.
Finally, under the third exception to Rule 21F-4(b)(4)(iii), an
officer, director, auditor or one of the other designated persons can
become a whistleblower after at least 120 days have elapsed since the
whistleblower provided the information to the audit committee, chief
legal officer, or chief compliance officer (or their equivalents) of
the entity at which the violation occurred, or to his or her
supervisor, or since the whistleblower received the information, if he
or she received it under circumstances indicating that the entity's
audit committee, chief legal officer, chief compliance officer (or
their equivalents), or his or her supervisor was already aware of the
information. As noted above, many commenters criticized as too vague
and unpredictable our proposed rule that would have permitted one of
the designated persons to make a whistleblower submission if an entity
failed to disclose the information to the Commission within a
reasonable time. In response to these comments, we have instead adopted
an exception that will permit a person in one of the designated
categories to become a whistleblower after a fixed period.
The 120-day period begins to run either from the date the
whistleblower informed other senior responsible persons at the entity,
or his or her supervisor, about the violations, or from the date the
whistleblower received the information, if the whistleblower was aware
that these other persons already knew of the violations. Thus, an
officer, director, or other designated person cannot receive a report
of misconduct, and keep silent about it while waiting for the 120-day
period to run, in order to become eligible for a whistleblower award.
The inclusion of a fixed 120-day period is intended for the benefit
of potential whistleblowers, so that they will have a date certain
after which they will no longer be ineligible to make a submission
based upon the information in their possession. It is not intended to
suggest to entities that they have a 120-day ``grace period'' for
determining their response to the violations. Furthermore, when
considering whether and to what extent to grant leniency to entities
for cooperating in our investigations and related enforcement actions,
the promptness with which entities voluntarily self-report their
misconduct to the public, to regulatory agencies, and to self-
regulatory organizations is an important factor.\166\
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\166\ See 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, SEC
Rel. Nos. 34-44969 and AAER-1470 (Oct. 23, 2001) (http://www.sec.gov/litigation/investreport/34-44969.htm.)
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At the same time, it is important to note that this rule is not
intended to, and does not, create any new or special duties of
disclosure on entities to report violations or possible violations of
law to the Commission or to other authorities. The provisions of this
rule are solely designed to provide greater specificity to certain
types of potential whistleblowers about the circumstances in which
their submissions will or will not make them eligible to receive an
award.
Nor do we intend to suggest that an internal investigation should
in all cases be completed before an entity elects to self-report
violations, or that 120 days is intended as an implicit ``deadline''
for such an investigation. Companies frequently elect to contact the
staff in the early stages of an internal investigation in order to
self-report violations that have been identified. Depending on the
facts and circumstances of the particular case, and in the exercise of
its discretion, the staff may receive such information and agree to
await further results of the internal investigation before deciding its
own investigative course. This rule is not intended to alter this
practice in the future.
(c) Rule 21F-4(b)(4)(iv)--Conviction for Violations of Law
a. Proposed Rule
Proposed Rule 21F-4(b)(4)(iv) excluded from the definition of
``independent knowledge'' information that a whistleblower obtained by
a means or in a manner that violates applicable Federal or state
criminal law. We explained our preliminary view that a whistleblower
should not be rewarded for violating a Federal or state criminal law.
b. Comments Received
Comments on this proposal were divided. Several commenters argued
that the proposal went too far in excluding information provided by
whistleblowers.\167\ One commenter explained that the exclusion would
raise difficult questions involving state or Federal criminal law,
including who would decide whether evidence was gathered in violation
of State or Federal criminal law and under what standard of
proof''.\168\
---------------------------------------------------------------------------
\167\ See, e.g., letters from Stuart D. Meissner, LLC; False
Claims Act Legal Center; NWC; Kurt Schulzke; Patrick Burns.
\168\ See letter from Stuart D. Meissner, LLC.
---------------------------------------------------------------------------
Another commenter stated that the Government has historically been
permitted to use documents without concern for how a whistleblower
obtained them as long as the Government did not direct a whistleblower
to take documents \169\ and there is no reason to bar a whistleblower
[[Page 34320]]
from obtaining an award if the Government would be permitted to use
those documents.
---------------------------------------------------------------------------
\169\ See letter from False Claims Act Legal Center. See also
letter from Patrick Burns.
---------------------------------------------------------------------------
Several commenters were supportive of the exclusion.\170\ One, for
example, stated that, even if additional securities law violations
might be uncovered by illegal acts, the result would be to undermine
respect for the rule of law.\171\ Another commenter recommended that
the exclusion should go beyond domestic criminal law violations to
include, among other things, state and Federal civil law.\172\
---------------------------------------------------------------------------
\170\ See, e.g., letters from the NSCP; the American Accounting
Association; GE Group. See also letter from Wanda Bond.
\171\ See letter from the NSCP.
\172\ See letter from Financial Services Roundtable.
---------------------------------------------------------------------------
With respect to whether the exclusion should extend to violations
of foreign criminal law, comments were divided.\173\ One commenter
stated that, without such an exclusion, individuals might be encouraged
to break the laws of foreign countries by the prospect of a
whistleblower award.\174\ Other commenters urged the Commission not to
extend the exclusion to violations of foreign criminal laws. One
commenter, for example, argued that there may be situations in which a
violation of a foreign criminal law is not a violation of a U.S.
Federal or state law, and that in such situations a whistleblower
should be able to obtain an award.\175\
---------------------------------------------------------------------------
\173\ Compare letters from Financial Services Roundtable,
American Accounting Association, National Society of Corporate
Responsibility, TRACE International, Inc. (supporting extending
exclusion to violations of foreign law); with letters from VOICES,
POGO, and Georg Merkl (opposing extending exclusion to violations of
foreign law).
\174\ See letter from TRACE International, Inc. See also, e.g.,
letters from the American Accounting Association; Financial Services
Roundtable; NSCP.
\175\ See letter from POGO. See also letters from VOICES and
Georg Merkl.
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In addition, commenters were sharply divided on whether we should
exclude information obtained in violation of a judicial or
administrative protective order.\176\ Commenters that supported the
exclusion expressed concern that trade secrets and other sensitive
information might be disclosed if we were to permit awards for
information provided in violation of judicial or administrative protect
orders.\177\ Other commenters expressed a general concern that
protective orders are often negotiated between the parties and entered
in private litigation as a way to protect proprietary information and
should not operate to shield from the Commission information related to
securities law violations.\178\
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\176\ Pursuant to Rule 21F-17(a), protective orders entered in
SRO proceedings may not be used to prohibit parties from providing
the Commission with information about a possible securities law
violation.
\177\ See, e.g., letters from Alcoa Group; Financial Services
Roundtable; and GE Group.
\178\ See, e.g., letters from VOICES; Georg Merkl; Patrick
Burns.
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c. Final Rule
After reviewing the comments, we have decided to adopt the proposed
rule, renumbered as Rule 21F-4(b)(4)(iv), but with a modification.
Under Rule 21F-4(b)(4)(iv), a whistleblower's information will be
excluded from the definition of ``independent knowledge'' if he or she
obtained the information by a means or in a manner that is determined
by a domestic court to violate applicable Federal or state criminal
law.\179\
---------------------------------------------------------------------------
\179\ This exclusion is also supported by Section 21F(c)(2)(B)
of the Exchange Act.
---------------------------------------------------------------------------
We continue to believe that this exclusion is consistent with the
intent of Congress that the whistleblower award program not be used to
encourage or reward individuals for obtaining information in violation
of Federal or state criminal law--even if the information might
otherwise assist our enforcement of the Federal securities laws.
Nonetheless, we have decided that the exclusion will only apply where a
domestic court determines that the whistleblower obtained the
information in violation of Federal or state criminal law.\180\ We
believe that Federal and state courts are better positioned than we are
to determine whether a whistleblower obtained the information in
violation of criminal law.
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\180\ If a criminal case is pending or known to be contemplated
against a whistleblower, we may defer decision on an award
application until the criminal matter is resolved.
---------------------------------------------------------------------------
We have determined not to extend the exclusion to cover information
obtained in violation of domestic civil or foreign law, or judicial or
administrative protective orders. Commenters raise a number of
persuasive points supporting and opposing these additional exclusions.
With respect to foreign law, we recognize that other countries often
have legal codes that vary greatly from our own, and we are not in a
position to decide as a categorical rule when it is appropriate to deny
an award based on foreign law.\181\ With respect to material that may
have been obtained in violation of domestic civil law, we believe that,
on balance, these exclusions would sweep too broadly and be difficult
to apply consistently given the patchwork of state and municipal civil
laws that might be implicated.
---------------------------------------------------------------------------
\181\ While the proposed rule does not extend the exclusion to
information obtained or disclosed in violation of foreign law, we
recognize that potential whistleblowers in foreign jurisdictions may
have obligations to comply with applicable foreign laws. For
instance, some foreign jurisdictions impose criminal penalties for
unlawfully obtaining certain information or for unlawfully
disclosing certain information to authorities outside their borders.
---------------------------------------------------------------------------
Finally, we find persuasive the comments that protective orders are
frequently negotiated between parties to private litigation and are
generally intended to protect proprietary information against public
disclosure or improper use. It would be against public policy for
litigants to obtain a protective order, or to seek enforcement of such
an order, for the purpose of preventing the disclosure of information
regarding violations of law to a law enforcement agency. For this
reason, we have determined not to exclude whistleblowers who provide us
with information that an opposing party may contend comes within the
scope of a protective order.
(d) Rule 21F-4(b)(4)(vi)--Information Obtained From Excluded Persons
Proposed Rule 21F-4(b)(4)(vii) excluded persons from making
whistleblower submissions based upon information they obtained from
other persons in whose hands the same information would be excluded as
``independent knowledge'' or ``independent analysis.'' We are adopting
the proposed rule with slight modifications to respond to comments and
to increase clarity. This provision is now set forth at Rule 21F-
4(b)(4)(v).
a. Proposed Rule
The proposed rule provided that we would not treat a whistleblower
submission as derived from ``independent knowledge'' or ``independent
analysis'' if the whistleblower obtained the information on which the
submission was based from any of the individuals described in Proposed
Rules 21F-4(b)(4)(i) through (vi) (the other exclusion provisions).
b. Comments Received
One commenter expressed the view that the proposed rule effectively
created a ``hearsay'' exception to the whistleblower provisions that
could produce unintended results.\182\ The commenter offered the
example of an employee who overhears a conversation in which a
compliance officer admits to participation in a Ponzi scheme. Under the
proposed rule, the commenter pointed out, the employee would be
ineligible to receive a whistleblower award.
---------------------------------------------------------------------------
\182\ See letter from NWC.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting a modified version
of the
[[Page 34321]]
rule. As adopted, Rule 21F-4(b)(vi) provides that a submission will not
be deemed to be derived from ``independent knowledge'' or ``independent
analysis'' if the whistleblower obtained the information for the
submission from a person who is subject to this section unless the
information is not excluded from that person's use, or the
whistleblower is providing the Commission with information about
possible violations involving that person.
We added the phrase ``unless the information is not excluded from
that person's use'' to the proposed rule in order to clarify that Rule
21F-4(b)(4)(vi) is intended to be purely derivative; i.e., if the
person from whom the information was obtained is free to use the
information in a submission (for example, pursuant to the exceptions
for officers, directors, auditors and others found in Rule 21F-
4(b)(4)(v)), then this rule does not bar use of the information. In
order to address the potential for the unintended consequence suggested
in the comment, we also added the proviso that this exclusion does not
apply if the whistleblower is providing information about violations
involving the person from whom the information was obtained.
We expect that Rule 21F-4(b)(4)(vi) will work in tandem with the
other exclusions set forth in Rule 21F-4(b)(4) to preclude submissions
in a limited set of circumstances. Thus, for example, if an employee
only learns about possible violations because he or she is interviewed
in the course of a company internal investigation, Rule 21F-4(b)(4)(vi)
will not permit that employee to file a whistleblower submission
claiming the information as his or her ``independent knowledge'' or
``independent analysis''.\183\ Similarly, if a senior company officer,
after receiving a report concerning possible securities violations,
gives the information to his or her assistant, the assistant will not
be able to seek an award based on the information as long as the
officer is barred from doing so.
---------------------------------------------------------------------------
\183\ This assumes that the employee learns the information in
the interview from an attorney or other person subject to Rules 21F-
4(b)(4)(i) or (ii), or from someone subject to Rule 21F-
4(b)(4)(iii)(C). Depending on all of the facts and circumstances,
the employee could also be directly excluded under Rule 21F-
4(b)(4)(i) if the interview is determined to be covered by the
attorney-client privilege.
---------------------------------------------------------------------------
6. Rule 21F-4(b)(5)--Original Source
Proposed Rule 21F-4(b)(5) described how we would determine if a
whistleblower was the ``original source'' of information that we
received from another source. We are adopting the rule as proposed,
with a slight modification to maintain consistency with other rule
changes.
a. Proposed Rule
The proposed rule provided that we would consider a whistleblower
to be the ``original source'' of the same information that we obtained
from another source if the information satisfied the definition of
original information and the other source obtained the information from
the whistleblower or the whistleblower's representative. If the
whistleblower claimed to be the ``original source'' of information
provided to us by any of the authorities set forth in Proposed Rule
21F-4(a) (relating to the ``voluntary'' submission of information),
then the whistleblower would be required to have ``voluntarily''
provided the information to the other authority within the meaning of
Proposed Rule 21F-4(a).
The proposed rule also required that the whistleblower establish
his or her status as the original source of information to our
satisfaction. In the event that the whistleblower claimed to be the
original source of information provided to us by one of the authorities
set forth in the rule or by another entity (including the
whistleblower's employer), the proposed rule further stated that we
might seek assistance and confirmation of the whistleblower's status
from the other entity.
b. Comments Received
The few comments we received on this proposed rule primarily sought
clarification on its application to particular circumstances.
One commenter requested that we clarify the situation in which one
person makes a submission based upon information obtained from a second
person, and the second person (the original source of the information)
later submits the same information.\184\ Another commenter noted the
potential for inequity that may result if the person who makes the
first whistleblower submission is later displaced from award
eligibility because the second submitter (e.g., the first person's
supervisor) claims to be ``the original source'' of information
submitted by the first person. The commenter expressed concern that the
second submitter might obtain the award, to the exclusion of the first
person, even though the second person may have known about the
violations for an extended period, done nothing to stop them, and only
made a submission after learning about the first person's
submission.\185\
---------------------------------------------------------------------------
\184\ See letter from SIFMA.
\185\ See letter from TAF.
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Another commenter suggested we make clear that if an individual
reports misconduct through a company's internal compliance or other
reporting processes, and the company subsequently self-reports the
violations to the Commission, the individual will be eligible for an
award as the ``original source'' of the information reported by the
company.\186\
---------------------------------------------------------------------------
\186\ See letter from Baron & Budd, P.C.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting Rule 21F-4(b)(5) as
proposed with a slight modification to conform to other rule changes.
Specifically, we are modifying the list of governmental and other
authorities set forth in the rule to conform to the revised list set
forth in Rule 21F-4(a) (see discussion above).
In addition, we provide the following clarifications to address the
comments. As the language of our rule indicates, if B makes a
whistleblower submission based upon information obtained from A, and A
later makes his or her own submission of that information, then A will
be considered the ``original source'' of the information (assuming that
A establishes his or her status as the original source and that the
information otherwise qualifies as ``original information'').\187\
---------------------------------------------------------------------------
\187\ This does not by itself mean that an award is due. The
submitter must still satisfy all of the other requirements of
Section 21F and of our rules, including that the information was
submitted voluntarily, it led to a successful Commission enforcement
action or related action, and the submitter is not ineligible for an
award.
---------------------------------------------------------------------------
However, A's status as the ``original source'' of the information
does not exclude B from award eligibility. In this example, because B
obtained the facts underlying his or her submission from A, and those
facts were not derived from publicly available sources, B would also be
deemed to have submitted information derived from his or her
``independent knowledge.'' Thus, both submissions could qualify as
``original information;'' B's because he or she was first to bring the
Commission information derived from ``independent knowledge,'' and A's
because he or she was the ``original source'' of information that, as
of B's submission, was already known to the Commission.
Further, by virtue of being first-in-time, B may have an advantage
over A. If B's submission were sufficiently specific, credible, and
timely that it caused us to open an investigation, and if a successful
enforcement action
[[Page 34322]]
resulted, then we would consider whether B's submission ``led to'' our
successful action under the lower standard set forth in Rule 21F-
4(c)(1). Correspondingly, if A made his or her submission after we were
already investigating the matter that B brought to us, then A's
information would be evaluated under Rule 21F-4(c)(2), and A would have
to meet the additional requirement that his or her information
``significantly contributed'' to the success of the action. In this
regard, we note that A would also be considered the ``original source''
of any additional information he or she provided that materially added
to our base of knowledge.\188\
---------------------------------------------------------------------------
\188\ See Rule 21F-4(b)(6).
---------------------------------------------------------------------------
An individual can also be the ``original source'' of information
that we receive from an entity, including, for example, other
government authorities, the whistleblower's employer, or other entities
to which the individual may report misconduct. For example, an
individual would be the original source of information provided to the
Commission by his or her employer if the individual reports possible
violations in the first instance through his or her employer's internal
whistleblower, legal, or compliance procedures for reporting
allegations of possible violations of law, the company later self-
reports the individual's information to the Commission, and the
individual thereafter files a whistleblower submission. In fact, as is
further described below, our final rules seek to enhance the incentives
for employees to utilize their company's internal reporting systems,
and we provide a clear alternate path for persons who do so to be
considered eligible for an award if the company later self-reports
violations to the Commission as result of the individual's internal
report.\189\
---------------------------------------------------------------------------
\189\ See Rules 21F-4(b)(7) and 4(c).
---------------------------------------------------------------------------
7. Rule 21F-4(b)(6)--Original Source; Additional Information
a. Proposed Rule
Proposed rule 21F-4(b)(6) addressed circumstances where we already
know some information about a matter from other sources at the time
that we receive a whistleblower submission related to the same matter.
In that case, the proposed rule provided that we would consider the
whistleblower to be an ``original source'' of any information he or she
provided that was derived from the whistleblower's independent
knowledge or independent analysis, and that materially added to the
information already in our possession. As our Proposing Release
explained, this standard was modeled after the definition of ``original
source'' that Congress included in the False Claims Act through recent
amendments.\190\
---------------------------------------------------------------------------
\190\ 31 U.S.C. 3730(e)(4)(B), Public Law 111-148 Sec.
10104(h)(2), 124 Stat. 901 (Mar. 23. 2010).
---------------------------------------------------------------------------
b. Comments Received
One commenter suggested that we clarify how we plan to address the
situation where one whistleblower provides original information that
leads to successful enforcement of an action, and a second
whistleblower provides additional information that ``materially aids''
the enforcement of the same case.\191\
---------------------------------------------------------------------------
\191\ See letter from SIFMA.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting Rule 21F-4(b)(6) as
proposed. Accordingly, a whistleblower will be deemed to be an
``original of source'' of information he or she provides that
materially adds to the Commission's base of knowledge about a matter.
In cases where a second whistleblower voluntarily provides information
that materially adds to what we already know about the matter, and
assuming that all of the other requirements of our rules are satisfied,
we will assess whether the additional information provided by the
second whistleblower also led to successful enforcement of our action
pursuant to the standards described in Rule 21F-4(c). If so, and if, as
a result, we determine that the second whistleblower is also entitled
to an award, then we will determine an award allocation among
whistleblowers pursuant to the criteria set forth in Rule 21F-6.
8. 21F-4(b)(7): Original Source: Lookback
a. Proposed Rule
Proposed Rule 21F-4(b)(7) provided that, if a whistleblower
reported the original information to other authorities or people
identified in Proposed Rules 21F-4(b)(4)(iv) and (v) (personnel
involved in compliance or similar functions, or who are informed about
possible violations with the expectation that they will take steps to
address them), and the whistleblower within 90 days submitted the same
information to the Commission, we would consider that the whistleblower
provided the information as of the date of his or her original
disclosure to one of these other authorities or people. In proposing
this rule in this manner, we were seeking to protect the ability of the
whistleblower to pursue internal or other channels to quickly address
the violation while ensuring that the Commission receives this critical
information in a timely fashion.
b. Comments Received
The Commission received numerous comments suggesting that we extend
the lookback period or eliminate it altogether. Commenters suggested
that 90 days was not sufficient time for an internal compliance or
review program to conduct a sufficiently thorough investigation and
suggested extending the period to 120 days, 180 days, or a reasonable
period of time.\192\ Others, also calling for a longer lookback period
or none at all, suggested that the time limit would burden
whistleblowers seeking to complete their own investigations and
complicate the process.\193\ Some commenters suggested that the
Commission should coordinate with other authorities to determine timing
rather than burden a whistleblower with proving the timing.\194\
---------------------------------------------------------------------------
\192\ See, e.g., letters from Association of Criminal Defense
Lawyers, AT&T, Business Roundable Institute for Corporate Ethics
(``Business Roundtable''), NSCP.
\193\ See, e.g., letters from Georg Merkl, NWC.
\194\ See e.g. letter from Storch, Amini & Munves PC.
---------------------------------------------------------------------------
c. Final Rule
In response to the almost uniform view of commenters suggesting a
longer lookback period, we are modifying the proposed rule to extend
the lookback period to 120 days. Thus, a whistleblower who first
reports to an entity's internal whistleblower, legal, or compliance
procedures for reporting allegations of possible violations of law and
within 120 days reports to the Commission could be an eligible
whistleblower whose submission is measured as if it had been made at
the earlier internal reporting date. This means that even if, in the
interim, another whistleblower has made a submission that caused the
staff to begin an investigation into the same matter, the whistleblower
who had first reported internally will be considered the first
whistleblower who came to the Commission, assuming that his information
was sufficiently specific and credible to have caused the staff to
begin an investigation.\195\
---------------------------------------------------------------------------
\195\ However, in that instance, the other whistleblower would
still be considered for an award if his information significantly
contributed to the success of our enforcement action. See Rule 21F-
4(c)(2).
---------------------------------------------------------------------------
We are balancing priorities with the length and existence of this
lookback
[[Page 34323]]
period, each with the ultimate objective of identifying and remedying
violations of the Federal securities laws quickly. On the one hand, 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. For this reason, we are not requiring
that a whistleblower utilize an available internal compliance program
prior to submission to the Commission, and we are not providing for a
lookback period as long as requested by some commenters. Because of our
strong law enforcement interest in receiving high quality information
about misconduct quickly we have chosen a lookback period shorter than
the 180 days or more that some commenters requested.
On the other hand, 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 possible
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. We believe that the balance struck in the final
rule will promote the continued development and maintenance of robust
compliance programs. As we noted in our proposing release, we are not
seeking to undermine effective company processes for receiving reports
on possible violations including those that may be outside of our
enforcement interest, but are nonetheless important for companies to
address.
The inclusion of this provision is designed for the benefit of
whistleblowers by providing a reasonable period of time to make their
decisions. As discussed elsewhere in this release, we are not requiring
potential whistleblowers to use internal compliance and reporting
procedures 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 do not. Thus, there may well be instances where
internal disclosures could be inconsistent with effective investigation
or the protection of whistleblowers. Ultimately, we believe that
whistleblowers are in the best position to assess whether reporting
potential securities violations through their companies' internal
compliance and reporting systems would be effective.
Nevertheless, as we noted in our proposing release, 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.\196\ 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.\197\
---------------------------------------------------------------------------
\196\ Exchange Act Release No. 44969 (October 23, 2001).
\197\ 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. And, in
determining whether to give a company the opportunity to investigate
and report back, we may consider a number of factors, including, but
not limited to, information we have concerning the nature of the
alleged conduct, the level at which the conduct allegedly occurred,
and the company's existing culture related to corporate governance.
We may also consider information we have about the company's
internal compliance programs, including what role, if any, internal
compliance had in bringing the information to management's or the
Commission's attention.
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9. Rule 21F-4(c)--Information That Leads to Successful Enforcement
a. Proposed Rule
As proposed, Rule 21-4(c) explained when we would consider original
information to have led to successful enforcement. The Proposed Rule
distinguished between information regarding conduct not under
investigation or examination and information regarding conduct already
under investigation or examination.
For information regarding conduct not under investigation or
examination, the Proposed Rule established a two-part test for
determining whether the information led to successful enforcement.
First, the information must have caused the staff to commence an
investigation or examination, reopen an investigation that had been
closed, or to inquire into new and different conduct as part of an
existing examination or investigation. Second, the information must
have ``significantly contributed'' to the success of an enforcement
action filed by the Commission.
For information regarding conduct under investigation or
examination, the Proposed Rule provided a significantly higher
standard. To establish that information led to successful enforcement,
a whistleblower would need to demonstrate that the information: (1)
would not have otherwise been obtained; and (2) was essential to the
success of the action.
b. Comments Received
Although a few commenters approved of the standards in the Proposed
Rule,\198\ most stated that the standards were too high, ambiguous, or
both.\199\ Several commenters criticized the requirement that
information not only cause the staff to open an investigation or
examination but also that it ``significantly contributed'' to the
success of the action, noting that the ``significantly contributed''
element is not contained in the statute and is too high a
standard.\200\ Commenters also expressed concern that the standard
would create uncertainty over when awards would be granted, which in
turn would make potential whistleblowers less likely to come forward
with information.\201\ One commenter suggested that we should examine
whether the whistleblower has provided ``enough information to get the
Commission to open an investigation.'' \202\
Commenters also criticized the proposed standard applicable when
there is already an examination or investigation underway, arguing that
it would be almost impossible for whistleblowers to show that
information
[[Page 34324]]
would not have otherwise been obtained and was essential to the success
of the action.\203\ One commenter expressed concern that the standards
could result in anomalous outcomes, providing an example where one
whistleblower provides a bare-boned tip that causes the staff to open
an investigation (but does not ``significantly contribute'' to the
success of the action), and another whistleblower provides a subsequent
tip that is a complete roadmap of the case after the investigation has
been opened (but the information is not ``essential'' to the success of
the action), yet neither would receive an award.\204\
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\198\ See Chris Barnard; American Accounting Association,
Auditing Standards Committee.
\199\ See, e.g., TAF; VOICES.
\200\ See letters from American Association for Justice;
Grohovsky Group; Cornell Securities Law Clinic; TAF; VOICES; NWC.
\201\ Letters from TAF; VOICES.
\202\ See letter from Grohovsky Group.
\203\ Letter from VOICES (arguing that, particularly given our
funding issues, we should not condition awards on the theoretical
possibility that the staff could uncover the evidence).
\204\ Letter from Grohovsky Group.
---------------------------------------------------------------------------
As noted, we requested comment on whether our rules should require
whistleblowers to report violations of the securities laws through
their internal compliance and reporting systems before submitting the
information to us. Comments on this issue were sharply divided. Many
commenters strongly supported such a requirement. In particular,
commenters argued that we should require internal reporting because
doing so will:
1. Allow companies to take appropriate actions to remedy improper
conduct at an early stage; \205\
---------------------------------------------------------------------------
\205\ See letters from Lum; Chamber of Commerce Group.
---------------------------------------------------------------------------
2. Allow companies to self-report; \206\
---------------------------------------------------------------------------
\206\ See letter from Baker, Donaldson, Bearman, Caldewell &
Berkowitz (``Baker Donaldson'').
---------------------------------------------------------------------------
3. Avoid undermining internal compliance programs and preserve
systems companies have installed designed to deter, indentify, and
correct violations; \207\
---------------------------------------------------------------------------
\207\ See letters from Baker Donaldson; Chamber of Commerce
Group; Foster Wheeler; Apache Group; Alcoa Group; Allstate Group.
---------------------------------------------------------------------------
4. Allow the whistleblower program to supplement, rather than
supersede the internal control requirements under the Sarbanes-Oxley
Act of 2002; \208\
---------------------------------------------------------------------------
\208\ See letters from Arent Fox; Alcoa Group.
---------------------------------------------------------------------------
5. Allow the Commission to preserve its scarce resources by relying
upon corporate internal compliance programs; \209\
---------------------------------------------------------------------------
\209\ See letter from ALG.
---------------------------------------------------------------------------
6. Promote a working relationship between the Commission and
companies; \210\
---------------------------------------------------------------------------
\210\ Id.
---------------------------------------------------------------------------
7. Allow compliance personnel to address conduct that does not yet
rise to the level of a violation or is not a violation (based on a
misunderstanding of fact or law); \211\
---------------------------------------------------------------------------
\211\ See letters from Foster Wheeler; Apache Group.
---------------------------------------------------------------------------
8. Increase the quality of tips the Commission receives; \212\ and
---------------------------------------------------------------------------
\212\ See letter from Apache Group.
---------------------------------------------------------------------------
9. Avoid internal investigations being compromised by unwillingness
on the part of whistleblowers to participate.\213\
---------------------------------------------------------------------------
\213\ See letter from Apache Group.
---------------------------------------------------------------------------
Many other commenters strongly opposed a requirement that
whistleblower report internally before reporting to the Commission.
Several commenters argued that doing so would:
1. Prohibit whistleblowers from reporting fraud directly and
immediately to the Commission; \214\
---------------------------------------------------------------------------
\214\ See letter from NWC.
---------------------------------------------------------------------------
2. Be inconsistent with Congressional intent; \215\
---------------------------------------------------------------------------
\215\ See letters from TAF; POGO. See also Letter from Senator
Charles Grassley (``requiring whistleblowers to first go through
internal compliance programs would be at odds with the law Congress
wrote'').
---------------------------------------------------------------------------
3. Create unnecessary and improper hurdles for whistleblowers;
\216\
---------------------------------------------------------------------------
\216\ See letter from TAF.
---------------------------------------------------------------------------
4. Place whistleblowers at risk of retaliation; \217\
---------------------------------------------------------------------------
\217\ See letters from TAF; Grohovsky Group; POGO.
---------------------------------------------------------------------------
5. Result in whistleblowers deciding not to report misconduct;
\218\
---------------------------------------------------------------------------
\218\ See letters from Grohovsky Group; POGO.
---------------------------------------------------------------------------
6. Eliminate incentives for companies to improve their internal
compliance programs.\219\
---------------------------------------------------------------------------
\219\ See letter from POGO.
---------------------------------------------------------------------------
7. Contravene an employee's right to disclose information
anonymously and directly to the Commission;\220\ and
---------------------------------------------------------------------------
\220\ See letters from NWC and Daniel J. Hurson.
---------------------------------------------------------------------------
8. Be inconsistent with the DOJ and IRS whistleblower
programs.\221\
---------------------------------------------------------------------------
\221\ See letters from TAF and NWC.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we have significantly modified Rule
21F-4(c). First, we are persuaded by those commenters who stated that
the standards in the Proposed Rule were too high. As such, we have
adopted standards that should be easier to satisfy--both for
information regarding conduct not under investigation or examination
and information regarding conduct already under investigation or
examination--in the Final Rule.
Moreover, as further described below, internal compliance programs
are not substitutes for rigorous law enforcement. However, we believe
that internal compliance programs play an important role. While we are
not requiring whistleblowers to report misconduct internally before
reporting to us, we agree that the incentives to do so should be
strengthened. Accordingly, the Final Rule includes a provision for a
new standard applicable to a whistleblower who reports information
internally. The details of the final rule are discussed below.
i. Rule 21F-4(c)(1): Standard for information concerning conduct
not under investigation or examination.
We have decided to lower the standard applicable to information
that concerns conduct not under investigation or examination. As noted
above, the Proposed Rule required that the information must have
``significantly contributed'' to the success of the action. In the
Final Rule, we have deleted ``significantly contributed'' from the
standard. Under the Final Rule, information will be considered to have
led to successful enforcement when it is sufficiently specific,
credible, and timely to cause the staff to commence an examination,
open an investigation, reopen an investigation that the Commission had
closed, or to inquire concerning different conduct as part of a current
examination or investigation, and the Commission brings a successful
judicial or administrative action based in whole or in part on the
conduct identified in the original information.
We do not anticipate a rigid, mechanical application of this
standard. As a general matter, in assessing whether information `led
to' a successful enforcement action, we will examine the relationship
between the information in a submission and the allegations in the
Commission's complaint filed in the civil action or order filed in the
administrative proceeding. Our inquiry will focus on whether the
submission identifies persons, entities, places, times and/or conduct
that correspond to those alleged by the Commission in the judicial or
administrative action. As part of this analysis, we may consider
whether, and the extent to which, the information included: (1)
Allegations that formed the basis for any of the Commission's claims in
the judicial or administrative action; (2) provisions of the securities
laws that the Commission alleged as having been violated in the
judicial or administrative action; (3) culpable persons or entities (as
well as offices, divisions, subsidiaries or other subparts of entities)
that the Commission named as defendants, respondents or uncharged
wrongdoers in the judicial or administrative action; or (4) investors
or a defined group of investors that the Commission named as victims or
injured parties in the judicial or administrative action.
The Final Rule also states that the information submitted by the
whistleblower must be sufficiently ``specific, credible and timely'' to
cause
[[Page 34325]]
the Commission to commence an investigation or examination. This new
language is intended to describe generally the type of information that
would cause our staff to open an investigation or examination. While we
believe it is appropriate to adopt a lower standard in the Final Rule,
due to our limited resources and the high volume of tips that we
receive each year, high-quality tips--ones that are specific, credible
and timely--are most likely to lead to a successful enforcement action.
ii. Rule 21F-4(c)(2): Standard for information concerning conduct
already under investigation or examination.
We have also decided to lower the standard applicable for
information that concerns conduct already under investigation or
examination. We agree with the commenters who expressed concern that
the standard in the Proposed Rule--that the information would not have
otherwise been obtained and was essential to the success of the
action--in practice might be too difficult to satisfy. As a result, for
information concerning conduct already under investigation or
examination, we will find information to have led to successful
enforcement when the information ``significantly contributed'' to the
success of our action.
While we continue to believe that the primary focus of the program
is to encourage the submission of information regarding conduct not
already known to us, we recognize that in some cases information
voluntarily provided by a whistleblower can play a vital role in
advancing an existing investigation. Thus, a whistleblower will be
eligible for an award in a matter already under investigation if his or
her information ``significantly contributes'' to our success. In
applying this standard, among other things, we will look at factors
such as whether the information allowed us to bring: (1) Our successful
action in significantly less time or with significantly fewer
resources; (2) additional successful claims; or (3) successful claims
against additional individuals or entities.
At the same time, we do not want to reward a whistleblower who has
obstructed an ongoing investigation in an effort to obtain an award. In
this regard, absent extraordinary circumstances, we will not consider
information to have ``significantly contributed'' to the success of our
action if: (i) We or some other law enforcement agency has issued a
subpoena or other document request, inquiry or demand to an entity or
an individual other than the whistleblower; (ii) there is evidence that
the whistleblower was aware of the investigative request, inquiry, or
demand; and (iii) the whistleblower withheld or delayed providing
responsive documents prior to making the related submission to the
Commission. This approach is consistent with one of the principal goals
of the program: To incentivize whistleblowers to come forward early
with information of possible violations of the securities laws rather
than wait until they become aware of an investigation by the Commission
or other agency.\222\ Further, it would not be good policy for a person
to be rewarded for ``significantly contributing'' to the success of an
action when he has knowingly obstructed the investigation of the
misconduct.
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\222\ 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 * * *.'').
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iii. Rule 21F-4(c)(3): Additional incentives to encourage reporting
through internal compliance programs.
Paragraph (3) of Rule 21F-4(c) is a new provision that has been
added, in response to comments, to create a significant financial
incentive for whistleblowers to report possible violations to internal
compliance programs before, or at the same time, they report to us. The
final rule provides that if: (1) A whistleblower reports original
information through his or her employer's internal whistleblower, legal
or compliance procedures before or at the same time he or she reports
them to the Commission; (2) the employer provides the Commission with
the whistleblower's information or with the results of an investigation
initiated in response to the whistleblower's information; and (3) the
information provided by the employer to the Commission ``led to''
successful enforcement under the criteria of Rule 21F-4(c)(1) or (2)
discussed above, then the whistleblower will receive full credit for
the information provided by the employer as if the whistleblower had
provided the information to us.\223\ Thus, when the employer provided
information ``led to'' a successful enforcement action, the
whistleblower will be eligible for an award, even if the information
the whistleblower originally provided to the employer would not have
satisfied the ``led to'' requirements.
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\223\ Employees who report internally in this manner will have
anti-retaliation employment protection to the extent provided for by
Section 21F(h)(1)(A)(iii) of the Exchange Act, which incorporates
the broad anti-retaliation protections of Sarbanes-Oxley Section
806, see 18 U.S.C. 1514A(b)(2).
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To qualify for an award under this new provision, the rule requires
that a whistleblower must provide information ``through an entity's
internal whistleblower, legal or compliance procedures for reporting
allegations of possible violations of law.'' A report to a supervisor
will qualify under this standard if the entity's internal compliance
procedures require or permit reporting misconduct in the first instance
to supervisors. Furthermore, if an entity does not have established
internal procedures for reporting violations of law, we will consider
an employee who reports a possible violation to the entity's legal
counsel, senior management, or a director or trustee to have provided
the information through the appropriate ``internal whistleblower, legal
or compliance procedures.'' \224\
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\224\ To qualify for consideration under Rule 21F-4(c)(3), a
whistleblower must establish that he or she provided original
information through the appropriate ``internal whistleblower, legal
or compliance procedures.'' Accordingly, prospective whistleblowers
will be better able to support their claims under this provision if
they generate, obtain and retain contemporaneous documentation
(e.g., e-mails or other written records) demonstrating their
compliance with the requirements of the Rule, including documents
evidencing: (i) the substance of the information; (ii) the means by
which the information was provided; (iii) the recipients of the
information; and (iv) the date on which the information was
provided.
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Rule 21F-4(c)(3) incentivizes whistleblowers to report internally
in appropriate circumstances by providing them a meaningful opportunity
to increase their probability of receiving an award. In effect,
reporting internally provides a second potential path to an award. We
anticipate that not only individuals who were predisposed to report
internally prior to the enactment of the whistleblower award program,
but also some who would not have been inclined to report internally,
will respond to Rule 21F-4(c)(3)'s financial incentive by utilizing
internal reporting procedures. Put differently, the rule's financial
incentives should both mitigate any diversion from internal reporting
of individuals who would be predisposed to report internally in the
absence of the whistleblower program, and incentivize new individuals
who otherwise might never have reported internally to enter the pool of
potential internal whistleblowers. As a result, the provision should
increase the likelihood that individuals will report misconduct to
effective internal reporting programs, allowing such programs to
continue to play an important role in facilitating compliance with the
securities laws.
Although many commenters argued that we should require
whistleblowers to report possible violations internally either before
or contemporaneously with reporting to us, we are not
[[Page 34326]]
persuaded that such a requirement would achieve better overall
enforcement of the Federal securities laws than the approach we are
adopting for several reasons. First, we believe that there are a
significant number of whistleblowers who would respond to the financial
incentive offered by the whistleblower program by reporting only to the
Commission, but who would not come forward either to the Commission or
to the entity if the financial incentive were coupled with a mandatory
internal reporting requirement.\225\ In those cases, the Commission
would not receive critical information about possible securities law
violations, and companies and investors would suffer harm as ongoing
violations remained undetected and unremedied.
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\225\ Specifically, the fear of retaliation and other forms of
harassment, as well as other social and psychological factors, can
have a chilling effect on certain whistleblowers who, absent a
mandatory internal reporting requirement, would respond to the
financial incentive offered by the whistleblower program by
providing the Commission with information about possible securities
law violations. See discussion in Part IV(A)(7) of the Economic
Analysis. A number of commenters who routinely work with
whistleblowers supported this assessment. See, e.g., letters from
Grohvosky (explaining that if potential whistleblowers were required
to report internally, many would remain silent); TAF (same).
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Second, our approach should encourage companies to continue to
strengthen their internal compliance programs in an effort to promote
internal reporting. Potential whistleblowers are more likely to respond
to Rule 21F-4(c)(3)'s financial incentive by reporting internally when
they believe that the company or entity has a good internal compliance
program--i.e., a compliance program that will take their information
seriously and not retaliate.\226\ We anticipate that companies will
recognize this, take steps to promote a corporate environment where
employees understand that internal reporting can have a constructive
result, and that the net effect of this will be enhanced corporate
compliance with the Federal securities laws.
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\226\ See generally Richard E. Moberly, Sarbanes-Oxley's
Structural Model To Encourage Corporate Whistleblowers, 2006 BYU L.
REV. 1107, 1144 (2006).
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Third, while internal compliance programs are valuable, they are
not substitutes for strong law enforcement. In some cases, law
enforcement interests will be better served if we know of potential
fraud before the entities or individuals involved learn of our
investigation. This is particularly true when there is a risk that an
entity or individual may try to hinder or impede our investigation by,
for example, destroying documents or tampering with witnesses.\227\
Similarly, there are circumstances where a whistleblower may have
legitimate reasons for not wanting to report the information
internally, for example, legitimate concerns about misconduct by the
company's management or within the internal compliance program, or a
reasonable basis to fear retaliation or personal harm.
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\227\ Similarly, we note that a requirement for mandatory
internal reporting before reporting to the Commission would result
in undesirable outcomes in the case of entities' with ineffective
internal compliance processes. In these cases, mandatory internal
pre-reporting would lead to unnecessary delays before the violation
can be addressed by the Commission, resulting in potentially
increased injuries to the company and investors.
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In addition, we do not believe that a general requirement on
whistleblowers to report possible violations through internal
compliance procedures would be consistent with the language of, or
legislative intent underlying, Section 21F. As evidenced by the text of
Section 21F, the broad objective of the whistleblower program is to
enhance the Commission's law enforcement operations by increasing the
financial incentives for reporting and lowering the costs and barriers
to potential whistleblowers, so that they are more inclined to provide
the Commission with timely, useful information that the Commission
might not otherwise have received.\228\ However, as discussed above, a
general requirement that employees report internally as a condition of
participating in the whistleblower program would impose a barrier that
in some cases would dissuade potential whistleblowers from providing
information to the Commission, contrary to the purpose of the
whistleblower provision.\229\ Moreover, a mandatory internal reporting
requirement would deviate from the operation of other established
Federal whistleblower award programs, and there is no indication in the
text or legislative history of Section 21F that Congress intended that
result.\230\
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\228\ The statute incentivizes whistleblowers to report possible
securities law violations to the Commission by offering them
financial awards, reducing the risks from employment retaliation,
and lowering the barriers through user-friendly procedures and
appellate redress. See Section 21F(b)-(c) of the Exchange Act (10-
30% awards); id. 21F(d) (whistleblower anonymity); id. 21F(e) (no
contractual obligations can be imposed on whistleblowers unless
provided for in a Commission rule or regulation); id. 21(f) (right
of appeal); id. 21F(h) (anti-retaliation protection and heightened
confidentiality requirements for whistleblower identifying
information). See also Section 922(d) of Dodd-Frank Act (mandating a
study of the ``whistleblower protections'' established in Section
21F of the Exchange Act).
\229\ Similarly, an internal reporting requirement would appear
inconsistent with the provisions of Section 21F that are designed to
protect the identity of a whistleblower. See Section 21F(d)(2) &
(h)(2). Simply put, even where an entity may have implemented
generally effective procedures for anonymous reporting, there will
be situations where a whistleblower's tip might, by the nature of
the information it discloses, reveal the identity of the
whistleblower--e.g., situations where only a few people would have
assess to the information. The financial incentives approach that we
are adopting allows the whistleblower to access whether an internal
report might disclose his identity and, if so, whether he wishes to
report internally notwithstanding this possibility.
\230\ We also considered suggestions by some commenters that we
should require internal reporting by employees of issuers that are
subject to Section 301 of the Sarbanes-Oxley Act of 2002 (``SOX'')
in order to harmonize Section 21F with the requirement of Section
301 that listed companies have audit committee procedures for the
receipt, retention, and treatment of complaints regarding
accounting, internal accounting control, and auditing matters,
including procedures for the submission of information anonymously.
See, e.g. letters from Business Roundtable; ABA; U.S. Chamber of
Commerce Group; Alcoa Group. In Section 301 of SOX, Congress
mandated that listed companies establish structural mechanisms to
facilitate internal whistleblowing by employees. In Section 21F,
however, Congress chose a wholly different model--one that provides
financial incentives for employees and others to report violations
directly to the Commission. See Richard E. Moberly, Sarbanes-Oxley's
Structural Model To Encourage Corporate Whistleblowers, 2006 BYU L.
REV. 1107, 1108 n.5 (2006); Geoffrey Christopher Rapp, Beyond
Protection: Invigorating Incentives for Sarbanes-Oxley Corporate and
Securities Fraud Whistleblowers, 87 B.U.L.Rev. 91 (2007). We do not
think it appropriate to limit the path opened by Section 21F by a
Commission-imposed requirement that employees of listed companies
also utilize internal audit committee or other complaint procedures.
Further, even if a company has anonymous complaint procedures
consistent with Section 301 of SOX, in some cases an anonymous
whistleblower's identity can be gleaned from the facts and
circumstances surrounding the whistleblower's complaint. In those
situations, requiring the whistleblower to report internally would
be in tension with the mandate of Section 21F that we protect
information that could reasonably be expected to reveal the identity
of a whistleblower. See Section 21F(h)(2) of the Exchange Act.
Finally, as discussed above, we believe that our approach will
incentivize individuals who were pre-disposed to report internally
to continue to do so, and thus will significantly mitigate the
concern of commenters that our rules will undermine internal
reporting processes established pursuant to Section 301.
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At the same time, we also do not agree with the comment that no
provisions should be made in our rule to encourage internal reporting
because whistleblowers would do so anyway.\231\ Although some evidence
suggests that many whistleblowers will continue to
[[Page 34327]]
report misconduct internally,\232\ we understand that the financial
incentives established by Section 21F could have the potential to
divert other whistleblowers away from reporting internally. If this
diversion were significant, it might impair the usefulness of internal
compliance programs, which can play an important role in achieving
compliance with the securities laws. Accordingly, we believe that it is
appropriate for us to provide significant financial incentives as part
of the whistleblower program to encourage employees and other insiders
to report violations internally, while still leaving the ultimate
decision whether to report internally to the whistleblower.
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\231\ See, e.g., letter from NWC (``NWC strongly urges that the
Commission rules be revised and * * * treat employees equally
whether they choose to make their disclosures internally,
externally, or both.''). But cf. Chamber of Commerce Group (``In the
absence of an affirmative restriction on external reporting when
effective internal compliance channels are available, or provision
of a significant incentive for using those internal channels,
employees will face an irresistible temptation to go to the SEC with
their report.'') (emphasis added).
\232\ See letter from NWC. This comment included a study
indicating that roughly 90% of individuals who eventually filed qui
tam suits under the False Claims Act also reported the misconduct
internally, without any incentives for internal reporting. It is not
clear that data about whistleblower behavior under the False Claims
Act necessarily will be an accurate predictor of behavior under our
program. The barriers to participation as a False Claims Act
whistleblower are appreciably higher than in our program: for
example, to be eligible for an award under the False Claims Act, a
qui tam relator must file a Federal court complaint alleging fraud
with specificity as required by Rule 9(b) of the Federal Rules of
Civil Procedure, whereas under our program, a whistleblower only
needs to complete a Form TCR, sworn under penalty of perjury.
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10. Rule 21F-4(d)--Action
Proposed Rule 21F-4(d) defined the term ``action'' to mean a single
captioned judicial or administrative proceeding. We are revising the
proposed rule to permit consideration of multiple cases that arise out
of a common nucleus of operative facts as a single ``action.''
a. Proposed Rule
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 collected sanctions on which awards are based,\233\
proposed rule 21F-4(d) defined ``action'' to mean a single captioned
civil or administrative proceeding. Under the proposed rule, ``action''
included all defendants or respondents and all claims 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.
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\233\ See Proposed Rule 21F-5.
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Also, the proposed rule meant 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.
b. Comments Received
Commenters offered competing views on the proposed interpretation
of ``action.'' A number of commenters supported our proposed
definition.\234\ Several commenters disagreed with the proposal, urging
that the Commission should aggregate multiple Commission actions
arising out of a whistleblower's submission for purposes of satisfying
the $1,000,000 threshold \235\ because to do otherwise was to put form
over substance and not fully reward whistleblowers for the information
they provided that led to successful actions.\236\
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\234\ See letters from Chris Barnard, Auditing Standards
Committee, and Institute of Internal Auditors.
\235\ See, letters from VOICES, NWC, Stuart D. Meissner, LLC,
Georg Merkl, and Wanda Bond.
\236\ See letter from the NWC.
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Two other commenters argued that our definition of ``action''
should be narrowed so that, in a case involving multiple counts, only
the counts resulting from the whistleblower's information are
considered.\237\ These commenters were concerned that, without this
limitation, the rules would encourage whistleblowers to report even
minor violations in the hope that they will be grouped with more
serious violations in a single action with the result that all of the
sanctions in the action together meet the covered action threshold.
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\237\ See letters from the NSCP and SIFMA.
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c. Final Rule
After reviewing the comments, we are adopting the rule with
substantial modifications. Notwithstanding the use of the singular term
``action'' in Section 21F, we agree with the commenters who urged that
Congress did not intend for a meritorious whistleblower to be denied
consideration for an award simply because we chose to bring separate
proceedings against respondents or defendants involved in the same or
closely related conduct.\238\
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\238\ As noted above, two commenters argued that we should
interpret ``action'' narrowly such that we would only pay an award
to a whistleblower for monetary sanctions related to specific counts
in an action that were based upon the whistleblower's information.
We decline to do so. First, we do not believe that such a narrow
interpretation is consistent with the purpose of the whistleblower
program, which is to encourage whistleblowers to provide the
Commission with information that leads to successful enforcement
actions. The proposed narrow interpretation of action would reduce
incentives for whistleblowers to provide the Commission with
information because (i) it would create uncertainty regarding how
monetary sanctions may be assigned to specific counts and (ii) it
would not reward whistleblowers who provide the Commission with
information regarding lesser misconduct (although misconduct
sufficient to cause the Commission to open an investigation) but
which led the Commission to uncover much more significant
misconduct. Second, we do not believe that such a narrow
interpretation of action is practical. In contested actions, courts
often do not assign monetary sanctions against a single defendant on
a per count basis, and neither do Commission settlements. As such,
we would have no reasonable basis to assign specific amounts to
various counts in an action.
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Accordingly, as adopted, Rule 21F-4(d) defines the term ``action''
generally to mean a single captioned judicial or administrative
proceeding brought by the Commission. However, the rule also identifies
two exceptions to this general definition. First, an ``action'' will
constitute two or more Commission proceedings arising from the same
nucleus of operative facts for purposes of making an award under Rule
21F-10. Second, for purposes making payments under Rule 21F-14 on a
Commission action for which we have already made an award, we will
treat as part of that same action any subsequent Commission proceeding
that, individually, results in a monetary sanction of $1,000,000 or
less, and that arises out of the same nucleus of operative facts.
The same-nucleus-of-operative-facts test is a well-established
legal standard that is satisfied where two proceedings, although
brought separately, share such a close factual basis that the
proceedings might logically have been brought together in one
proceeding.\239\ In exercising our discretion and deciding whether two
or more proceedings arise from the same nucleus of operative
[[Page 34328]]
facts, we intend to apply a flexible approach and will consider a
number of factors, including whether the separate proceedings involve
the same or similar: (1) Parties (whether named as defendants/
respondents or simply named within the complaint or order); (2) factual
allegations; (3) alleged violations of the Federal securities laws; or
(4) transactions or occurrences.\240\
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\239\ See, e.g., Harper v. AutoAlliance Intern., Inc., 392 F.3d
195, 209 (6th Cir. 2004) (``Claims form part of the same case or
controversy [for purposes of supplemental jurisdiction] when they
`derive from a common nucleus of operative facts.''') (quoting
Ahearn v. Charter Township of Bloomfield, 100 F.3d 451, 454-55 (6th
Cir. 1996)). To determine whether two or more proceedings involve
the same nucleus of operative facts, courts look at ``factors such
as `whether the facts are related in time, space, origin or
motivation,' `whether they form a convenient trial unit,' and
whether treating them as a unit `conforms to the parties'
expectations.''' In re Iannochino, 242 F.3d 36, 46 (1st Cir. 2001)
(quoting Restatement (Second) of Judgments Sec. 24 (1982))
(internal quotation marks omitted). See also Airframe Systems, Inc.
v. Raytheon Co., 601 F.3d 9, 15 (1st Cir. 2010). Put another way,
``as long as the new complaint grows out of the same transaction or
series of connected transactions as the old complaint, the causes of
action are considered to be identical.'' Kale v. Combined Ins. Co.,
924 F.2d 1161, 1166 (1st Cir. 1991) (internal quotation marks and
citations omitted).
\240\ An administrative or judicial proceeding brought by the
Commission will be treated as part of only one covered action.
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Paragraph (d)(1) allows us to treat together as a covered action
for purposes of making an award under Rule 21F-10, two or more
administrative or judicial proceedings brought by the Commission if
those proceedings arise from the same nucleus of operative facts. So,
for example, if we bring multiple proceedings during the course of an
investigation, and these proceedings involve the same nucleus of
operative facts but none yields a monetary sanction in excess of
$1,000,000, we may nonetheless issue a Notice of Covered Action and
treat these proceedings as one covered action for purposes of making an
award under Rule 21F-10. Thus, if a qualified whistleblower provided us
with original information that led to the successful enforcement of any
one of the proceedings, we will make an award to that whistleblower for
10 to 30 percent of the total monetary sanctions collected in those
proceedings.
Similarly, we will treat together a proceeding that yielded a
monetary sanction of $1,000,000 or less with a Commission proceeding
that alone would qualify as a covered action if the two proceedings
involve the same nucleus of operative facts. Here again, we believe
this is consistent with Congress's intent that qualified whistleblowers
who provide us with original information that leads to enforcement
proceedings yielding monetary sanctions in excess of $1,000,000 should
receive an award payout that fully reflects the monetary sanctions
collected.
Paragraph (d)(1) also authorizes us to treat as a covered action
under Rule 21F-10 two or more Commission proceedings that otherwise
might individually qualify as covered actions where these proceedings
involve the same nucleus of operative facts. We believe that treating
these proceedings together under the Rule 21F-10 procedures as one
covered action, rather than processing them as separate covered
actions, will help make the awards procedures more efficient and user-
friendly, thereby further encouraging whistleblowers to come forward.
Finally, paragraph (d)(2) provides that, for purposes of
determining the payment on an award pursuant to Rule 21F-14, we will
deem as part of the Commission action upon which the award was based
any subsequent Commission proceeding that, individually, results in a
monetary sanction of $1,000,000 or less, and that arises out of the
same nucleus of operative facts.\241\ For example, if we make a
whistleblower award for a covered action brought against an entity, but
thereafter bring a separate proceeding against the officer who was
responsible for the entity's conduct in which we do not recover in
excess of $1,000,000, we may in our discretion determine to treat the
second proceeding as part of the previous covered action and provide a
payment based on the total of the two proceedings.
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\241\ If a subsequent Commission proceeding arises from the same
nucleus of operative facts as two covered actions for which we have
already made awards, we will treat the subsequent proceeding as part
of the covered action to which it bears the closest relationship.
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11. Rule 21F-4(e)--Monetary Sanctions
Proposed Rule 21F-4(e) tracked the definition of ``monetary
sanctions'' found in Section 21F(a)(4) of the Exchange Act 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.\242\ We received no
comments on the proposed rule. We are adopting the rule as proposed. As
was explained in our Proposing Release, we interpret the reference in
Section 21F(a)(4) to ``penalties, disgorgement, and interest'' to be
examples of monetary sanctions, and not exclusive. Thus, regardless of
how designated, we will consider all amounts that are ``ordered to be
paid'' in a Commission action or a related action as ``monetary
sanctions'' for purposes of Section 21F.
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\242\ 15 U.S.C. 78u-6(a)(4).
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12. Rule 21F-4(f)--Appropriate Regulatory Agency
a. Proposed Rule
Section 3(a)(34) of the Exchange Act defines the term ``appropriate
regulatory agency.'' Consistent with this definition, the proposed rule
defined the term ``appropriate regulatory agency'' to mean 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
added to Section 3(a)(34) of the Exchange Act by future amendment.\243\
Although Section 3(a)(34) defines the Commission and these other
agencies to be ``appropriate regulatory agencies'' for specified
functions and purposes, we stated in our Proposing Release that we
would treat these agencies as ``appropriate regulatory agencies'' for
all purposes under these rules. This would mean that, under Section
21F(c)(2) \244\ and Rule 21F-8, a member, officer, or employee of one
of the designated agencies would be ineligible to receive a
whistleblower award 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.\245\
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\243\ 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.
\244\ 15 U.S.C. 78u-6(c)(2).
\245\ See Section 21F(c)(2)(A), 15 U.S.C. 78u-6(c)(2)(A).
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b. Comments Received
Two commenters supported our definition.\246\ One commenter
suggested that, in cases involving auditors, we should treat the PCAOB
as an ``appropriate regulatory agency.'' \247\
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\246\ See letters from Chris Barnard and Georg Merkl.
\247\ See letter from Auditing Standards Committee.
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c. Final Rule
After considering the comments, we are adopting Rule 21F-4(f) as
proposed. As Congress placed Section 21F in the Exchange Act, we
believe it appropriate to define ``appropriate regulatory agency'' for
purposes of Section 21F consistently with the existing Exchange Act
definition of the same term. For this reason, we have determined not to
define ``appropriate regulatory agency'' to include the PCAOB or any
other authority not set forth in Section 3(a)(34) of the Exchange Act.
This approach does not inappropriately exclude the PCAOB for any
relevant purposes under our rules. Section 21F(c)(2)(A) \248\ and Rule
21F-8(c)(1) exclude from award eligibility members, officers, or
employees of ``appropriate regulatory agencies,'' and
[[Page 34329]]
of the PCAOB. Similarly, under Section 21F(h)(2)(D) \249\ and Rule 21F-
7(a)(2), the PCAOB is separately set forth as an authority with which
we may share whistleblower-identifying information.\250\
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\248\ 15 U.S.C. 78u-6(c)(2)(A).
\249\ 15 U.S.C. 78u-6(h)(2)(D).
\250\ However, Section 21F does not permit us to treat PCAOB
actions as ``related actions'' for purposes of payment of an award.
See Sections 21F(a)(5), 15 U.S.C. 78u-6(a)(5) and 21F(h)(2)(D), 15
U.S.C. 78u-6 (h)(2)(D).
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13. Rule 21F-4(g)--Appropriate Regulatory Authority
Rule 21F-4(g) defines an ``appropriate regulatory authority'' to
mean an appropriate regulatory agency other than the Commission.
Section 21F(h)(2)(D) \251\ of the Exchange Act provides that,
without the loss of its status as confidential in the hands of the
Commission, we may provide information that identifies a whistleblower
to other authorities set forth in the statute, including ``an
appropriate regulatory authority.'' Through the operation of Section
21F(a)(5),\252\ we are also directed to pay awards on related actions
brought by an ``appropriate regulatory authority.''
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\251\ 15 U.S.C. 78u-6(h)(2)(D).
\252\ 15 U.S.C. 78u-6(a)(5).
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The proposed rules did not include a definition of ``appropriate
regulatory authority.'' Instead, we used the defined Exchange Act term
``appropriate regulatory agency'' for purposes of the provisions
dealing with ineligibility for awards, where that term expressly
appears,\253\ as well as the provisions dealing with sharing of
whistleblower-identifying information and awards in connection with
related actions, where the statute actually uses the term ``appropriate
regulatory authority.'' \254\ As a result of this approach, the
proposed rules could have been read to mean that an action brought by
the Commission was a ``related action,'' even though our intention was
to consider only actions brought by authorities other than the
Commission as ``related actions.''
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\253\ Section 21F(c)(2), 15 U.S.C. 78u-6(c)(2); Proposed Rule
21F-8(c).
\254\ Section 21F(a)(5) and (h)(2)(D)(i), 15 U.S.C. 78u-6(a)(5)
and (h)(2)(D)(i); Proposed Rules 21F-3(b) and 21F-7(a)(2).
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In response to comments, and as discussed above, we have revised
our definition of ``action'' in order to provide for payment of awards
on additional Commission enforcement actions that might otherwise have
qualified as ``related actions'' under a literal reading of the
proposed rules. As a result of that revision, there is no other reason
to treat the Commission as an ``appropriate regulatory authority'' for
the purposes set forth in the statute. Accordingly, in order to avoid
confusion and to establish a single consistent route to payment of an
award based on Commission enforcement actions, we have determined to
adopt a separate definition of the term ``appropriate regulatory
authority'' that excludes the Commission.\255\
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\255\ As noted, Section 21F(h)(2)(D) provides that, ``without
the loss of its status as confidential in the hands of the
Commission,'' we may provide whistleblower-identifying information
to ``an appropriate regulatory authority.'' Thus, it seems clear
that for that purpose the term ``appropriate regulatory authority''
must apply to entities other than the Commission.
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14. Rule 21F-4(h)--SRO
Proposed Rule 21F-4(g) defined the term ``self-regulatory
organization'' to mean 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. As was explained in our Proposing Release, Section
3(a)(26) includes each of these organizations as a ``self-regulatory
organization,'' except that the Municipal Securities Rulemaking Board
is designated as a self-regulatory organization solely for purposes of
Sections 19(b) and (c) of the Exchange Act (relating to
rulemaking).\256\ 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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\256\ 15 U.S.C. 78s(b) and (c).
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The few commenters on this proposal all supported it.\257\ We are
adopting Rule 21F-4(g) as proposed, but re-designating it as Rule 21F-
4(h).
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\257\ See letters from Auditing Standards Committee, Georg
Merkl, and Chris Barnard.
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E. Rule 21F-5--Amount of Award
a. Proposed Rule
Proposed Rule 21F-5 stated 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 is the range that is specified in
Section 21F(b)(1) of the Exchange Act.
b. Comments Received
We received few comments on this section. One commenter, a Member
of Congress, suggested that we should consider placing an upper-end
limit on the dollar amount that any one whistleblower could receive to
avoid giving excessive awards.\258\ Another commenter suggested that we
should give further guidance on how award percentages would be
determined as between Commission and related actions.\259\
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\258\ Letter from Senator Carl Levin.
\259\ Letter from Auditing Standards Committee, Institute of
Internal Auditors.
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c. Final Rule
We are adopting the final rule as proposed, except that we have
added a new paragraph (a) to reflect Congress's clear direction that
the determination of the amount of an award lies in our
discretion.\260\
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\260\ See Section 21F(c)(1)(A), 15 U.S.C. 78u-6(c)(1)(A).
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Paragraph (b) of Section 21F of the Exchange Act 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.
Our final rule tracks this provision. 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. As we noted in our
proposed rule, 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. But, in any case, the amounts would, in
total, fall within the statutory range of 10 to 30 percent. As to the
suggestion that we use our discretion to avoid giving excessive awards,
we note that the statute requires that we give an award of a minimum of
10 percent of the amount collected regardless of the overall size, and
we do not have discretion to reduce that statutory minimum.
F. 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, Rule 21F-6 sets forth the criteria
that the Commission will take into consideration in determining the
percentage of the award between 10 and 30 percent.
[[Page 34330]]
a. Proposed Rule
As proposed, Rule 21F-6 provided that the Commission would consider
four general criteria, when determining the percentage of a
whistleblower award: (1) Significance of the information provided by a
whistleblower to the success of the Commission action or related
action; (2) degree of assistance provided by the whistleblower and any
legal representative of the whistleblower in the Commission action or
related action; (3) programmatic interest of the Commission in
deterring violations of the securities laws by making awards to
whistleblowers who provide information that leads to successful
enforcement actions; and (4) whether an 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. The proposing release also stated that, when
determining the percentage of a whistleblower award, the Commission
would also be authorized to consider the following optional
considerations: (1) Character of the enforcement action; (2) dangers to
investors or others presented by the underlying violations involved in
the enforcement action; (3) timeliness, degree, reliability, and
effectiveness of the whistleblower's assistance; (4) time and resources
conserved as a result of the whistleblower's assistance; (5) whether
the whistleblower encouraged or authorized others to assist the staff
who might otherwise not have participated in the investigation or
related action; (6) any unique hardships experienced by the
whistleblower as a result of his or her reporting and assisting in the
enforcement action; (7) degree to which the whistleblower took steps to
prevent the violations from occurring or continuing; (8) efforts
undertaken by the whistleblower to remediate the harm caused by the
violations; (9) whether the information provided by the whistleblower
related to only a portion of the successful claims brought in the
Commission or related action; (10) culpability of the whistleblower;
and (11) whether, and the extent to which, a whistleblower reported the
possible violation through effective internal whistleblower, legal, or
compliance procedures before reporting the violations to the
Commission.
b. Comments Received
We received a wide range of comments on Proposed Rule 21F-6. The
comments addressed the general methodology for making award
determinations, and suggestions for additional criteria to be included
in the rule. Commenters also responded to our specific questions about
whether to include in the rule criteria concerning whether to increase
awards to whistleblowers who reported into an internal compliance or
reporting system and whether to reduce awards to culpable
whistleblowers.
With respect to methodology, some commenters recommended that we
adopt a more transparent methodology for making award
determinations.\261\ Others urged we adopt a methodology in which
certain criteria would have the same impact on our award determinations
in all cases, such as by giving the factor greater weight than other
criteria,\262\ or by using a factor to decrease a whistleblower's award
\263\ or to cap a whistleblower's award at 10 percent.\264\ Several
commenters suggested that some of the optional considerations for
making awards outlined in the release should be required and placed
into the rule text.\265\ Other commenters recommended additional
factors that should be considered by the Commission when making an
award.\266\
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\261\ See, e.g., letters from Harold Burke and Partrick Burns.
\262\ See the letter from the NSCP.
\263\ See, e.g., letters from Valspar, Institute of Internal
Auditors, and Washington Legal Foundation.
\264\ See, e.g., letters from Anixter Int., Business Roundtable,
Taft, Financial Services Roundtable, Alcoa Group.
\265\ See, e.g., letters from the Association of Corporate
Counsel, Foster Wheeler, Anixter Int., Business Roundtable,
Financial Services Roundtable, Society of Corporate Secretaries,
Wells Fargo, Ethics & Compliance Officer Association, Alcoa Group,
Deloitte, CCMC, Apache Group.
\266\ See, e.g., letters from Harold Burke (whether the
submission exposed a nationwide practice; whether the whistleblower,
or whistleblower's counsel, did not provide or offer to provide any
help after submitting the tip, or hampered the government's efforts
in developing its case; and whether the whistleblower substantially
delayed reporting the fraud); John Wahh (whether the whistleblower
benefitted from the securities violation); Chris Barnard (the role
and culpability of the whistleblower in the reported securities
violations); Auditing Standards Committee (the relative amount of
the award, rather than the relative percentage amount); Georg Merkl
(the economic risk the whistleblower took to come forward and report
the securities violations); and DC Bar (new more detailed criteria
for encouraging use of existing compliance programs).
---------------------------------------------------------------------------
Commenters expressed strong and divergent views on whether to
include a factor related to a whistleblower's use of internal
compliance and reporting systems. Many commenters suggested that the
optional award consideration relating to whether a whistleblower
reported a possible securities violation through effective internal
whistleblower, legal, or compliance procedures before reporting it to
the Commission should be listed as a required factor in the rule
text.\267\ Others, however, argued that the optional award
consideration should be eliminated because it is inconsistent with the
statute's purpose, vague, and impractical because it would require the
Commission to independently determine the effectiveness of internal
compliance programs and to make subjective conclusions about the
whistleblower's specific circumstances and mindset.\268\
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\267\ See, e.g., letters from the Association of Corporate
Counsel, Foster Wheeler, Anixter Int., Business Roundtable,
Financial Services Roundtable, Society of Corporate Secretaries,
Wells Fargo, Ethics & Compliance Officer Association, Alcoa Group,
Deloitte, and CCMC.
\268\ See, e.g., letters from the NCCMP, Georg Merkl, Daniel J.
Hurson, and Auditing Standards Committee.
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In response to our question regarding whether the Commission should
consider a whistleblower's role and culpability in the unlawful conduct
to exclude the whistleblower from eligibility or as a criteria that
would reduce the award amount, comments were also sharply divided.\269\
Many commenters recommended that the Commission should reduce a
culpable whistleblower's award because the failure to do so would
create incentives for individuals to engage in wrongdoing or to conceal
wrongdoing.\270\ Other commenters suggested that the Commission should
place this optional consideration into the rule text so that it would
be required to be considered in every case.\271\ Many other commenters
opposed rules that would exclude culpable whistleblowers from
eligibility for awards or would reduce the amount of their awards
beyond what is already contained in the statute.\272\ These commenters
contended that, without sufficient financial incentives, insiders with
the most knowledge and evidence about wrongdoing will not come forward,
resulting in securities laws violations going undetected (or at least
[[Page 34331]]
experiencing a further delay before they are detected).
---------------------------------------------------------------------------
\269\ See, e.g., letters from the Auditing Standards, Apache
Group, Georg Merkl, NWC, Connolly & Finkel, Target, SIFMA, Business
Roundtable, Washington Legal Foundation, Morgan Lewis, Financial
Services Roundtable, Society of Corporate Secretaries, Wells Fargo,
TRACE International, Inc, Alcoa Group, Oppenheimer Funds,
Association of Corporate Counsel, and CCMC.
\270\ See, e.g., letters from Connolly & Finkel, Target, SIFMA,
Business Roundtable, Washington Legal Foundation, Morgan Lewis,
Financial Services Roundtable, Society of Corporate Secretaries,
Wells Fargo, Trace, Alcoa Group, Oppenheimer Funds, Association of
Corporate Counsel, and CCMC.
\271\ See, e.g., letters from Apache Group.
\272\ See, e.g., Auditing Standards, Georg Merkl, and NWC.
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c. Final Rule
Although we continue to believe the four criteria set forth in
Proposed Rule 21F-6--three of which derive from the statute--are
important, we have significantly revised and restructured the final
rule in response to comments. The changes are designed to describe more
specifically the factors relevant to the Commission's determinations,
and thus make award determinations more transparent, predictable, and
fair. Similar to the approach used by the Department of Justice and
Internal Revenue Service,\273\ we adopt a methodology for determining
awards where some factors suggest an increase and others a decrease in
award percentage. This analytical framework incorporates into the final
rule text the four required criteria from the proposed rule and the
eleven optional considerations from the proposing release.
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\273\ E.g., Internal Revenue Manual Sec. 25.2.2.9.2.
---------------------------------------------------------------------------
Under the final rule, when determining the percentage of a
whistleblower award, the following required criteria may increase a
whistleblower's award percentage: (1) Significance of the information
provided by the whistleblower (the first required criteria in the
proposed rule and the statute); (2) assistance provided by the
whistleblower (the second required criteria in the proposed rule and
the statute); (3) law enforcement interest in making a whistleblower
award (the third and fourth required criteria in the proposed rule and
the third required criteria in the statute); and (4) participation by
the whistleblower in internal compliance systems. In contrast, the
following required criteria may decrease a whistleblower's award
percentage: (1) Culpability of the whistleblower; (2) unreasonable
reporting delay by the whistleblower; and (3) interference with
internal compliance and reporting systems by the whistleblower. Under
many of the required criteria, we have set forth in the final rule
related optional considerations that may be taken into account when
considering the criteria. These potentially relevant factors are
designed to provide greater detail regarding how award determinations
will be made and to address commenters' other concerns and
recommendations.
Although we have considered the views of commenters who recommended
that the presence or absence of certain criteria should have a distinct
and consistent impact on our award determinations, the final rule does
not establish such a methodology that would permit a mathematical
calculation of the appropriate award percentage. Since every
enforcement matter is unique, the analytical framework adopted by the
Commission in the final rule provides general principles without
mandating a particular result. Accordingly, no attempt has been made to
list the factors in order of importance, weigh the relative importance
of each factor, or suggest how much any factor should increase or
decrease the award percentage. Depending upon the facts and
circumstances of each case, some factors may not be applicable or may
deserve greater weight than others. Furthermore, the absence of any one
of the positive factors does not mean that the award percentage will be
lower than 30 percent, nor does the absence of negative factors mean
the award percentage will be higher than 10 percent. Thus, a
whistleblower would not be penalized for not satisfying any one of the
positive factors. For example, a whistleblower who provides the
Commission with significant information about a possible securities
violation and provides substantial assistance in the Commission action
or related action could receive the maximum award regardless of whether
the whistleblower satisfied other factors such as participating in
internal compliance programs. In the end, we anticipate that the
determination of the appropriate percentage of a whistleblower award
will involve a highly individualized review of the facts and
circumstances surrounding each award using the analytical framework set
forth in the final rule.
In response to concerns expressed by commenters that the proposed
rules could incentivize whistleblowers to bypass corporate compliance
programs, delay reporting violations, or otherwise interfere with
internal compliance systems in order to enhance their future award, we
have taken several steps to address this in the final rule. First, to
reflect the important investor protection role that corporate
compliance programs can serve and increase the incentive for
whistleblowers to participate in these programs, the final rule
includes a positive factor that requires the Commission to assess
whether the whistleblower participated in his or her company's internal
compliance and reporting systems.\274\ Second, to minimize ongoing
investor harm, maximize the deterrent impact of our enforcement cases,
and to discourage delayed reporting by whistleblowers, the final rule
includes a negative factor that requires the Commission to assess
whether the whistleblower substantially and unreasonably delayed
reporting the securities violations. Lastly, to penalize whistleblowers
who attempt to undermine their employer's internal compliance or
reporting systems, the final rule includes a negative factor that
requires the Commission to assess whether there is evidence provided to
the Commission that the whistleblower intentionally interfered with his
or her company's internal compliance systems. Together, these
provisions are designed to give whistleblowers appropriate incentives
to report securities violations voluntarily to their corporate
compliance programs and not to impair the effectiveness of these
important programs.
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\274\ Unlike the optional consideration in the release to the
proposed rule, the final rule does not require the Commission to
evaluate whether the internal compliance and reporting systems of an
entity are ``effective.'' We believe that defining what constitutes
``effective'' internal compliance procedures for a wide range of
entities is beyond the scope of these rules and determining whether
such procedures existed at a specific entity would impose an
unnecessary administrative burden on the staff. Accordingly, the
final rule relies on whistleblowers to determine whether reporting
potential securities violations internally would be appropriate or
desirable at their entity, without requiring us to independently and
subsequently assess the effectiveness of their entity's internal
compliance procedures. However, in determining whether to give a
company the opportunity to investigate and report back, the
Commission may consider information we have about the company's
internal compliance programs.'' See supra at n. 199.
---------------------------------------------------------------------------
As discussed in greater detail below in the discussion of Rule 21F-
16, we do not believe that a per se exclusion for culpable
whistleblowers is consistent with Section 21F of the Exchange Act. By
allowing certain less-culpable whistleblowers to receive awards
consistent with the limitations set forth in the final rules, we have
provided incentives for persons involved in wrongdoing to come forward
and disclose illegal conduct involving others while limiting awards to
those whistleblowers. However, after considering the public policy
concerns expressed by commenters, we have included in the final rule a
negative factor that requires the Commission to assess the culpability
or involvement of the whistleblower in matters associated with the
Commission's action or related actions.
G. Rule 21F-7--Confidentiality of Submissions
a. Proposed Rule
Proposed Rule 21F-7 reflected the confidentiality requirements set
forth in
[[Page 34332]]
Section 21F(h)(2) of the Exchange Act \275\ 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), we proposed Rule 21F-7
to explain 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.\276\
---------------------------------------------------------------------------
\275\ 15 U.S.C. 78u-6(h)(2).
\276\ 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.
---------------------------------------------------------------------------
Paragraph (a)(1) of the proposed rule authorized 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.\277\ Proposed paragraph (a)(2) authorized
disclosure 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 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 rule stated that the Commission
may determine what assurances of confidentiality are appropriate prior
to disclosing such information. Paragraph (a)(3) authorized disclosure
in accordance with the Privacy Act of 1974.
---------------------------------------------------------------------------
\277\ See U.S. Const. Amend. VI.
---------------------------------------------------------------------------
Because many whistleblowers may wish to provide information
anonymously, paragraph (b) of the proposed rule stated that anonymous
submissions will be permitted with certain specified conditions.
Proposed paragraph (b)(1) required 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 was to prevent
fraudulent submissions and to facilitate communication and assistance
between the whistleblower and the staff. Any whistleblower may be
represented by counsel--whether submitting information anonymously or
not.\278\ Proposed paragraph (b)(2) required that anonymous
whistleblowers and their counsel follow the required procedures
outlined in Proposed Rule 21F-9. Paragraph (b)(3) required that
anonymous whistleblowers disclose their identity, pursuant to the
procedures outlined in Proposed Rule 21F-10, before the Commission will
pay any award, as is required by the statute. In the proposing release,
we also solicited comments on whether we should include limits on the
fees attorneys may collect from whistleblowers under our program.
---------------------------------------------------------------------------
\278\ 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).
---------------------------------------------------------------------------
b. Comments Received
We received few comments related to the confidentiality provisions.
One commenter expressed concern about the Commission's exercise of its
authority to share the identity of a whistleblower with a foreign law
enforcement or regulatory authority because the whistleblower will have
no assurance against the possibility of adverse consequences other than
``trust[ing] the [foreign] country's regulators''.\279\ Another
commenter stated that the Commission has no authority to compel an
attorney to reveal the identity of an anonymous whistleblower, and
that, in cases where we know the whistleblower's identity, our rules
should require that we notify the whistleblower, and provide the
whistleblower an opportunity to seek a protective order, any time the
whistleblower's identity may be revealed.\280\ A third commenter noted
that allowing a whistleblower to remain anonymous could encourage false
or overstated claims.\281\
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\279\ See letter from Eric Dixon, LLC; see also pre-release
letter from Ruby Monroe (expressing concern for confidentiality of
whistleblowers from foreign jurisdictions).
\280\ Letter from NWC.
\281\ Letter from Bruce McPheeters.
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Because an anonymous whistleblower must retain an attorney and
because an attorney representing a whistleblower will be deemed to be
practicing before the Commission, we requested comments on whether the
Commission should adopt rules governing conduct by attorneys
representing whistleblowers and in particular rules regarding
attorneys' fees in the representation of whistleblowers. The majority
of commenters opposed the adoption of a rule regarding fees.\282\ The
rationales offered in support of this objection included that such a
rule would make it nearly impossible for corporate whistleblowers to
obtain attorneys to represent them in Dodd-Frank cases; excessive
attorneys' fees already are governed by state bar rules; and such a
rule would interfere with the contractual relationship between a
whistleblower and his or her attorney.
---------------------------------------------------------------------------
\282\ See, e.g., NWC; Grohovsky Group; American Association for
Justice; Continewity; Stuart D. Meissner, LLC.
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In contrast, several commenters recommended that the Commission
adopt by rule or otherwise publicly state that attorneys representing a
whistleblower will not be entitled to receive a contingency fee based
on any amount ultimately rewarded to the whistleblower.\283\ The
rationales offered for this recommendation included that a
whistleblower's counsel is not likely to participate materially in the
investigation of a matter filed through the whistleblower program;
\284\ public companies may be inundated with frivolous claims or claims
based on incomplete information brought by attorneys who represent
multiple complainants, hoping that one of them will be successful in an
award from the Commission; \285\ and a whistleblower in a difficult
situation may have limited ability to negotiate appropriate fees for
representation.\286\
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\283\ Letters from Baker Donelson; Washington Legal Foundation;
Institute of Internal Auditors.
\284\ Letter from Baker Donelson.
\285\ Id.
\286\ Letter from Institute of Internal Auditors.
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Other commenters addressed the question of whether the Commission
should adopt rules regarding attorney
[[Page 34333]]
conduct generally. Two commenters suggested that the Commission adopt
attorney conduct standards for attorneys representing whistleblowers
since a myriad of law firms will be advertising and soliciting work on
whistleblowing. One suggested adopting, for the representation of
whistleblowers, some form of 17 CFR 205.1 et seq., which details the
requirements of Section 307 of the Sarbanes Oxley Act addressing
standards of professional conduct for attorneys appearing and
practicing before the Commission in the representation of issuers.\287\
The other noted that the Commission should clarify or confirm that an
attorney representing a whistleblower under Section 21F(d)(1) or (2)
will be deemed to be ``appearing or practicing before the Commission''
and thereby be bound by Section 4C of the Exchange Act and Section 102
of the Rules of Practice of the Commission.\288\
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\287\ Letter from Americans for Limited Government.
\288\ Letter from Baker Donelson, PC.
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c. Final Rule
We are adopting Rule 21F-7 largely as proposed. The rule tracks the
provisions of the statute and identifies those instances where the
Commission, in furtherance of its regulatory responsibilities, may
provide information to certain delineated recipients.
We made two changes. First, we changed the term ``appropriate
regulatory agency'' to ``appropriate regulatory authority.'' As
discussed above, our use of this newly-defined term, which excludes the
Commission, better reflects the facts that we share information with
other agencies, and, that under our rules, related actions similarly
are actions brought by other agencies that are based upon a
whistleblower's information.\289\
---------------------------------------------------------------------------
\289\ See Rule 21F-4(g).
---------------------------------------------------------------------------
Second, where we share information that could reasonably be
expected to reveal the identity of a whistleblower with foreign
securities or law enforcement authorities, we proposed that we ``may
determine what assurances of confidentiality'' we deem necessary. We
have changed that language to state that we ``will'' make such a
determination, thereby making clear, consistent with Section 21F, that
we will obtain appropriate assurances of confidentiality before sharing
such information with foreign authorities. We plan to work closely with
whistleblowers or their attorney in an effort to take appropriate steps
to maintain their confidentiality, consistent with the requirements of
Section 21F(h)(2).\290\ At the same time, however, Congress expressly
authorized us to disclose whistleblower-identifying information subject
to the limitations and conditions set forth in Section 21F(h)(2).
Accordingly, we do not believe it would be consistent with either
Congress's intent or with the proper exercise of our enforcement
responsibilities to require by rule that our staff notify a
whistleblower before any authorized disclosure, and provide the
whistleblower with an opportunity to seek a protective order.
---------------------------------------------------------------------------
\290\ For example, we are adding a question to our whistleblower
submission form that asks whistleblowers to tell us if they are
giving us any particular documents or other information in their
submission that they believe could reasonably be expected to reveal
their identity.
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In addition, as we noted in our proposing release, pursuant to Rule
102(e) of the Commission's Rules of Practice,\291\ 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.\292\ Representation of
whistleblowers will constitute practice before the Commission, and
thus, 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).
---------------------------------------------------------------------------
\291\ 17 CFR 201.102(e).
\292\ 17 CFR 102(f).
---------------------------------------------------------------------------
We have also decided not to include a rule regarding attorneys'
fees in our Final Rule. While there are reasonable arguments on both
sides, we think the better approach is to leave issues of attorneys'
fees to state bar authorities and to contractual arrangements between
prospective whistleblowers and their attorneys. We believe that both
state bar authorities and individual whistleblowers are better equipped
than the Commission to make determinations regarding the appropriate
amount of attorneys' fees.
H. Rule 21F-8--Eligibility
a. Proposed Rule
Paragraph (a) of Proposed Rule 21F-8 provided that whistleblowers
must provide information in the form and manner required by these rules
in order to be eligible for a whistleblower award.\293\ The proposed
rule also stated that the Commission, in its sole discretion, may waive
any of these procedural requirements based upon a showing of
extraordinary circumstances.
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\293\ 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 were described
in Proposed Rules 21F-9 through 21F-11. Proposed Rule 21F-8(b)
contained several additional procedural requirements designed to assist
the Commission in evaluating and using the information provided. These
included 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.
Paragraph (b) of the proposed rule also required 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. Proposed paragraph (b) also
authorized the staff to require that a whistleblower enter into a
confidentiality agreement in a form acceptable to the Office of the
Whistleblower, including a provision that a violation may result in the
whistleblower being ineligible for an award.\294\
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\294\ 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 recited the categories of
individuals 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
[[Page 34334]]
U.S.C. 78j-1); 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 made foreign officials ineligible to
receive a whistleblower award. In order to prevent evasion of these
exclusions, paragraph (c)(5) of the proposed rule also provided that
persons who acquire information from ineligible individuals are
ineligible for an award. In addition, paragraph (c)(6) made 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.
b. Comments Received
We received several comments on these sections. One commenter
opposed the provision under which the Commission could require
whistleblowers to enter into confidentiality agreements, stating that
the statute does not authorize this requirement and it may violate a
whistleblower's free speech rights and interfere with a whistleblower's
ability to sue Commission staff.\295\ Other commenters stated that the
Commission should not add to the list of ineligible persons designated
by Congress.\296\ One commenter suggested that the provision making
ineligible any whistleblower who knowingly uses a false writing or
document in a submission should be redrafted to clarify that the
exclusion only applies if a whistleblower does so with intent to
deceive the Commission. The commenter stated that this change would
permit a whistleblower to submit a false document created by someone
else as evidence of that other person's or entity's wrongdoing.\297\
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\295\ Letter from NWC.
\296\ Letters from Stuart D. Meissner, LLC, Chris Barnard.
\297\ Letter from Grohovsky Group.
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Another commenter noted that significant information could come
from whistleblowers who are employees of state-owned foreign companies,
and that our rule would treat those employees as foreign officials and
would thus deem them ineligible for an award.\298\
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\298\ Letter from NWC.
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Although proposed Rule 21F-8(c)(5) was intended to prevent evasion
of our rules by making ineligible any whistleblower who acquires
information from other ineligible persons, some comments suggested
that, as proposed, the rule was at once too broad and too narrow in
certain respects. One commenter noted that a similar provision in
proposed Rule 21F-4(b)(4) created, in effect, a ``hearsay exception''
that would exclude from eligibility any whistleblower who overheard an
excluded individual talking about a fraud in which the other person was
a participant.\299\ Another commenter pointed out that a culpable
whistleblower could evade the limitations of proposed Rule 21F-15
simply by providing information about violations to a third party.\300\
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\299\ See letter from NWC.
\300\ See letter from ABA.
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Finally, one commenter urged that we deem ineligible any
whistleblower who refused to cooperate with a company's internal
investigation, or who provided inaccurate or incomplete information or
otherwise hindered such an investigation.\301\
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\301\ Letter from SIFMA.
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c. Final Rule
After considering these comments, we are adopting the proposed rule
with certain modifications. The eligibility requirements reflect the
express requirements and limitations set forth in Section 21F, and are
otherwise a reasonable exercise of our authority to adopt rules that
are necessary or appropriate to implement the provisions of Section
21F.
As adopted, Rule 21F-8(b)(4) provides that a whistleblower may be
required to enter into a confidentiality agreement as to any non-public
information that the Commission provides to the whistleblower. The
addition of the reference to ``non-public'' information that ``the
Commission provides'' clarifies that the rule does not limit the
whistleblower's use of information that he or she already knows, or
learns from other sources, and does not acquire through our
investigation.
We have also changed proposed Rule 21F-8(c)(5) (now re-designated
as Rule 21F-8(c)(6)) to provide that a person is ineligible if he or
she acquires original information from either a person who is subject
to the auditors exclusion found in paragraph (c)(4) (discussed below),
unless the information is not excluded from that person's use, or the
whistleblower is providing the Commission with information about
possible violations involving that person, or from any person with
intent to evade any provision of these rules. The first part of this
provision tracks the language of Rule 21F-4(b)(4)(vi), and is simply
intended to assure consistent treatment under Rule 21F-8 and Rule 21F-
4(b)(4) of potential whistleblowers who obtain their information from
independent public accountants involved in engagements required under
the Federal securities laws. The second part of this provision is
designed to prevent persons who are prohibited or limited in making a
claim under any provision of our rules (including culpable
whistleblowers under Rule 21F-16) from evading our rules by colluding
with a third party. This change also clarifies that the intent of the
exclusion is to address efforts to evade our rules, and not persons who
legitimately learn about violations being perpetrated by ineligible
persons.
We have decided to maintain the exclusion for ``foreign officials''
as proposed. The exclusion for foreign officials would include
employees of foreign instrumentalities, including state-owned entities.
Our conclusion is informed by the Foreign Corrupt Practices Act,\302\
which includes within its definition of ``foreign officials'' those who
are employed by an instrumentality of a foreign government, which
includes state-owned entities.\303\ We believe that it is appropriate
to treat the exclusion for foreign officials under the whistleblower
program consistent with the definition of foreign official under the
FCPA, because FCPA enforcement actions are the contexts in which the
exclusion is most likely to apply. Inconsistent treatment could, we
believe, risk unnecessary confusion as to when and under what
circumstances someone is a foreign official for purposes of two closely
related provisions of the securities laws.
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\302\ Broadly, the anti-bribery provisions of the FCPA make it
unlawful for issuers (and their officers, directors, employees,
agents and stockholders), domestic concerns, and foreign persons and
entities (acting within the U.S.), to make, offer or authorize the
payment of bribes, directly or indirectly, to foreign officials,
foreign parties, foreign party officials, and foreign candidates for
public office for the purpose of obtaining or retaining business for
or with, or directing business to, any person. See 15 U.S.C. 78dd-1,
et seq.
\303\ A ``foreign official'' is defined in the FCPA as ``any
officer or employee of a foreign government or any department,
agency, or instrumentality thereof, or of a public international
organization, or any person acting in an official capacity for or on
behalf of any such government or department, agency, or
instrumentality, or for or on behalf of any such public
international organization.'' See 15 U.S.C. 78dd-2(h)(2)(A).
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In addition, whistleblower awards to employees of foreign state-
owned
[[Page 34335]]
entities have the potential to create some of the same negative
repercussions discussed in the proposed rule, i.e., the 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), the incentive for foreign officials to make reports to the
United States rather than to local authorities, and concerns about
protection of foreign officials who become whistleblowers.
We have also modified Rule 21F-8(c)(7) to clarify that the
exclusion of a whistleblower for using any false writing or document
that contains a false, fictitious, or fraudulent statement or entry
will only apply when the whistleblower thereby intends to mislead or
otherwise hinder the Commission or another authority in connection with
a related action.\304\
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\304\ See letter from Grohovsky Group.
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We have determined not to adopt an eligibility exclusion based on a
whistleblower's conduct with respect to an internal investigation. In
some cases, a whistleblower may have a reasonable concern that causes
him or her to report misconduct directly to the Commission. In other
cases, this concern may be less justified. However, we believe that a
categorical rule that excludes whistleblowers for failure to reasonably
cooperate with internal investigations would create too much
uncertainty, and too great a disincentive, for whistleblowers who are
considering how to report misconduct. Thus, such a rule would undermine
the effectiveness of the whistleblower program. In appropriate
circumstances, however, we will consider the whistleblower's conduct in
connection with an internal investigation in the determination of
whether the whistleblower's conduct ``led to'' a successful enforcement
action,\305\ and/or in determining the amount of an award.
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\305\ For example, if a whistleblower hindered an internal
investigation, but the company nonetheless self-reported violations,
we could consider the whistleblower's conduct in determining whether
the whistleblower caused us to open an investigation into the
matter.
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Finally, Rule 21F-8(c)(4) reflects the exclusions set forth in
Section 21F(c)(2)(C) for persons who obtain information through the
performance of an audit of financial statements and for whom a
whistleblower submission ``would be contrary to the requirements of
Section 10A'' of the Exchange Act.
We are adopting Rule 21F-8(c)(4) as it was originally proposed
without change, as it largely tracked the language of Section
21F(c)(2)(C). The statute prohibits an award ``* * * to any
whistleblower who gains the information through the performance of an
audit of financial statements required under the securities laws and
for whom such submission would be contrary to the requirements of
section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78j-1).''
Rule 21F-8(c)(4) accordingly only disqualifies those submissions
that are contrary to Section 10A. The most obvious example is where the
auditor did not file a ``10A Report'' with the SEC's Office of Chief
Accountant, but instead submitted information about the company's
illegal act to us to be considered for the award under the
whistleblower program.
In adopting this rule we carefully considered the comments on Rule
21F-4(b)(4)(iii) because those issues are similar to ones implicated in
determining eligibility. In connection with that proposal, some
commenters advocated that individuals should not be allowed to make a
submission alleging that the firm violated Section 10A, while others
recommended allowing such a rule.\306\ The rule we are adopting today
allows an accountant to make a submission alleging that his firm
violated Section 10A (or other professional standards), because such a
submission is not ``contrary to the requirements of Section 10A.'' If
such a submission is made, then, as is the case with Rule 21F-
4(b)(4)(iii)(D), the whistleblower will also be able to obtain an award
if the information leads to a successful action against the engagement
client.
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\306\ Letters from PwC, KPMG, Center for Audit Quality
(``CAQ''), Deloitte, Ernst & Young (``EY''), TAF. Compare, CAQ
(``The CAQ has concerns about the Proposed Rules to the extent that
they permit whistleblower awards for information reported by an
independent public accountant regarding his or her firm's
performance of services related to an engagement required under the
securities laws (i.e., whistleblower reporting by an accountant with
respect to his or her own firm's performance of services''), with
TAF (``* * * where that legal duty is not honored, and the audit
film fails to comply with its obligations under Section 10A, a
whistleblower's submission of the information to the SEC is
consistent with both Section 10A and the Commission's overall
enforcement mission. In such circumstance, the policies underlying
both Section 10A and Dodd Frank weigh in favor of rewarding the
whistleblower who reports wrong doing when the audit firm has failed
to.'').
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An allegation that a firm violated Section 10A is consistent with
the statute especially when the allegation is that an audit firm failed
to assess or investigate illegal acts or make a report to the
Commission. Accordingly, a person can make a submission that alleges
not only that the audit firm failed to make a report with the
Commission under Section 10A(b)(3), but also that the firm failed to
follow any other procedures set forth in Section 10A or professional
standards.\307\ By specifically allowing allegations of violations of
the Federal securities laws or professional standards the rule may help
insure that wrongdoing by the firm (or its employees) is reported in a
timely fashion. This is especially important because of the important
gatekeeper role that auditors play in the securities markets.
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\307\ Violations of law are not restricted to the audit or
interim review work performed by an audit firm. For example, if an
employee observes insider trading, auditor independence failures at
a firm or other quality control failures that are not specific to
any particular audit, then a submission containing those allegations
is permitted.
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Commission staff will carefully evaluate a submission alleging a
Section 10A violation to determine whether it contains a specific and
credible allegation of a violation of Section 10A.\308\ A specific and
credible allegation is one made in good faith and is not a pretext for
circumventing the requirements of Section 10A. In assessing whether an
allegation of a firm's Section 10A violation is specific and credible,
the staff may consider the facts and circumstances surrounding the
submission, including the level of detail, documentary support,
descriptions of particularized conduct or omissions by identified
persons, as well as the materiality or non-triviality of the alleged
Section 10A violation. For example, the Commission may consider, among
other things:
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\308\ As with other submissions, the contents are sworn under
penalty of perjury which provides additional safeguards against
pretextual submissions.
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Whether the audit firm conducted an assessment of or
investigation into the alleged illegal act by the issuer and the
quality of that investigation;
Whether the audit firm followed the requirements of
Section 10A and its response to the allegation of an illegal act;
The position or title of the whistleblower and the role
the person played in the firm's violations;
The role of the whistleblower in the Section 10A
investigation or assessment; and
The timing of the submission.
We are also providing guidance about several important aspects of
Rule 21F-8(c)(4). First, the information must be gained through the
work done for an audit for an issuer.\309\ Non-issuers, such
[[Page 34336]]
as broker dealers or investment advisors,\310\ are not covered by
Section 10A and, subject to Rule 21F-(b)(4)(iii)(D), submissions
relating to them are allowed.
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\309\ The text of Section 10A only refers to audits of financial
statements of issuers and thus the requirements--including the
reporting requirements--are imposed on audits for issuers. Issuer is
a defined term under Section 10A.
\310\ In some instances, broker dealers or investment advisors
may also be issuers as that term is defined in Section 10A.
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Second, we interpret the phrase ``through an audit of a company's
financial statements'' in Rule 21F-8(c)(4) as meaning information that
is learned through an audit of a company's financial statements when it
is linked to audit procedures or audit work. Accordingly, the phrase
clearly and most directly applies to members of an audit engagement
team. It applies to the engagement partner, quality review partner, and
other people working directly on the engagement. It also applies to
foreign affiliates or specialists who are used by the engagement
team.\311\
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\311\ Information is also learned through an audit of a
company's financial statements when other professionals learn of a
company's illegal act as a result of communications with the audit
engagement team as part of the audit. For example, if the national
office of an audit firm were consulted about a possible illegal act,
including accounting irregularities, then the national office
personnel consulted on the matter would not be eligible for a
whistleblower award based on that information. Similarly, if a tax
professional at an audit firm were consulted to assist in auditing
the tax footnote for an issuer and learned of an illegal act, then
that person would not be eligible for a whistleblower award. In
other words, where professional staff is performing procedures for
an audit or have been contacted by someone performing procedures for
an audit, the information was gained through an audit. However, if
one of these other professionals who are performing work for an
audit also learns of a violation by the audit firm or its associated
persons, then he may be eligible for an award with respect to a
violation by the firm.
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Third, although both Dodd-Frank and Section 10A only refer to
``audits of financial statements,'' we believe this includes quarterly
reviews, which are frequently viewed as a step in the annual audit
process and therefore may properly be considered as encompassed within
Section 10A's scope. Accordingly, if an auditor discovers or detects an
illegal act during either a quarterly review or annual audit, it is
required to comply with Section 10A.\312\ An audit firm's failure to
follow the procedures or otherwise comply with Section 10A when
confronted with an illegal act--regardless of whether the violation is
detected during a year-end audit or an interim review--is a violation
of law and an individual would be able to make a submission alleging
that his audit firm violated the law or professional standards.
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\312\ Under Section 10A auditors must notify senior management
of the issuer and the audit committee of illegal acts even if they
are immaterial to the financial statements. See Section 10A(b)(1).
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Information gained through the audit of financial statements
extends beyond illegal conduct with respect to the financial statements
themselves. Section 10A broadly defines ``illegal act'' as any ``act or
omission that violates any law, or any rule or regulation having the
force of law.'' Further, the statutory disqualification was not limited
to information gained only about financial statements; rather, it
disqualified a submission where the person ``gains the information
through the performance of an audit of financial statements required
under the securities laws.''
In response to a footnote in the proposing release, certain
commenters from the audit profession advocated expanding the scope of
the exclusion to disqualify virtually all employees of accounting
firms, regardless of whether those employees are performing audit
services or are performing services for public companies.\313\ The
footnote stated: ``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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\313\ E.g., PwC (``The exclusion should extend to all reports by
employees of accounting firms with respect to information obtained
through performing services of any nature for an audit client. The
exclusion should not be limited to information obtained through the
engagement required by the securities laws itself.''); Deloitte
(``Deloitte urges the Commission to provide expressly in the final
rules that whistleblowers whose information was obtained through any
services to public company audit clients provided by an accounting
firm are excluded from eligibility to receive a whistleblower
award.'')
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As noted above, we are clarifying the application of information
obtained ``through an audit of a company's financial statements'' with
respect to firm personnel outside of the audit engagement team itself.
We decline to codify a per se exclusion for all employees or all
engagements, especially engagements involving non-issuer clients.
Persons working on other engagements, to the extent that they are not
covered by Section 10A or are not required under the Federal securities
laws, will not be deemed ineligible simply because the engagement is
with an audit client of the firm.
Several commenters recommended that whistleblowers should have to
use internal reporting processes by either reporting up the chain at
the audit firm or reporting to the audit client.\314\ We are declining
to adopt a rule that would require all employees of accounting firms
use the internal processes whether at the audit firm or at the audit
client. This approach is consistent with the final rule regarding
internal compliance persons, and we address certain of these
commenters' concerns through our adoption of Rule 21F-4(b)(4)(D).
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\314\ E.g., letter from Deloitte (````Any final rule should
require, as a condition of eligibility to receive a monetary award
that whistleblowers report their concerns fully and in good faith
through company sponsored whistleblower systems before reporting
externally. At a minimum, the final rules should require the
concurrent submission of internal and external reports. In the
alternative, any final rule should expressly state that good-faith
internal reporting prior to making any external report will be
considered a strongly positive factor in determining the amount of a
whistleblower award, and that a whistleblower's failure to use
internal whistleblower systems prior to reporting to the SEC will be
considered a strongly negative factor.'')
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Finally, a submission is not contrary to 10A--even where the 21F-
8(c)(4) exception would otherwise apply--where the whistleblower has a
reasonable basis to believe either of the following: (i) The disclosure
of the information to the Commission is necessary to prevent the
relevant entity from committing a material violation of the securities
laws that is likely to cause substantial injury to the financial
interest or property of the entity or investors; or (ii) the relevant
entity is engaging in conduct that will impede an investigation of
misconduct even if the submission does not contain an allegation of
audit firm wrongdoing.\315\
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\315\ We have not adopted the 120-day exclusion set forth in
Rule 4(b)(4)(vi)(C) because we believe it is unnecessary here.
Section 10A provides that, if an issuer fails to report to the
Commission any securities law violations discovered in the course of
the Section 10A audit, the independent public accounting firm must
do so. The firm's failure to promptly report the information to the
Commission constitutes a violation of Section 10A. A whistleblower
may at any point thereafter report this Section 10A violation to the
Commission, and thus become eligible for an award based on a covered
action against the public accountant or the issuer.
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I. Rule 21F-9--Procedures for Submitting Original Information
Proposed Rule 21F-9 set forth a two-step process for the submission
of original information. The first step required 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 required the whistleblower to complete a separate
declaration form, signed under penalty of perjury, in which the
whistleblower would be required to make certain representations
concerning the veracity of the information provided and the
[[Page 34337]]
whistleblower's eligibility for a potential award. In response to
comments, we are adopting a more streamlined process that requires
submitting only one form signed under penalty of perjury.
a. Proposed Rule
Paragraph (a) of Proposed Rule 21F-9 required the submission of
information in one of two ways. A whistleblower could 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.\316\ Proposed Form TCR, and the instructions thereto, were
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.\317\
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\316\ The Electronic Data Collection System is the Commission's
interactive, web-based database for submission of tips, complaints
and referrals. Both the online database and proposed Form TCR are
designed to elicit substantially similar information concerning the
individual submitting the information and the violation alleged. On
November 9, 2010, we separately submitted a request to the Office of
Management and Budget for Paperwork Reduction Act approval of the
Electronic Data Collection System. Accordingly, for purposes of
these rules, we are only discussing proposed Form TCR.
\317\ Items A1 through A4 of proposed Form TCR requested the
whistleblower's personal information, including name, contact
information and occupation. In instances where a whistleblower
submitted information anonymously, the identifying information for
the whistleblower would not be required, but proposed Items B1
through B4 of the form required the name and contact information of
the whistleblower's attorney. This information could 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 requested basic identifying information for the
individual(s) or entit(ies) to which the complaint relates. Proposed
Items D1 through D9 were designed to elicit details concerning the
alleged securities violation. The questions posed on proposed Form
TCR were designed to elicit the minimum information required for the
Commission to make a preliminary assessment concerning the
likelihood that the alleged conduct suggested a violation of the
securities laws. Moreover, the proposed instructions to Form TCR
were designed to assist the whistleblower and facilitate the
completion of the form.
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In addition to submitting information in the form and manner
required by paragraph (a), we proposed in paragraph (b) of Proposed
Rule 21F-9 that whistleblowers who wish to be considered for an award
in connection with the information they provided to the Commission must
also complete and provide the Commission with a separate form--proposed
Form WB-DEC, Declaration Concerning Original Information Provided
Pursuant to Sec. 21F of the Securities Exchange Act of 1934. Proposed
Form WB-DEC required a whistleblower to answer certain threshold
questions concerning the whistleblower's eligibility to receive an
award. The form also contained 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,
was true, correct and complete to the best of the whistleblower's
knowledge, information and belief. Moreover, the statement acknowledged
the whistleblower's understanding that the whistleblower may be subject
to prosecution and be 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 made any
false, fictitious, or fraudulent statements or representations, or used
any false writing or document knowing that the writing or document
contained any false, fictitious, or fraudulent statement or entry.
In instances where information is provided by an anonymous
whistleblower, paragraph (c) of Proposed Rule 21F-9 required 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. In the proposing
release, we explained that the proposed certification from counsel was
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. Additionally, the proposed
certification process provided a mechanism for anonymous whistleblowers
to be advised by their counsel regarding their preliminary eligibility
for an award.\318\
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\318\ Items A1 through A3 of proposed Form WB-DEC requested the
whistleblower's name and contact information. In the case of
submissions by an anonymous whistleblower, the form required the
name and contact information of the whistleblower's attorney instead
of the whistleblower's identifying information in proposed Items B1
through 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 requested information concerning the information submitted by the
whistleblower to the SEC. Item C1 required the whistleblower to
indicate the manner in which the information was submitted to the
Commission. Proposed Item C2 asked for the TCR number assigned to
the whistleblower's submission. Proposed Items C3 asked 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 asked whether the
whistleblower has provided the same information being provided to
the Commission to any other agency or organization and, if so,
requested 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 required the
whistleblower to make certain representations concerning the
whistleblower's eligibility for an award. Finally, the form required
the sworn declarations from the whistleblower and the
whistleblower's counsel discussed above.
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Finally, Proposed Rule 21F-9(d)(1) stated how whistleblowers who
provided original information to the Commission in writing after the
enactment of Dodd-Frank but before the adoption of final rules could
perfect their status as whistleblowers under the Commission's award
program. This provision required a whistleblower who provided original
information to the Commission in a format or manner other than that
required by paragraph (a) of Proposed 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
Proposed 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.
b. Comments Received
Commenters generally were of the view that our proposed procedures
for submitting information should be streamlined.\319\ Two commenters
recommended that we adopt a process similar to that of the Internal
Revenue Service, which requires the submission of only one form.\320\
One commenter recommended eliminating the forms altogether and
requiring only a written submission.\321\ A few commenters urged us to
retain the flexibility to exercise our discretion to waive technical
[[Page 34338]]
requirements as appropriate in particular circumstances, so as not to
disqualify otherwise meritorious whistleblower tips on technical
grounds.\322\
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\319\ See, e.g., letters from NWC; Jane Liu; Patrick Burns;
Alexander Hoover; NCCMP; DC Bar; Georg Merkl; Michael Lawrence.
\320\ Letter from NCCMP; DC Bar. Two commenters also suggested
that we adopt the IRS's certification language in IRS Form 211. See
NCCMP; NWC.
\321\ Letter from NWC.
\322\ See, e.g. letters from DC Bar; NWC.
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Several commenters recommended that we require proposed Form TCR to
be signed under penalty of perjury, similar to the requirement for
proposed Form WB-DEC.\323\ These commenters expressed the view that the
lapse of time between the filing of proposed Form TCR and the sworn
Form WB-DEC could cause significant resources to be expended by a
company in cases where a TCR containing a false or spurious claim is
immediately investigated by the SEC.\324\ One commenter recommended
that, to protect against submissions that are not necessarily made in
bad faith but nevertheless lack merit, the rules should require all
submissions for which a whistleblower seeks an award to be certified by
third-party professionals (such as attorneys, accountants and
individuals with experience in compliance, ombuds and human resources
functions) who would attest to their good faith, foundation, accuracy
and relevance.\325\
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\323\ Letters from ABA; Goodwin Proctor.
\324\ Id.
\325\ Letter from Taft, Stettinius & Hollister, LLP.
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A few commenters recommended modifications to the attorney
certification requirement of Proposed Rule 21F-9(c) relating to
submissions by anonymous whistleblowers. Two commenters suggested that,
to ensure that whistleblowers who engage legal counsel do not submit
claims based on mere speculation or hunches, attorneys handling
anonymous claims should be required to review the client's information
and certify that the client can show ``particularized facts suggesting
a reasonable probability'' that a securities violation has actually
occurred or is occurring.\326\ By contrast, one commenter opposed the
attorney certification requirement on grounds that it inappropriately
shifts to attorneys responsibility for a client's fraudulent
submission, the nature of which the attorney may be unaware.\327\
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\326\ Letters from ABA; Goodwin Procter.
\327\ See letter from Eric Dixon, LLP.
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We received two comments relating to the proposed process for
perfecting whistleblower status under paragraph (d) of Proposed Rule
21F-9. One commenter urged us to eliminate the 120-day deadline for
perfecting whistleblower status.\328\ Another took issue with the
requirement that original information submitted after the date of
enactment of the Dodd-Frank Act but before adoption of the final rules
must be in writing in order to retain the status of original
information.\329\
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\328\ Letter from Georg Merkl.
\329\ Letter from Storch Amini. We note that this requirement
emanates from the statute and not from our proposed rules.
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In the proposing release, we solicited comment on whether it would
be appropriate to eliminate the fax and mail options and require that
all submissions be made electronically. Some commenters expressed the
view that eliminating fax and mail submission could discourage some
whistleblowers, such as those with concerns about security and privacy
\330\ and persons who may be less familiar and comfortable with
computers.\331\ By contrast, one commenter supported mandating
electronic submission for environmental and cost reasons.\332\
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\330\ Letter from Auditing Standards Committee; Institute of
Independent Auditors.
\331\ Letter from Georg Merkl.
\332\ Letter from Continewity LLC.
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A number of commenters did not take issue with our proposed process
but suggested specific modifications to the proposed forms.
Recommendations included:
Revising the forms to accommodate joint submissions by
more than one person.\333\
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\333\ Letter from Grohovsky Group. This commenter also was of
the view that the rules should recognize that there are two distinct
situations where more than one person might be considered a
``whistleblower'' with respect to an enforcement action: ``(1) when
two or more persons make a joint submission, or (2) when two or more
persons, not acting in concert with each other, make submissions at
different times that relate to the same enforcement action.'' In the
latter situation, the commenter suggested that there should be a
mechanism to encourage those persons to reach an agreement with each
other so that, at some point, they can proceed jointly.
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Adding a checkbox to the current TCR form to effectively
allow complainants to elect whistleblower status.\334\
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\334\ Letter from Jane Liu and Michael Lawrence.
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Removing the question concerning the whistleblower's
occupation from the TCR form.\335\
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\335\ Letter from Auditing Standards Committee.
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Amending Form WB-DEC to include a question as to whether
the whistleblower reported the matter to a company's internal
compliance reporting system.\336\
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\336\ See, e.g., letters from SIFMA; ICI; Society of Corporate
Secretaries.
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Revising Item 3 on proposed Form TCR, which asked whether
the potential whistleblower held any of a list of positions at the
company, to add ``company counsel'' to the list.\337\
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\337\ Letter from Auditing Standards Committee (``Knowing from
the initial form whether the whistleblower was counsel to a company
makes sense as a threshold review issue, and could serve as an
important first indicator to the Commission staff reviewing the form
that the whistleblower's complaint involved potentially privileged
information and documents.'')
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Adding an item to Proposed Form WB-DEC that requires
whistleblowers to identify whether and to what extent the information
they are providing was obtained from any lawyer working for or on
behalf of the entity that is the subject of the complaint.\338\
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\338\ Letter from Auditing Standards Committee (a specific
question ``that could elicit whether counsel was the source of
information would greatly enhance the staff's ability to identify
the risk of receiving privileged information and would be an
appropriate means of balancing the Commission's interest in
receiving information with the need to protect the privilege * * *
``Knowing this information would allow the Commission staff to
quickly and efficiently segregate the report for more detailed
review and consideration and should present no additional burdens on
whistleblowers seeking to submit the form * * * It seems appropriate
to exclude any illegally obtained information, whether domestically
or abroad.'')
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Replacing the phrase ``compliance officers'' in the
instructions for completing Form TCR with the phrase ``compliance
professionals'' to make clear that the question is intended to capture
others performing compliance-related functions in companies.\339\
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\339\ Letter from Murphy.
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Finally, several commenters advanced what may be characterized as
policy-type recommendations for operation of the whistleblower
program.\340\ Although these comments do not require specific changes
to the proposed rules, we have considered them and anticipate that,
where appropriate, we will incorporate some of the suggestions in
implementing policies and procedures for our whistleblower program.
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\340\ See, e.g., Georg Merkl (rules should require staff to
inform potential whistleblowers who submit information that they may
be eligible for an award and provide them with information about the
program); Harold Burke (Commission should assign case officers to
all filed matters, require staff to provide annual updates to
whistleblowers and require at least one face-to-face meeting with a
whistleblower); Wanda Bond (Commission should provide date and time-
stamped receipt of information received from whistleblowers and
establish mechanism by which whistleblowers can check the status of
their claims).
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c. Final Rule
After considering the comments, we have adopted a more streamlined
process for submission of information that eliminates the requirement
of a separate Form WB-DEC and requires the submission of only one
form--Form TCR--signed under penalty of perjury. Form TCR essentially
combines the key questions posed in Proposed Form TCR and Proposed Form
WB-DEC into a single form. By consolidating the two forms, we have
simplified the process
[[Page 34339]]
by eliminating the burden on whistleblowers of having to file a second
form and eliminating some duplicative questions that appeared on both
proposed forms. Rule 21F-9(b) provides that, to be eligible for an
award, a whistleblower at the time he submits his TCR must declare
under penalty of perjury that the information he is providing is true
and correct to the best of his knowledge and belief.
In response to comments, we also made several modifications to Form
TCR. Specifically, we revised Form TCR to allow for joint submissions
by more than one whistleblower. This comports with the intent of
Section 21F, which defines ``whistleblower'' as ``any individual, or 2
or more individuals acting jointly, who provides information relating
to a violation of the securities laws to the Commission * * *''
In addition, to address commenters' concerns regarding the receipt
by the Commission of potentially privileged information, we added
``counsel'' to the list of positions held by a whistleblower, and
amended Item 8 on Proposed Form TCR (renumbered as item 10 in the form
as adopted), which asks the whistleblower to describe how he or she
obtained the information that supports the claim, to identify with
particularity any information submitted by the whistleblower that was
obtained from an attorney or in a communication where an attorney was
present. As explained in our proposing release, the attorney-client
privilege 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
communication. In our view, a specific question that could elicit
whether counsel was the source of information would enhance the staff's
ability to identify the risk of receiving privileged information and
would be an appropriate means of balancing the Commission's interest in
receiving information with the policy goal of protecting the privilege.
In addition, knowing this information would allow the staff to quickly
segregate the information for more detailed review and consideration.
As discussed elsewhere, several provisions in our rules encourage,
but do not require, whistleblowers to utilize their companies' internal
compliance and reporting systems when appropriate. In response to
comments urging us to include a question on our form asking whether the
whistleblower reported the matter to a company's internal compliance
program, and to address those instances in which a whistleblower
chooses to report the violation internally, we amended questions 4a and
4b of proposed Form TCR, which asked the whistleblower to provide
details about any prior action taken regarding the complaint, to
specifically state whether the whistleblower reported the violation to
his or her supervisor, compliance office, whistleblower hotline,
ombudsman, or any other available mechanism at the entity for reporting
violations. This language borrows from the instructions to question 4a
on Proposed Form TCR.
Finally, we added an optional question to Form TCR to enable the
whistleblower to identify any particular documents or other information
in the submission that the whistleblower believes could reasonably be
expected to reveal his or her identity. The purposes of this question
is to afford whistleblowers who wish to remain anonymous the
opportunity to guard documents or information which, if shown to a
third party, may reasonably be expected to reveal their identity. It
would also assist the investigative staff utilizing the information in
making this determination.\341\
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\341\ The Commission will reach its own conclusion about whether
the information that the whistleblower identifies in fact could be
reasonably expected to reveal the whistleblower's identity, but we
believe this analysis could be significantly aided by a
whistleblower's identification of documents that he or she believes
might reasonably reveal his or her identity.
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As to the submission of Form TCR, we agree with commenters'
suggestion that we should require submissions of information made
pursuant to our whistleblower program to be made under penalty of
perjury, and accordingly, are requiring that the form be accompanied by
sworn certifications by the whistleblower and counsel. We are not
adopting the recommendation that all whistleblower submissions be
certified by third party professionals because we think that the
requirement is inconsistent with our user-friendly mandate and would
unnecessarily add to a whistleblower's financial burden of submitting a
tip to the Commission. Moreover, in our view, the requirement of a
certification by the whistleblower or, in case of anonymous submission,
the whistleblower's counsel, is sufficient to deter false or meritless
submissions.
In response to comments that the counsel certification places an
undue burden on counsel for anonymous whistleblowers, we have amended
the counsel certification provision to include the phrase ``true,
correct and complete to the best of [counsel's] knowledge, information
and belief.'' The addition of this phrase makes clear that we will not
hold attorneys accountable if they possess a good-faith belief that the
information they are submitting on behalf of the whistleblower is true,
correct and complete. The addition of this phrase also achieves
consistency with the whistleblower's certification, which contained
this language.
Form TCR as adopted also includes in the counsel certification a
representation by the attorney representing an anonymous whistleblower
that the attorney has ``obtained the whistleblower's non-waiveable
consent to provide the Commission with his or her original signed Form
TCR upon request in the event that the Commission requests it ``due to
concerns that the whistleblower may have knowingly and willfully made
false, fictitious, or fraudulent statements or representations, or used
any false writing or document knowing that the writing or document
contains any false fictitious or fraudulent statement or entry.''
Moreover, the certification reflects the attorney's consent to be
legally obligated to do so within 7 calendar days of receiving such a
request from the Commission. We believe that this modification to the
attorney certification is necessary to effectuate the ``penalty of
perjury'' provision in the whistleblower's declaration, and to enable
the Commission to enforce the provision in appropriate cases.
Although some commenters recommended that we require attorneys to
certify that the client can show ``particularized facts suggesting a
reasonable probability'' that a securities violation has actually
occurred or is occurring, we have decided not to adopt this standard.
In our view, requiring attorneys to verify the form for completeness
and accuracy and certify that the information is true, correct and
complete to the best of the attorney's knowledge, information and
belief is sufficient to discourage frivolous submissions to the
Commission. We further believe that a higher standard that might
require a ``reasonable probability'' that a securities violation
actually has occurred or is occurring is unnecessary in light of an
attorney's already existing ethical obligations in dealing with the
Commission.
With regard to other comments relating to the process for
submitting information and our proposed forms, we have decided to keep
the fax and mail submissions as options to ensure that whistleblowers
who do not have access to a computer or who may be averse to electronic
transmissions have an alternative means of submitting
[[Page 34340]]
information to us. In addition, we made the response to item A4 of Form
TCR, which asked for the whistleblower's occupation, optional.
In response to comments that we should eliminate the form
requirement so as not to disqualify whistleblowers on technical
grounds, we note that we address such instances elsewhere in our rules.
Specifically, Rule 21F-8(a) retains the Commission's discretion to
waive the procedural requirements of the rules upon a showing of
extraordinary circumstances.
A. Procedure for Submitting Original Information
As adopted, paragraph (a) of Rule 21F-9 requires whistleblowers to
submit their information in one of two ways: (1) Through the
Commission's Web-based, interactive database for the submission of
tips, complaints and referrals; or (2) by completing Form TCR (Tip,
Complaint or Referral) and mailing or faxing the form to the SEC Office
of the Whistleblower, 100 F Street NE., Washington, DC 20549-5631, Fax
(703) 813-9322. Paragraph (b) provides that, to be eligible for an
award, a whistleblower must submit his or her original information
under penalty of perjury.
In instances where information is provided by an anonymous
whistleblower, paragraph (c) of Rule 21F-9 provides that the attorney
for the whistleblower must submit the information on the
whistleblower's behalf pursuant to paragraph (a). In addition, the
attorney must retain a copy of the submission, signed by the
whistleblower under penalty of perjury, and must sign the counsel
certification discussed above.
In response to commenters' general suggestion that we make the
application process more user friendly, we have eliminated the proposed
requirement that whistleblowers who made their submission after the
date of enactment of Dodd-Frank but before the effective date of these
rules must perfect their whistleblower status by re-submitting their
information in the format required by these rules. We agree that it
would be unnecessarily burdensome to require these whistleblowers to
make a duplicative submission to us. To the extent that there is
additional information that the TCR form might otherwise solicit and
which we might desire prior to the award application phase, the staff
can contact these whistleblowers (or their counsel if applicable) to
obtain that information. For those whistleblowers who submitted their
information anonymously during this period, however, we are requiring
them to provide their attorney with a completed and signed copy of Form
TCR within 60 days of the effective date of these rules. This is
generally consistent with our proposed rule, and we believe that it is
necessary and appropriate because, unlike whistleblowers whose identity
we are aware of, we are more constrained in our ability to confirm an
anonymous whistleblower's information and eligibility. We believe that
requiring whistleblowers to provide their attorney within 60 days the
signed declaration from the Form TCR may help ensure earlier in the
process that these whistleblowers are eligible for an award and have
provided truthful information to us.
Thus, as adopted, paragraph (d) provides that, if a whistleblower
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, the whistleblower's submission will be deemed to satisfy the
requirements set forth in paragraphs (a) and (b). However, if the
whistleblower submitted the information anonymously, paragraph (d)
requires the whistleblower to provide his or her attorney with a
completed and signed copy of Form TCR within 60 days of the effective
date of these rules. In addition, the attorney must retain the signed
form in his or her records, and the whistleblower must provide a copy
of the signed form to the Commission staff upon request by Commission
staff prior to any payment of an award to the whistleblower in
connection with the submission. Notwithstanding the foregoing,
paragraph (d) provides that the whistleblower must follow the
procedures and conditions for making a claim for a whistleblower award
described in Rules 21F-10 and F-11.
B. Form TCR
As adopted, items A1 through A3 of Form TCR request name and
contact information for each whistleblower submitting the information.
In instances where a whistleblower submits information anonymously, the
identifying information for the whistleblower is not required, but
items B1 through B4 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. Items C1 through C4 request basic
identifying information for the individual(s) or entit(ies) to which
the complaint relates. Items D1 through D12 are designed to elicit
details concerning the alleged securities violation. Items D1 and D2
ask the whistleblower to provide the date of the occurrence and
describe the nature of the complaint. Items D3 and D4 correspond to the
same-numbered items on former Proposed Form WB-DEC. Items 3a and 3b ask
whether the complainant or their counsel had any prior communications
with the SEC concerning the matter and, if so, the name or the person
with whom they communicated. Items 4a through 4c ask whether the
whistleblower has provided the same information to any other agency or
organization, or whether any other agency or organization has requested
the information from the whistleblower and, if so, to provide details,
including the name and contact information for the point of contact at
the other agency or organization, if known.
Item 5a of Section D asks whether the complaint relates to an
entity of which the whistleblower is or was an officer, director,
counsel, employee, consultant or contractor. Items 5b through 5d ask
whether the whistleblower has reported the violation to his or her
supervisor, compliance office, whistleblower hotline, ombudsman, or any
other available mechanism at the entity for reporting violations.
Items 6a and 6b ask whether the whistleblower took any other action
regarding the complaint and request details regarding any such action.
Although our rules do not mandate internal reporting prior to providing
information to the SEC, this question is designed to address instances
in which a whistleblower chooses to report the violation to his or her
company first and will afford such whistleblowers the opportunity to
provide the Commission with any additional relevant details relating to
their internal reporting.
Item D7 asks about the type of security or investment involved, the
name of the issuer and the ticker symbol or CUSIP number, if
applicable. Item D8 asks the whistleblower to state in detail all facts
pertinent to the alleged violation and to explain his or her belief
that the acts described constitute a violation of the Federal
securities laws. Item D9 asks 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 D10 asks for an explanation of how and
from whom the whistleblower obtained the information that supports the
claim. In addition, the whistleblower is asked to identify any
information that was
[[Page 34341]]
obtained from an attorney or in a communication where an attorney was
present. Item D11 asks the whistleblower to identify any particular
documents or other information in their submission that they believe
could reasonably be expected to reveal their identity, and requests the
whistleblower to explain the basis for his or her belief that his or
her identity would be revealed if the documents were disclosed to a
third party. Item D12 provides the whistleblower with an opportunity to
furnish any additional information the whistleblower thinks may be
relevant to his submission.
Section E of Form TCR corresponds to Section D on Proposed Form WB-
DEC. Items E1 through E9 require the whistleblower to make certain
representations concerning the whistleblower's eligibility for an
award.\342\
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\342\ Item E1 asks the whistleblower to state whether he or she
is currently, or was at the time the whistleblower acquired the
original information that is being submitted to the SEC, a member,
officer, or employee of the Department of Justice; the Securities
and Exchange 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; the Public
Company Accounting Oversight Board; any law enforcement
organization; or any national securities exchange, registered
securities association, registered clearing agency, or the Municipal
Securities Rulemaking Board. Item 2 asks the whistleblower to state
whether he or she is, or was at the time the whistleblower acquired
the original information being submitted to the SEC, 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 Securities Exchange
Act of 1934. Item 3 asks if the whistleblower acquired the
information through the performance of an engagement required under
the securities laws by an independent public accountant. Item 4 asks
whether the whistleblower is providing the information pursuant to a
cooperation agreement with the SEC or with any other agency or
organization. In item 5, we ask the whistleblower to state whether
he or she is a spouse, parent, child or sibling of a member or
employee of the SEC, or whether the whistleblower resides in the
same household as a member or employee of the SEC. Item 6 asks
whether the whistleblower is providing the information before the
whistleblower (or anyone representing the whistleblower) received
any request, inquiry or demand that relates to the subject matter of
the submission (i) From the SEC, (ii) in connection with an
investigation, inspection or examination by the PCAOB, or any SRO;
or (iii) in connection with an investigation by the Congress, any
other authority of the Federal government, or a state Attorney
General or securities regulatory authority. In item 7, we ask
whether the whistleblower is the subject or target of a criminal
investigation or has been convicted of a criminal violation in
connection with the information being submitted to the SEC and
request details concerning any such investigation or conviction.
Item 8 asks whether the whistleblower acquired the information being
submitted to the Commission from any person described in Item E1
through E6. Item 9 requests additional details concerning the
whistleblower's responses to items 1 through 8.
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In Section F, the whistleblower is required to declare under
penalty of perjury under the laws of the United States that the
information contained in the form is true, correct and complete to the
best of the whistleblower's knowledge, information and belief. In
addition, the whistleblower acknowledges his understanding that he may
be subject to prosecution and ineligible for a whistleblower award if,
in his submission of information, his other dealings with the SEC, or
his 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 Section G requires an attorney for an
anonymous whistleblower to certify that the attorney reviewed the form
for completeness and accuracy and that the attorney has verified the
identity of the whistleblower on whose behalf the form is being
submitted by viewing the complainant's valid, unexpired government
issued identification (e.g., driver's license, passport). In addition,
the attorney must certify that he or she will retain an original,
signed copy of the form, with Section F signed by the whistleblower, in
his or her records. Finally, the attorney must indicate that the
attorney has obtained the whistleblower's non-waiveable consent to
provide the Commission with his or her original signed Form TCR upon
request in the event that the Commission requests it due to concerns
that the whistleblower may have knowingly and willfully made false,
fictitious, or fraudulent statements or representations, or used any
false writing or document knowing that the writing or document contains
any false fictitious or fraudulent statement or entry. The
certification also reflects the attorney's consent to be legally
obligated to do so within 7 calendar days of receiving such a request
from the Commission.
J. Rule 21F-10--Procedures for Making a Claim Based on a Successful
Commission Action
a. Proposed Rule
In Proposed Rule 21F-10, we described the procedures that a
whistleblower would be required to follow in order to make a claim for
an award based on a Commission action, and the Commission's proposed
claims review process. 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 Office of the Whistleblower would
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 would
require claimants to file their claim for an award within sixty (60)
days of the date of the Notice. A claimant's failure to timely file a
request for a whistleblower award would bar that individual from later
seeking a recovery.
Paragraph (b) of Proposed Rule 21F-10 described the procedure for
making a 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, would 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 required the claimant
to provide basic identifying information, including first and last name
and contact information. Proposed Items B1 through B4 requested the
name and contact information for the whistleblower's attorney, if
applicable. Proposed Items C1 and C2 requested 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
[[Page 34342]]
requested 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 requested information concerning related
actions. A whistleblower would be required to complete Section E 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 required 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 contained 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 provided that a claim on Form
WB-APP, including any attachments, must be received by the Office of
the Whistleblower within sixty (60) days of the date of the Notice of
Covered Action in order to be considered for an award.
Paragraph (c) required 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 Office of the Whistleblower prior to the
payment of an award. This requirement is derived from Subsection
21F(d)(2)(B) of the Exchange Act.
Paragraph (d) of Proposed Rule 21F-10 described 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 Office of the Whistleblower and
designated Commission staff (defined in Proposed Rule 21F-10 as the
``Claims Review Staff'') would evaluate all timely whistleblower award
claims submitted on Form WB-APP. In connection with this process, the
Office of the Whistleblower 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). Following that evaluation, the Office of the
Whistleblower 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.
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 Office of the
Whistleblower make available for the claimant's review the materials
that formed the basis of the Claims Review Staff's Preliminary
Determination.
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 Office of the
Whistleblower making those materials available for the claimant's
review, a claimant may submit a written response to the Office of the
Whistleblower 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 Office of
the Whistleblower. However, such meetings are not required and the
Office of the Whistleblower may in its sole discretion decline the
request.
Paragraph (f) of Proposed Rule 21F-10 made 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 would 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.
Paragraph (g) of Proposed Rule 21F-10 described 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 Office of
the Whistleblower 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 requested 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 requested 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 Office of the Whistleblower. 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.
b. Comments Received
We received a number of comments suggesting that the claims process
be simplified, streamlined, or made less formal. Several commenters
criticized the initial requirement that a whistleblower submit an award
application within 60 days of a Notice of Covered Action.\343\ These
commenters generally stated that this requirement could be eliminated
if the Office of the Whistleblower were required to contact
whistleblowers directly to inform them that a covered action has been
successfully litigated and contended that the proposal places an undue
burden on whistleblowers to monitor the SEC Web site to learn of
[[Page 34343]]
their potential eligibility for an award.\344\
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\343\ See, e.g., letters from VOICES; Grohovsky Group; NWC;
Wanda Bond; False Claims Act Legal Ctr.
\344\ See letters from VOICES; Grohovsky Group; False Claims Act
Legal Center.
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A few commenters stated that claims resolution process should be
less formal and more focused on reaching a negotiated settlement. One
such comment asserted that the procedures for determining awards seemed
``overly formalistic,'' noting that negotiation has been highly
effective in resolving issues in qui tam cases under the False Claims
Act.\345\ Another commenter recommended that a settlement process be
built into the claims resolution process.\346\
---------------------------------------------------------------------------
\345\ See letter from Grohovsky Group.
\346\ See letter from NWC.
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Finally, several commenters suggested additional procedures or
guidance that we could employ to assist whistleblowers with the claims
process. One commenter recommended that the application form should be
simplified.\347\ Another commenter recommended that we send
whistleblowers a checklist of any further requirements once the
whistleblower submits information, including how and where the
whistleblower can find the `Notice of Covered Action' on the SEC's Web
site and a contact for any further questions.\348\ This commenter also
recommended that we provide a method for whistleblowers to check on the
progress of the claims process.\349\
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\347\ See letter from NWC (recommending that a whistleblower
should submit a ``simplified form, consistent with the form
recommended by the Inspector General,'' rather than the proposed WB-
APP).
\348\ See letter from Wanda Bond.
\349\ See letter from Wanda Bond.
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c. Final Rule
After reviewing the comments, we are adopting the rule with several
modifications.
We have decided not to eliminate the Notice of Covered Action or to
otherwise model the procedures after those employed in the qui tam
context. The qui tam context is substantially different from our
situation because qui tam actions necessarily will involve one or more
known relators with whom the Department of Justice will have worked. By
contrast, in enforcement actions that we institute and litigate (based
in part on information and assistance from one or more whistleblowers),
there may be one whistleblower with whom we have worked closely, but
other claimants who have a potential basis for award eligibility as
well. Our procedures must provide due process to all potential
claimants and accordingly cannot be tailored only to those claimants
with whom the staff has worked closely. For that reason, we believe the
``Notice of Covered Action'' procedure provides the best mechanism to
provide notice to all whistleblower claimants who may have contributed
to the action's success. Nevertheless, we anticipate that the Office of
the Whistleblower's standard practice will be to provide actual notice
to whistleblowers with whom the staff has worked closely. We also
believe the application form, preliminary determination, opportunity
for response, and final determination together should operate to ensure
that all potential claimants have a fair opportunity to pursue an award
claim. A more informal process modeled after the qui tam procedures
might favor those whistleblowers who have worked closely with our staff
and might not provide a full and fair opportunity for claims by others
who nonetheless may have provided original information that led to the
successful covered action.\350\
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\350\ In addition, in those situations where the Claims Review
Staff determines that it may be appropriate, the rule provides the
Office of the Whistleblower with a mechanism to engage in
discussions with known whistleblowers. Indeed, paragraph (e)(1)(ii)
provides claimants with an opportunity to request a meeting with the
Office of the Whistleblower following a Preliminary Determination.
The Office of the Whistleblower could use these meetings in
appropriate cases as an opportunity to reach a tentative agreement
with a meritorious whistleblower on the terms of a Proposed Final
Determination, which could then be presented to the Commission for
approval.
---------------------------------------------------------------------------
Nonetheless, to respond to some of the concerns raised by
commenters and to make the process more accessible to whistleblowers,
we have made several modifications in the final rule. First, we have
decided to increase the period for claimants to file their claim for an
award from sixty (60) days to ninety (90) days. This additional time
should provide claimants with a better opportunity to review the
Commission's Web site and file an application following the publication
of a Notice. In our view, this 90-day period strikes an appropriate
balance between competing whistleblower interests--allowing all
potential whistleblowers a reasonable opportunity to periodically
review the Commission's Web site and to file an application, on the one
hand, but providing finality to the application period so that the
Commission can begin the process of assessing any applications and
making a timely award to any qualifying whistleblowers, on the other
hand.\351\
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\351\ Two commenters asserted that there is no support in the
statute for a rule barring a whistleblower from obtaining an award
if he fails to file a timely claim after the 60-day notice. See
letter from VOICES. See also letter from False Claims Act Legal
Center. We disagree. The statutory authority to adopt rules
necessary or appropriate to implement the awards program, which is
contained in Section 21F(j), plainly permits the Commission to
establish procedures for submitting information and making claims
for awards. See also Section 21F(b)(1) (providing for payments
``under regulations promulgated by the Commission''). The 90-day bar
provides finality at the end of a reasonable application period so
that we may assess the award applications and conclusively determine
which applicant, if any, is entitled to an award, and in what
percentage amount.
---------------------------------------------------------------------------
Second, in light of comments that we simplify the WB-APP form, we
have made Section G of the form optional. As commenters stated, when a
whistleblower has worked closely with the staff on a matter, requiring
that whistleblower to furnish a submission explaining the degree and
value of his or her assistance may well be unnecessary. At the same
time, such a whistleblower--or other claimants who have not worked as
closely with the staff and wish to advocate the value of their
assistance--should have the opportunity to do so. We have determined
not to make any further modifications to the form, however, because the
remaining information that we request is in our view necessary so that
we have a sufficient record to consider the claimant's application
(and, if a petition for review is filed, so that the court of appeals
has a sufficient record to conduct a review).
Third, in paragraph (d), we have provided the Director of
Enforcement with express authority to designate the staff members to
serve on the Claims Review Staff. The Director of Enforcement may
designate staff from the Enforcement Division, the Office of the
Whistleblower, or other Commission divisions or offices to serve on the
Claims Review Staff, either on a case-by-case basis or for fixed
periods, as the Director deems appropriate.
Fourth, in paragraph (e), we have clarified that any response a
claimant files to a Preliminary Determination must be in a form and
manner that the Office of the Whistleblower shall require. Fifth, in
paragraph (e)(1)(i), we have added a reference to new Rule 21F-12,
clarifying that a claimant can request that the Office of the
Whistleblower make available for his or her review the materials from
among those set forth in Rule 21F-12 that the Claims Review Staff used
as the basis for its Preliminary Determination.\352\
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\352\ We have also revised final rule 21F-10 (and made a
corresponding revision in final rule 21F-11) to provide that the
Final Order of the Commission will be provided to a claimant by the
Office of the Whistleblower instead of the SEC Office of the
Secretary (although the Office of the Secretary will continue to
issue the Order). We have done so to reflect the fact that the
Office of the Whistleblower is the appropriate Commission liaison
with whistleblower claimants.
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[[Page 34344]]
The following chart represents a general overview of the process
that we are adopting:
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TR13JN11.000
BILLING CODE 8011-01-C
K. Rule 21F-11--Procedure for Making a Claim Based on a Successful
Related Action
a. Proposed Rule
Proposed Rule 21F-11 set forth the procedures for determining
awards based upon related actions. Paragraph (a) of Proposed Rule 21F-
11 informed 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 described the procedures for
making a claim for an award in a related action. The process
essentially mirrored the procedure for making a claim in connection
with a Commission action
[[Page 34345]]
and would require 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 requested 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 set 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 proposed rule provided that the Office of the Whistleblower 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 Office
of the Whistleblower 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 described the
Commission's claims review process in related actions. The Commission
proposed to utilize the same claims review process in related actions
that it would utilize in connection with claims submitted in connection
with a covered Commission action.
b. Comments Received
The Commission did not receive any comments directed specifically
to this proposed rule. Nonetheless, several of the comments on Rule
21F-10--those recommending that we employ certain additional procedures
or guidance to assist whistleblowers with the claims process--are also
relevant to Rule 21F-11.
c. Final Rule
We are adopting Rule 21F-11 with several modifications, which
parallel certain of the changes we made to Rule 21F-10.
First, in paragraph (b)(2), we have extended to ninety (90) days
the period that a whistleblower has to file a claim following the entry
of a final order imposing monetary sanctions in a related action where
the entry of the final order occurs after the whistleblower has
submitted a claim for an award in the Commission's covered action. This
gives whistleblowers a longer time in which to file a claim, reducing
the likelihood that a meritorious whistleblower would miss the filing
deadline. Second, in paragraph (e), we have clarified that any response
a claimant files to a Preliminary Determination must be in a form and
manner that the Office of the Whistleblower shall require. Third, in
paragraph (e)(1)(i), we have added a reference to new Rule 21F-12,
clarifying that a claimant can request that the Office of the
Whistleblower make available for his or her review the materials from
among those set forth in Rule 21F-12 that the Claims Review Staff used
as the basis for its Preliminary Determination.
The following chart represents a general overview of the process
that we are adopting:
[[Page 34346]]
[GRAPHIC] [TIFF OMITTED] TR13JN11.001
L. Rules 21F-12 & 13--Materials That May Be Used as the Basis for an
Award Determination and That May Comprise the Record on Appeal; Right
of Appeal
a. Proposed Rule
In Proposed Rule 21F-12, we described claimants' appeal rights and
designated the materials that could comprise the record on appeal.
We intended paragraph (a) of the proposed rule to track Section
21F(f) of the Exchange Act, which provides for certain rights of appeal
of Commission orders with respect to whistleblower awards. Under
Section 21F, a decision of the Commission regarding the amount of an
award would not be appealable when the Commission has followed the
statutory mandate to award between 10 and 30 percent of the monetary
sanctions collected after taking into consideration the criteria
established under Section 21F(c)(1)(B) of the Act. A decision regarding
whether or to whom to make an award could 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, appeals of final
orders of the Commission entered pursuant to the Exchange Act could 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.
Paragraph (b) of the proposed rule designated the materials that
comprise the record on appeal. These included the Claims Review Staff'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.
Other than the materials identified for inclusion in the record on
appeal, the proposed rule provided the Claims Review Staff and the
Commission with discretion on a case-by-case basis to determine the
materials that could be relied upon to form the award
determination.\353\
---------------------------------------------------------------------------
\353\ See, e.g., Proposed Rule 21F-10(e)(1)(i); Proposed Rule
21F-11(e)(1)(i).
---------------------------------------------------------------------------
b. Comments Received
We received only a few comments on this proposal. One commenter
stated that the proposed rule unduly restricted the whistleblower's
appeals rights by foreclosing judicial review of the Commission's
determination of the amount of the award and claims of abuse of
discretion in applying the statutory criteria set forth in Dodd-Frank
922(f).\354\ Another commenter recommended that the rule should include
a provision to permit a whistleblower who is wrongfully denied a reward
to obtain, as a matter of course, attorney's fees under the Equal
Access to Justice Act if the claimant prevails on
[[Page 34347]]
appeal.\355\ A third commenter criticized our proposal to the extent
that it would not make available internal deliberative process
materials that are prepared exclusively to assist the Commission in
deciding the claim.\356\
---------------------------------------------------------------------------
\354\ See letter from False Claims Act Legal Center (citing
Senate Report No. 111-176, at 112 (April 30, 2010)).
\355\ See letter from NWC.
\356\ See letter from Eric Dixon.
---------------------------------------------------------------------------
c. Final Rule
After reviewing the comments, we are adopting a new Rule 21F-12
that specifies the material that may form the record of the
Commission's award determination, and rule 21F-13, concerning appeals,
which substantially follows proposed rule 21F-12.
Rule 21F-12(a) specifies the materials that we may rely upon to
form the basis for an award determination. We believe that specifying
the materials that we may rely upon will promote transparency and
consistency in the claims review process.
Under Rule 21F-12(a), the Commission and staff may rely on the
following items:
Any publicly available materials from the covered action
or related action, including (i) the complaint, notice of hearing,
answers and any amendments thereto; (ii) the final judgment, consent
order, or final administrative order; (iii) any transcripts of the
proceedings, including any exhibits; (iv) any items that appear on the
docket; and (v) any appellate decisions or orders.
The whistleblower's Form TCR, including attachments, and
other related materials provided by the whistleblower to assist the
Commission with the investigation or examination.
The whistleblower's Form WB-APP, including attachments,
and any other filings or submissions from the whistleblower in support
of the award application.
Sworn declarations (including attachments) from the
Commission's staff regarding any matters relevant to the award
determination.
With respect to an award claim involving a related action
by another entity, any statements or other information that the entity
provides or identifies in connection with an award determination.
However, we will not consider any materials if the entity that provided
them has not authorized us to share the information with the claimant,
because we do not believe it would be fair or appropriate to rely upon
information that may not be made available to the claimant.\357\
---------------------------------------------------------------------------
\357\ For instance, if a state Attorney General should provide
us with information to assist us in processing a whistleblower
claim, but should expressly tell us that the information is highly
sensitive and may not be shared with the whistleblower because it
might jeopardize on-going criminal law enforcement investigations,
we will not rely on the particular information in processing the
whistleblower's claim because we cannot also share the information
with the claimant.
---------------------------------------------------------------------------
Any other documents or materials including sworn
declarations from third-parties that are received or obtained by the
Office of the Whistleblower to assist us in resolving the claimant's
award application, including information related to the claimant's
eligibility (provided that we are also permitted to share it with the
claimant).\358\
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\358\ For instance, if a third party should voluntarily provide
us with information related to a whistleblower's claim, but
expressly request that we not disclose the information to the
claimant for fear the claimant would realize the third-party had
been the source, we will not rely on the particular information
because we cannot also share it with the claimant.
---------------------------------------------------------------------------
Rule 21F-12(b) provides that a claimant is not entitled to obtain
any materials beyond those that form the basis of an award
determination, including ``pre-decisional or internal deliberative
process materials that are prepared exclusively to assist the
Commission in deciding the claim.'' The proposed rules did not provide
claimants with an opportunity to review materials that we did not rely
upon to form the basis for an award determination, and Rule 21F-12(b)
simply clarifies that claimants are not entitled to obtain these
materials.\359\
---------------------------------------------------------------------------
\359\ See, e.g., Proposed Rule 21F-10(e)(1)(i); Proposed Rule
21F-11(e)(1)(i). See also Proposed Rule 21F-12(b).
---------------------------------------------------------------------------
In Proposed Rule 21F-12(b) (which is now Final Rule 21F-13(b)), we
provided that a claimant is not entitled to include pre-decisional
material in the record on appeal, and we are now further clarifying in
Rule 21F-12(b) that a claimant is not entitled to receive those
materials from the Commission. We do not agree with the suggestion that
internal deliberative process materials that are prepared exclusively
to assist the Commission's decisional process should be included within
the record on appeal. These materials are by their nature pre-
decisional work product that may often contain the staff's ``frank
discussion of legal and policy making materials,'' \360\ and the
disclosure of these materials would have a chilling effect on our
decision-making process.\361\
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\360\ See, e.g., NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 151
(1975); see also United States v. Farley, 11 F.3d 1385, 1389 (7th
Cir. 1993) (``[F]rank discussion of legal and policy matters is
essential to the decision-making process of a governmental
agency.''); Town of Norfolk v. U.S. Army Corps of Eng'rs, 968 F.2d
1438, 1458 (1st Cir. 1992).
\361\ See generally Dep't of Interior v. Klamath Water Users
Protective Ass'n, 532 U.S. 1, 8-9 (2001) (stating that the
``deliberative process privilege rests on the obvious realization
that officials will not communicate candidly among themselves if
each remark is a potential item of discovery and front page news'').
---------------------------------------------------------------------------
Rule 21F-12(b) also consolidates provisions from Proposed Rules
21F-10(e)(1)(i) and 21F-11(e)(1)(i) that provide that the Office of the
Whistleblower may: (1) make redactions as necessary to comply with any
statutory restrictions, to protect the Commission's law enforcement and
regulatory functions, and to comply with requests for confidential
treatment from other law enforcement and regulatory authorities; and
(2) require a claimant to sign a confidentiality agreement before
providing these materials.
We are adopting Rule 21F-13(a)--which substantially tracks Proposed
Rule 21F-12(a)--to clarify that when the Commission makes an award
between 10 and 30 percent, and that determination is based on the
factors set forth in Rule 21F-6, our final order regarding the amount
of an award (including the award allocation among multiple
whistleblowers) is not appealable. The proposing rule had not expressly
stated that the award determination must be based on a consideration of
the factors in Rule 21F-6, but we believe this clarification ensures
that the rule is consistent with Section 21F(f) of the Exchange Act. We
have further clarified that, consistent with Section 21F(f), ``any
factual findings, legal conclusions, policy judgments, or discretionary
assessments'' that we make in considering the Rule 21F-6 factors are
not appealable.\362\
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\362\ Although one commenter cited to legislative history to
contend that we are unduly restricting the scope of appeals under
Section 21F(f), the legislative history identified in fact refers to
an earlier draft of the bill that became the Dodd-Frank Act. That
provision was subsequently changed before it was incorporated into
the Dodd-Frank Act so that it expressly precluded appeal of an award
amount where the Commission considered the relevant factors in
assessing the award. See 156 Cong. Rec. S5929 (daily ed. July 15,
2010) (statement of Sen. Dodd) (``amended to eliminate the right of
a whistleblower to appeal the amount of an award.'') Indeed, the
relevant provision of the earlier draft of the bill did not, unlike
Section 21F(f), include language that expressly excluded from the
scope of appeal ``the determination of the amount of an award if the
award was based on a consideration of the'' awards factors.
---------------------------------------------------------------------------
We are adopting Rule 21F-13(b)--which substantially tracks Proposed
Rule 21F-12(b); however, we have modified the proposed language to
clarify that the record on appeal shall consist of the Preliminary
Determination, the Final Order of the Commission, and any other items
from among those set forth in Rule 21F-12(a)
[[Page 34348]]
that either the Commission or the claimant identifies for inclusion in
the record. We believe that this modification is appropriate because it
expressly provides the claimant with an opportunity to designate items
for the appellate record from among those items set forth in Rule 21F-
12(a).
Finally, with respect to the suggestion that we include a provision
that would afford attorneys' fees pursuant to the Equal Access to
Justice Act to a claimant any time he or she prevails on appeal, we
believe that this would be inconsistent with EAJA's substantive
terms,\363\ which set forth the specific circumstances under which a
prevailing party may obtain attorney's fees.
---------------------------------------------------------------------------
\363\ See, e.g., Equal Access to Justice Act (EAJA) 28 U.S.C.
2412(d)(1)(A) (``[A] court shall award to a prevailing party other
than the United States fees and other expenses * * * incurred by
that party in any civil action (other than cases sounding in tort),
including proceedings for judicial review of agency action, brought
by or against the United States in any court having jurisdiction of
that action, unless the court finds that the position of the United
States was substantially justified or that special circumstances
make an award unjust.'').
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M. Rule 21F-14--Procedures Applicable to Payment of Awards
Proposed Rule 21F-13 addressed the procedures for payment of awards
to whistleblowers. After considering the comments on this proposal, we
are adopting the rule as proposed, except that we are redesignating the
rule as Rule 21F-14.
a. Proposed Rule
Paragraph (a) of the proposed rule provided that 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.\364\ Paragraph (b) provided 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.
Both of these provisions derive from language in Section 21F(b) of the
Exchange Act.\365\
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\364\ 15 U.S.C. 78u-6(g).
\365\ 15 U.S.C. 78u-6(b).
---------------------------------------------------------------------------
Paragraph (c) addressed the timing for payment. It stated 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 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.
Paragraph (d) of the proposed rule described 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 otherwise should be made.
In general, the provision specified the priority among whistleblowers
for payment when amounts become available in the Fund to pay awards.
b. Comments Received
We received only a few comments on the payment procedures under
proposed rule 21F-13 and our request for comment on the possibility
that whistleblowers could be paid with monies that otherwise could be
distributed to victims pursuant to a Commission action.\366\
---------------------------------------------------------------------------
\366\ 15 U.S.C. 78u-6(g)(3)(B). That possibility arises from a
provision in the law that requires the Commission to deposit into
the Fund an amount equal to the unsatisfied portion of a
whistleblower award from any monetary sanction collected by the
Commission in the Commission action on which the award is based if
the balance of the Fund is not sufficient to satisfy the award.
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One commenter stated that it was improper to reward whistleblowers
at the expense of victims and suggested that the Commission consider
the interests of victims first and reward whistleblowers only after
victims have been made whole.\367\ Another commenter believed that the
tension between paying an award to a whistleblower and compensating
victims is unlikely to occur given the present balance of the Fund, but
suggested that, if the tension did arise, the Commission could defer
paying an award to a whistleblower until all victims have been
compensated, or alternatively, ask the whistleblower to voluntarily
defer payment of an award until all victims have been compensated.\368\
A third commenter stated that the Commission should make sure that the
IRS is notified of any payments to whistleblowers and that any award
recipient receives a Form 1099.\369\
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\367\ See letter from Americans for Limited Government.
\368\ See letter from Georg Merkl.
\369\ See letter from John Wahh.
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c. Final Rule
After reviewing and considering the comments, we are adopting Rule
21F-13 as proposed, except that we are redesignating the rule as Rule
21F-14.
We are sympathetic to the commenters' concern that in some
circumstances whistleblowers might be paid with monies that otherwise
could be distributed to victims pursuant to a Commission action. That
possibility is a consequence of the whistleblower statute, however, not
the rule. Moreover, deferring payment to a whistleblower would not
resolve this issue. If there are insufficient amounts in the Fund to
pay a whistleblower award, the statute requires that monies needed to
satisfy the award be deposited into the Fund from any monies collected
in the Commission action on which the award is based. Once deposited
into the Fund, these monies can be paid only to a whistleblower (or for
specified purposes to the SEC's Inspector General), not to victims.
Deferring payment to a whistleblower would not free up these monies to
compensate victims first. Accordingly, we are constrained by the
funding mechanism established in the whistleblower statute, and do not
believe that the issue can be resolved through payment procedures.\370\
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\370\ We agree with the comment that we notify the IRS and issue
Form 1099 for any whistleblower payment, but we do not believe that
any change to the rule is necessary to accomplish this. We expect to
issue Form 1099-MISC to each whistleblower and the IRS upon payment
of an award to a whistleblower who is not a foreign national. We
will coordinate with the IRS regarding the tax filing requirements
that may be applicable to the payment of an award to a whistleblower
who is a foreign national.
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As in the proposed rule, paragraph (a) of the rule that we are
adopting today provides that any award made pursuant to the rules will
be paid from the Fund. This provision derives directly from Section
21F(b)(2) of the Exchange Act, which states that any amount paid to a
whistleblower shall be paid from the Fund.\371\ Paragraph (b) provides
that 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.
\372\ This requirement derives from Section 21F(b)(1) of the Exchange
Act, which provides that an award is based upon the monetary sanctions
collected in the Commission action or related action.\373\
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\371\ 15 U.S.C. 78u-6(b)(2).
\372\ Where the Commission receives a monetary sanction that is
deemed satisfied by payment of a separate money judgment obtained by
an entity described in Rule 21F-3(c)(1)--i.e., a payment in a
``related action''--the monetary sanction will not be counted as
having been collected in both the Commission action and in the
related action.
\373\ 15 U.S.C. 78u-6(b)(1). We note that, if monetary sanctions
are ordered to be paid in a Commission or related action, but
payment is waived, in whole or in part, for inability to pay or for
other reasons, payment to a whistleblower is made only with respect
to the amounts actually collected in such action. However, this does
not affect whether the $1,000,000 monetary sanctions threshold is
satisfied for purposes of qualifying as a covered action.
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[[Page 34349]]
Paragraph (c) of the final rule, like the proposed rule, provides
that any payment of an award for a monetary sanction collected in a
Commission action will 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 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 whistleblower claims. In that circumstance, if one
whistleblower appealed 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.
Finally, as in the proposed rule, paragraph (d) of the final rule
describes how the Commission will 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 will be paid when amounts become
available in the Fund, subject to the terms set forth in paragraphs
(d)(1) and (d)(2). Under 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 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. Under
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 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.
N. Rule 21F-15--No Amnesty
a. Proposed Rule
Proposed rule 21F-14 stated that the provisions of Section 21F of
the Exchange Act do not provide whistleblowers with amnesty or immunity
for their own misconduct. However, the proposed rule noted that the
Commission will take whistleblowers' cooperation into consideration in
accordance with its Policy Statement Concerning Cooperation by
Individuals in [SEC] Investigations and Related Enforcement Actions (17
CFR 202.12).
b. Comments Received
We received few comments on this proposed rule. All of the
commenters urged the Commission to adopt a liberal approach to granting
amnesty to whistleblowers.\374\ One commenter suggested that there will
be a large group of high-quality potential whistleblowers that have
concerns about their potential liability and will not come forward to
report securities violations without assurances that they will not be
civilly or criminally prosecuted.\375\ Another commenter stated that
there should be no firm rule on amnesty.\376\
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\374\ See, e.g., letters from NWC, John Wahh and Stuart D.
Meissner, LLC.
\375\ See letter from Stuart D. Meissner, LLC.
\376\ See letter from NWC.
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c. Final Rule
We are adopting the proposed rule without modification, except that
we have redesignated it as Rule 21F-15. The final rule provides notice
that whistleblowers will not automatically receive amnesty if they
provide information about securities violations to the Commission. Of
course, whistleblowers who have not participated in misconduct will not
need amnesty.
With respect to the suggestion that we establish a process in which
whistleblowers can receive amnesty or other forms of leniency, such
policies and procedures have already been publicly promulgated in the
``Fostering Cooperation'' section of the Enforcement Manual for the
Division of Enforcement. This section discusses in detail the wide
spectrum of tools available to the Commission and its staff for
facilitating and rewarding whistleblowers and other cooperators,
ranging from taking no enforcement action to pursuing reduced charges
and sanctions in connection with enforcement actions.\377\
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\377\ See http://www.sec.gov/divisions/enforce/enforcementmanual.pdf#6.2.
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O. Rule 21F-16--Awards to Whistleblowers who Engage in Culpable Conduct
a. Proposed Rule
Proposed rule 21F-15 stated that, for purposes of determining
whether the required $1,000,000 threshold for an award has been
satisfied, the Commission would not include any monetary sanctions that
the whistleblower is ordered to pay, or that an entity is ordered to
pay if the entity's liability is based substantially on conduct that
the whistleblower directed, planned, or initiated. The proposed rule
also stated that the Commission will not include any such amounts in
the total monetary sanctions collected for purposes of calculating the
amount of an award payment to a whistleblower.
b. Comments Received
We received many comments on this proposed rule. The comments
addressed whether whistleblowers' culpability in the unlawful conduct
should be a basis for excluding them from eligibility for an award or
reducing the amount of their awards.
Many of the commenters opposed any rule that would exclude culpable
whistleblowers from eligibility for awards or would reduce the amount
of their awards, reasoning that without sufficient financial incentives
potential high-quality whistleblowers would not come forward and fraud
schemes would go undetected or be discovered much later than they
otherwise might.\378\ Some commenters contended that the Commission did
not have the statutory authority to exclude culpable whistleblowers
from eligibility for awards beyond what is already contained in the
statute--that is, whistleblowers who are convicted of a criminal
violation related to the covered action.\379\ Other commenters argued
that culpable whistleblowers are often ``insiders'' with valuable
first-hand knowledge of fraudulent conduct, and as such are frequently
the best sources of information about companies and senior level
management involved in
[[Page 34350]]
misconduct.\380\ One commenter suggested that allowing culpable
whistleblowers to be eligible for awards may also deter future
misconduct because securities violators would know that they forever
face an increased risk that one of their co-conspirators ``might turn
state's evidence against them.'' \381\
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\378\ See, e.g., letters from Auditing Standards Committee, NWC
and Sipio.
\379\ See, e.g., letter from NWC.
\380\ See, e.g., letters from Vogel, Slade & Goldstein; Kenney &
McCafferty; Georg Merkl; and NWC.
\381\ See letter from NWC.
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Many other commenters advocated that culpable whistleblowers should
not be eligible for awards because the failure to exclude such
whistleblowers would create significant incentives for individuals to
engage in wrongdoing.\382\ Some commenters stated that, if the final
rule allows for awards to culpable whistleblowers, a whistleblower
would have an incentive to conceal or fail to disclose a fraud as it
continues to grow in order to satisfy the $1,000,000 threshold for
award eligibility or to receive a larger award.\383\ Others expressed
concern that paying awards to culpable whistleblowers would harm
internal compliance programs because it is critical that employees
raise ethical and compliance concerns before a violation occurs and the
proposed rules would incentivize whistleblowers to bypass or delay
reporting violations internally.\384\
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\382\ See, e.g., letters from SIFMA, Business Roundtable,
Washington Legal Foundation, Morgan Lewis, Financial Services
Roundtable, Society of Corporate Secretaries, Wells Fargo, Trace,
Alcoa Group, Oppenheimer Funds, Association of Corporate Counsel,
CCMC, Connolly & Finkel, Target, Thompson Hine, Americans for
Limited Government, Ryder Systems, Verizon, AT&T, Institute for
Corporate Ethics, TRACE International, Inc., and ABA.
\383\ See, e.g., letters from AT&T, Davis Polk, and John Wahh.
\384\ See, e.g., letters from the Business Roundtable and AT&T.
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Other commenters recommended that the final rule should limit, but
not prohibit, awards to culpable whistleblowers.\385\ One commenter
stated that the rules should allow the Commission to evaluate a
person's culpable conduct and use that evaluation as a basis for
reducing the amount of an award.\386\ Several commenters stated that
the role and culpability of the whistleblower in the unlawful conduct
should be a required criterion that would result in reducing the amount
of an award within the 10 to 30 percent range.\387\ Others suggested
that a partial exclusion of culpable whistleblowers would be more
appropriate. Specifically, these commenters recommended that
whistleblowers' unlawful conduct should not be considered for
determining the amount of a whistleblower award but should be
considered when determining whether the $1,000,000 threshold has been
met because the proposed rule disincentivizes individuals even
marginally involved in the wrongful conduct from helping the Commission
bring a successful enforcement action.\388\
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\385\ See, e.g., letters from Chris Barnard and Peter van
Schaick.
\386\ See the letter from ABA.
\387\ See, e.g., letters from the Auditing Standards Committee
of the Auditing Section of the American Accounting Association,
Wells Fargo, Chris Barnard and Peter van Schaick.
\388\ See, e.g., letters from DC Bar and Connolly & Finkel.
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c. Final Rule
We are adopting the proposed rule without modification, except that
we are redesignating it as Rule 21F-16. After carefully considering the
comments, we believe that the final rule appropriately incentivizes
culpable whistleblowers to report securities violations while
preventing culpable whistleblowers from financially benefiting from
their own misconduct or misconduct for which they are substantially
responsible.
As a preliminary matter, we do not believe that a per se exclusion
for culpable whistleblowers is consistent with Section 21F of the
Exchange Act. As commenters noted, the original Federal whistleblower
statute--the False Claims Act--was premised on the notion that one
effective way to bring about justice is to use a rogue to catch a
rogue.\389\ This basic law enforcement principle is especially true for
sophisticated securities fraud schemes which can be difficult for law
enforcement authorities to detect and prosecute without insider
information and assistance from participants in the scheme or their
coconspirators. Insiders regularly provide law enforcement authorities
with early and invaluable assistance in identifying the scope,
participants, victims, and ill-gotten gains from these fraudulent
schemes. Accordingly, culpable whistleblowers can enhance the
Commission's ability to detect violations of the Federal securities
laws, increase the effectiveness and efficiency of the Commission's
investigations, and provide important evidence for the Commission's
enforcement actions.
---------------------------------------------------------------------------
\389\ See Cong.--Globe, 37th Cong., 3d Sess. 955-56 (1863),
quoted in Issues and Developments in Citizen Suits and Qui Tam
Actions: Private Enforcement of Public Policy 119, 121 (1996) (U.S.
Senator Jacob M. Howard--``I have based (the provisions of False
Claims Act) on the old fashioned idea of holding out a temptation
and `setting a rogue to catch a rogue,' which is the safest and most
expeditious way of bringing rogues to justice.'').
---------------------------------------------------------------------------
Nevertheless, we share commenters' concern that failing to limit
culpable whistleblowers' eligibility for awards could create incentives
that are contrary to public policy. Accordingly, for purposes of
determining whether the $1,000,000 threshold has been satisfied or
calculating the amount of an award, the Commission will not count any
monetary sanctions that the whistleblower is ordered to pay or that are
ordered to be paid against any entity whose liability is based
substantially on conduct that the whistleblower directed, planned, or
initiated.\390\ This final rule provides an incentive for less culpable
individuals to come forward and disclose illegal conduct involving
others. At the same time, the rule limits awards based on the conduct
attributable to the culpable whistleblower. The rationale for this
limitation is that the common understanding of a whistleblower is one
who reports misconduct by another person and it would be contrary to
public policy for whistleblowers to benefit from their own misconduct.
As for the suggestion that a partial exclusion for culpable
whistleblowers should be adopted by the Commission, we believe that it
would be inappropriate to treat culpable whistleblowers more favorably
than other less or non-culpable whistleblowers, even if such
differential treatment could result in additional submissions from
culpable whistleblowers. Accordingly, we do not believe that the
monetary sanctions of an entity associated with misconduct that the
whistleblower substantially directed, planned, or initiated the
reported misconduct should be considered when determining whether the
culpable whistleblower met the $1,000,000 threshold. Finally, to
minimize any incentive for whistleblowers to conceal misconduct or to
delay reporting it, we have included in Rule 21F-6 a provision that
requires the Commission to consider whether it would be appropriate to
decrease a whistleblower's award percentage because of the culpability
of
[[Page 34351]]
the whistleblower or any substantial and unreasonable reporting delay
by the whistleblower.\391\
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\390\ In addition, as part of a negotiated settlement agreement,
deferred prosecution agreement, non-prosecution agreement, immunity
agreement, cooperation agreement, or other similar agreement with a
highly culpable whistleblower, we have the ability to obtain the
whistleblower's agreement to accept less than the statutory minimum
or to forgo seeking a whistleblower award. We may exercise this
authority in appropriate cases, including cases involving
whistleblowers who seek to participate in the Commission's
Cooperation Program and who substantially directed, planned, or
initiated the violation.
\391\ We do not agree with the suggestion of some commenters
that the rule will create an incentive for culpable whistleblowers
to delay reporting in order to increase the potential for a larger
award. Under these rules, a whistleblower has the greatest
likelihood of receiving an award if he reports misconduct to us
first. If a culpable whistleblower delays reporting, he runs the
substantial risk that another person will report first, or that the
misconduct will otherwise come to light, which will not only make
the whistleblower unlikely to obtain an award, but will increase the
likelihood that he will be prosecuted for his involvement in the
misconduct.
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P. Rule 21F-17--Staff Communications With Individuals Reporting
Possible Securities Law Violations
a. Proposed Rule
Proposed Rule 21F-16(a) provided that no person may take any action
to impede a whistleblower from communicating directly with the
Commission staff about a possible 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. The
Congressional purpose underlying Section 21F of the Exchange Act is to
encourage whistleblowers to report possible violations of the
securities laws by providing financial incentives, prohibiting
employment-related retaliation, and providing various confidentiality
guarantees.
Proposed Rule 21F-16(b) clarified 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 possible
securities law violation. The proposed rule stated that the staff is
authorized to communicate directly with these individuals without first
seeking the consent of the entity's counsel. The objective of paragraph
(b) 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 members of the staff who act in the
capacity of attorneys.
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.''\392\
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\392\ 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,\393\ 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.\394\ 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.\395\
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\393\ See generally Upjohn Co. v. United States, 449 U.S. 383
(1981).
\394\ 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.
\395\ 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 possible securities law
violations and to preserve the confidentiality of those who do so.\396\
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.
---------------------------------------------------------------------------
\396\ See, e.g., Exchange Act Section 21F (b) through (d) and
(h), 15 U.S.C 78u-6 (b) through (d) and (h).
---------------------------------------------------------------------------
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. Paragraph (b) of the proposal
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''\397\ and, will therefore not
require consent of the entity's counsel as might otherwise be required
by rules of professional conduct.\398\
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\397\ 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.''
\398\ 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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b. Comments Received
The comments that we received on Proposed Rule 21F-16(a) supported
it. One commenter noted that the proposed rule is especially important
because many firms require employees to sign confidentiality
agreements.\399\
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\399\ See letter from POGO. See also, e.g., letters from Kurt
Schulzke (stating the proposed rule represents an improvement over
the False Claims Act and IRS whistleblower regimes because of ``(a)
the effective nullification of confidentiality agreements and other
actions to `impede a whistleblower from communicating directly with
the Commission staff about a potential securities law violation' and
(b) the empowerment of the Commission staff to communicate directly
with whistleblowers regardless of state bar ethics rules governing
communications with represented parties.''); VOICES (stating that a
whistleblower should not be prevented from communicating directly
with the Commission staff by actions such as enforcing, or
threatening to enforce, a confidentiality agreement because such
actions would ``conflict with the purpose of the statute'').
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With respect to Proposed Rule 21F-16(b), a couple of commenters
supported the proposal,\400\ but others opposed it.\401\ Those
commenters
[[Page 34352]]
opposing the proposal generally expressed concern that it could
significantly erode the protections of the attorney-client privilege
because the staff could seek to obtain attorney-client privileged
information during the communications, or treat any attorney-client
information that the whistleblower conveys as a waiver of the
privilege. Several of these commenters recommended that the final rule
should contain express language stating that the staff is not permitted
to obtain attorney-client information during any communications
authorized by the rule.\402\
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\400\ See, e.g., letters from NWC; Kurt Schulzke. See also
Letter from Society of Corporate Secretaries (stating the Commission
``does not `need permission' to speak directly with a
whistleblower,'' but should ``be required to give the company notice
that it intends to do so[.]'').
\401\ See, e.g., letters from Business Roundtable; Financial
Services Roundtable; GE Group; Alcoa Group; Association of Corporate
Counsel; GE Group; Auditing Standards Committee.
\402\ See, e.g., letters from GE Group; Auditing Standards
Committee; Business Roundtable.
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Finally, a few comment letters asserted that the Commission lacks
authority to establish an ``authorized by law'' \403\ exception to
state attorney ethics rule that would permit the staff to engage in
these types of communications without the consent of the entity's
counsel.\404\ One of these commenters argued that nothing in Section
21F of the Exchange Act indicates that Congress intended to undermine
the so-called McDade-Murtha Amendment, which requires attorneys at the
Department of Justice to comply with the state bar disciplinary rules
of the state in which they are licensed.\405\
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\403\ Model Rules of Professional Conduct, Rule 4.2.
\404\ See, e.g., letters from GE Group; Financial Services
Roundtable; Association of Corporate Counsel.
\405\ 28 U.S.C. 530B.
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c. Final Rule
After reviewing the comments, we are adopting Rule 21F-16 as
proposed, except that we have redesignated it as Rule 21F-17.\406\
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\406\ We have modified the rule text to make clear that it
applies to any individual seeking to report possible securities law
violations to the Commission, and not just those who provide
information to us pursuant to the procedures set forth in Rule 21F-
9(a).
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Rule 21F-17(a) is necessary and appropriate because, as we noted in
the proposing release, efforts to impede an individual's direct
communications with Commission staff about a possible securities law
violation would conflict with the statutory purpose of encouraging
individuals to report to the Commission.\407\ Thus, an attempt to
enforce a confidentiality agreement against an individual to prevent
his or her communications with Commission staff about a possible
securities law violation could inhibit those communications even when
such an agreement would be legally unenforceable,\408\ and would
undermine the effectiveness of the countervailing incentives that
Congress established to encourage individuals to disclose possible
violations to the Commission.\409\
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\407\ Based on the suggestion of a commenter, we wish to clarify
that confidentiality agreements or protective orders entered in SRO
arbitration or adjudicatory proceedings may not be used to prevent a
party from reporting to us possible securities law violations that
he or she discovers during the proceedings. See letter from Stuart
D. Meissner, LLC. Indeed, given that the SRO's are charged with
helping us enforce the Federal securities laws, it would be an odd
result if one party in an SRO proceeding could use a protective
order to prevent another party from reporting a possible securities
law violation to us.
\408\ 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'').
\409\ 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. Paragraph (a) of the proposal
is not intended to prevent professional or religious organizations
from responding to a breach of a recognized common-law or statutory
privilege (e.g., psychiatrist-patient, priest-penitent) by one its
members.
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With respect to Rule 21F-17(b), we believe that this rule is a
necessary and appropriate means to implement Section 21F's purposes of
facilitating the disclosure of information to the Commission relating
to possible securities law violations and preserving the
confidentiality of those who do so.\410\ As a result, our rulemaking
authority under Section 21F(j) permits us to authorize our staff to
communicate directly with directors, officers, members, agents, or
employees of an entity that has counsel where the individual first
initiates communication with the Commission as a whistleblower.
Moreover, because Rule 21F-17(b) fits within the ``authorized to do so
by law'' exception of ABA Model Rule 4.2 and the state bar rules
modeled after it, Rule 21F-17(b) is fully consistent with state bar
rules.\411\
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\410\ We have made one non-substantive clarifying change to the
final rule text, replacing the term ``subject of your
communication'' with ``possible securities law violation.'' The
final rule provides that ``the staff is authorized to communicate
directly with you regarding the possible securities law violation
without seeking the consent of the entity's counsel.''
\411\ We disagree with the comment that Rule 21F-17(b) is
inconsistent with the McDade-Murtha Amendment, 28 U.S.C. 530B.
First, as we discussed above, Rule 21F-17(b) does not preempt state
bar ethics rules, but instead is simply an application of the
``authorized by law'' exception. Second, McDade-Murtha does not
apply to Commission attorneys.
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Although a number of commenters expressed concern that this rule
will undermine the attorney-client privilege, we emphasize that nothing
about this rule authorizes the staff to depart from the Commission's
existing procedures and practices when dealing with potential attorney-
client privileged information.\412\ As stated above,\413\ compliance
with the Federal securities laws is promoted when individuals,
corporate officers, and others consult about possible violations, and
the attorney-client privilege furthers such consultation. None of the
rules that we are promulgating under Section 21F, including Rule 21F-
17(b), is intended to undermine this benefit by having individuals
disclose to us information about possible securities laws violations
that they learned of through privileged communications. Thus, to the
extent that the staff may be engaged in a communication authorized
under Rule 21F-17(b) and issues relating to attorney-client privilege
should develop, the staff will proceed in accordance with established
Commission practices.\414\
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\412\ See generally SEC Division of Enforcement Manual Sec. 4.
\413\ See supra discussion of Rule 21F-4(b)(4)(i).
\414\ One commenter recommended that we should establish
operating procedures to deal with potentially privileged material.
See letter from Standards Committee of the Auditing Section of the
American Accounting Association. The staff is in the process of
developing internal operating protocols for dealing with attorney-
client information that whistleblowers may provide us.
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III. Paperwork Reduction Act
Certain provisions of the Proposed Rules contained ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (``PRA'') of 1995.\415\ 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 submitted proposed collections of
information to OMB for review in accordance with the PRA.\416\ The
titles for the collections of information were: (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
[[Page 34353]]
Securities Exchange Act of 1934). These three forms were proposed to
implement Section 21F of the Exchange Act. The proposed forms allowed 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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\415\ 44 U.S.C. 3501 et seq.
\416\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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The Commission did not receive any comments that directly addressed
its Paperwork Reduction Act analysis or its burden estimates.\417\ In
comments on the rule proposals, a number of commenters suggested that
the three-form process proposed for obtaining information from
whistleblowers was burdensome.\418\ As we discuss in connection with
Rule 21F-9, our final Rules require largely the same information to be
collected, but in response to comments we have combined the information
collection into only two forms--Form TCR, which incorporates several
questions previously posed on Proposed Form WB-DEC, and Form WB-APP--to
simplify the process for whistleblowers.
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\417\ We received one comment generally opining that our
proposed rules failed to adequately account for the time expended by
counsel in representing whistleblowers that extends beyond the
completion of our proposed forms. See letter from Stuart D.
Meissner, LLC at n. 3.
\418\ See. e.g., letters from Jane Liu; NWC; Patrick Burns.
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A. Summary of Collection of Information
Form TCR, submitted pursuant to Rule 21F-9, requests the following
information:
1. Background information regarding each complainant submitting the
TCR, including the person's name and contact information. We have added
a section for the identification of additional complainants.
2. If the complainant is represented by an attorney, the name and
contact information for the complainant'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 or complaint, including contact information;
4. Information regarding the tip or complaint, including the date
of the alleged violation; the nature of the complaint; the type of
security or investment, ticker symbol or CUSIP number and name of the
issuer or security, if relevant; whether the complainant or counsel has
had prior contact with Commission staff and with whom; whether
information has been communicated to another agency and, if so, details
about that communication, including the name and contact information
for the point of contact at the agency, if available; whether the
complaint relates to an entity of which the complainant is or was an
officer, director, counsel, employee, consultant or contractor; whether
the complainant has taken any prior actions regarding the complaint
including reporting the violation to a supervisor, compliance office,
whistleblower hotline, ombudsman, or any other available mechanism at
the entity for reporting violations; and the date of such action was
taken;
5. A description of the facts pertinent to the alleged violation,
including an explanation of why the complainant believes the acts
described constitute a violation of the Federal securities laws;
6. A description of all supporting materials in the complainant's
possession and the availability and location of any additional
supporting materials not in the complainant's possession;
7. An explanation of how the person submitting the complaint
obtained the information and, if any information was obtained form an
attorney or in a communication where an attorney was present, the
identification of any such information;
8. A description of any information obtained from a public source
and a description of such source;
9. A description of any documents or other information in the
complainant's submission that the complainant believes could reasonably
be expected to reveal his or her identity, including an explanation of
the basis for the complainant's belief that his or her identity would
be revealed if the documents were disclosed to a third party; and
10. Any additional information the complainant believes may be
relevant.
Also included in Form TCR are several items previously included in
proposed Form WB-DEC, which was required to be submitted pursuant to
Proposed Rule 21F-9. First, there are several questions that require a
complainant to provide eligibility-related information, by checking a
series of ``yes/no'' answers.\419\ Second, the form contains a
declaration, signed under penalty of perjury, that the information
provided to the Commission pursuant to Proposed Rule 21F-9 is true,
correct and complete to the best of the person's knowledge, information
and belief. Third, there is a counsel certification, which is required
to be executed in instances where a complainant makes an anonymous
submission pursuant to the whistleblower program and thus must be
represented by an attorney. This statement certifies that the attorney
has verified the complainant's identity, and has reviewed the
complainant's completed and signed Form TCR for completeness and
accuracy, and that the information contained therein is true, correct
and complete to the best of the attorney's knowledge, information and
belief. The certification also contains new statements, which were not
included in proposed Form WB-DEC, that: (i) The attorney has obtained
the complainant's non-waivable consent to provide the Commission with
the original completed and signed Form TCR in the event that the
Commission requests it due to concerns that the form may contain false,
fictitious or fraudulent statements or representations that were
knowingly or willfully made by the complainant; and (ii) the attorney
consents to be legally obligated to provide the signed Form TCR within
seven (7) calendar days of receiving such request from the Commission.
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\419\ See supra note 342 for a more detailed description of
these questions.
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Form WB-APP, submitted pursuant to Rules 21F-10 and F-11, requires
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 (TCR), (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 (i) the date of the Notice, (ii) the
Notice number, and (iii) the case name and number;
(6) For related actions, (i) the name and contact information for
the agency or organization to which the person provided the original
information; (ii) the date the person provided this information, (ii)
the date the agency or organization filed the related action, (iv) the
case name and number of the related action, and (v) the name and
contact information for the point of contact at the agency or
organization, if known;
(7) A series of questions concerning the person's eligibility to
receive an
[[Page 34354]]
award as described in the discussion Form TCR above; \420\
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\420\ See supra at 211 and note 342.
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(8) An optional 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 Rule 21F-6, and any supporting
documents; and
(9) A declaration, signed under penalty of perjury, 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. Use of Information
The collection of information on Forms TCR and WB-APP will 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 Form TCR will be individuals who wish to
provide information relating to possible violations of the Federal
securities laws and who wish to be eligible for whistleblower awards.
The likely respondents to Form WB-APP will be individuals who have
provided the Commission or to another agency in a related action with
information relating to a possible violation of the Federal securities
laws and who believe they are entitled to an award.
D. Total Annual Reporting and Recordkeeping Burden
i. Form TCR
The Commission estimates that it will receive approximately 30,000
tips, complaints and referrals submissions each year through its
Electronic Data Collection System or completed forms TCR.\421\ Of those
30,000 submissions, the Commission estimates that it will receive
approximately 3,000 Forms TCR each year.\422\ Each respondent would
submit only one Form TCR and would not have a recurring obligation. In
the proposing release, we proposed that a whistleblower would have to
complete two forms, proposed Form TCR and proposed Form WB-DEC, to be
eligible for an award. In the Final Rules, we have eliminated Form WB-
DEC and added the eligibility questions from that proposed form to Form
TCR.
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\421\ 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.
\422\ This number is a staff estimate based upon the expectation
that roughly 10 percent of all tips received by the Commission will
be submitted in hard copy on Form TCR. The staff anticipates that
most whistleblowers will elect to submit their information
electronically. The electronic submission of information will
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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The Commission estimates that it will take a whistleblower, on
average, one hour to complete the portion of Form TCR that does not
include the questions that had previously been included in proposed
Form WB-DEC. 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 annual PRA burden of Form TCR is 3,000
hours.
A person who submits information through a Form TCR or the
Electronic Data Submission System and who wishes to be eligible for an
award under the program must complete the remainder of Form TCR (the
additional questions related to eligibility that had been included in
Proposed Form WB-DEC). The Commission estimates that it will receive
this additional information in roughly 50 percent of the cases in which
the Commission receives a Form TCR or an electronic submission of
information.\423\ As noted above, the Commission estimates that it will
receive approximately 30,000 combined electronic submissions and
submission on Form TCR each year. Thus, the Commission estimates that
it will receive responses to these additional questions in
approximately 15,000 instances. We estimate that it will take a
whistleblower, on average, 0.5 hours to complete the remainder of Form
TCR.\424\ Accordingly, we estimate that the annual PRA burden of the
remainder of Form TCR is 7,500 hours.
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\423\ 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.
\424\ This is consistent with our estimate of the time it would
take a whistleblower, on average, to complete proposed Form WB-DEC.
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ii. 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, is required to submit a Form WB-APP to be
considered for an award. A whistleblower can 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. We originally
estimated that we would post approximately 130 such Notices each year.
Because the final rules allow for the aggregation of proceedings in
certain circumstances, as described in Rule 21F-4(d), we have increased
that estimate to 143 Notices per year.\425\ In addition, we estimate
that we will receive approximately 129 Forms WB-APP each year.\426\
Finally, we estimate that it will take a whistleblower, on average, two
hours to complete Form WB-APP. The completion time will 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 258 hours.
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\425\ This number is a staff estimate based upon (i) 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; (ii) the assumption
that there should be an increase (roughly 10 percent) in the number
of such actions as a result of the aggregation of proceedings
permitted under Rule 21F-4(d); and (iii) the assumption that there
should be an additional increase (roughly 30 percent) in the number
of such actions as a result of the whistleblower program.
\426\ This number is a staff estimate based upon two
expectations: first, that the Commission will 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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iii. Involvement and Cost of Attorneys
Under the Proposed Rules, an anonymous whistleblower is required,
and a whistleblower whose identity is known may elect, 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
[[Page 34355]]
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) will enter into hourly fee arrangements
with counsel.\427\ 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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\427\ 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,
1,500 of which contain eligibility-related information previously
contained in Proposed Form WB-DEC, and 129 Forms WB-APP annually; \428\
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\428\ 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 75 Forms TCR and 6 Forms WB-APP annually;
\429\
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\429\ 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; \430\ and
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\430\ 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) 2.5 hours to complete a Form
TCR,\431\ (ii), and (iii) 10 hours to complete a Form WB-APP.\432\
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\431\ In the proposing release, we estimated that it would take
an attorney, on average, 2 hours to complete proposed Form TCR. As
noted above, in the Final Rules, we have added to Form TCR questions
regarding eligibility that had been in proposed Form WB-DEC. As a
result, we estimate that it will take an attorney, on average, 2.5
hours to complete Form TCR.
\432\ 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 2.5 hours for the
completion of Form TCR and 10 hours for completion of Form WB-APP
(even though the Commission estimates that a whistleblower will be
able to complete the entire Form TCR (including the eligibility
questions that had been found in Form WB-DEC) in 1.5 hours and Form
WB-APP in 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) $75,000 for
the completion of Form TCR; (ii) $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 or her information electronically and to complete Form WB-
APP or submit his or her information electronically 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)].
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.
IV. Economic Analysis
As discussed above, Section 21F of the Exchange Act (added by
Section 922 of the Dodd-Frank Act) establishes substantial new
incentives and protections for whistleblowers.\433\ First, eligible
whistleblowers are entitled to an award equal to 10 to 30 percent of
the money recovered when they voluntarily provide us with original
information that leads to a monetary sanction greater than $1 million
in a Commission enforcement action. Second, Section 21F prohibits
employment retaliation against individuals for making submissions to us
and it provides that whistleblowers may make these submissions
anonymously.
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\433\ Whistleblowing is an individual decision that is generally
guided by a complex mix of pecuniary elements (e.g., fear of job
loss) and non-pecuniary elements (e.g., sense of ``doing the right
thing,'' fear of social ostracism). See Geoffrey Christopher Rapp,
Beyond Protection: Invigorating Incentives for Sarbanes-Oxley
Corporate and Securities Fraud Whistleblowers, 87 Boston Univ. L.
Rev. 91, 112-13 (2007) (citing sources); id. (``Assuming rational
decision making, an employee will blow the whistle when the marginal
private benefits exceed the marginal private costs.''). The
whistleblower award program established by Section 21F seeks to
shift the balance of these factors in favor of timely blowing the
whistle over silence for individuals who may have useful, quality
information about possible securities law violations.
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Although many of the requirements of the whistleblower award
program are established by Section 21F, Congress authorized the
Commission to issue rules and regulations as necessary or appropriate
to implement the program. In doing so, we faced a number of policy
issues on which we solicited public comment, including:
Whether the whistleblower program should provide financial
incentives for attorneys and others to breach the attorney-client
privilege in order to seek an award?
To what extent should the program provide awards to
individuals who have violated the Federal securities laws?
Whether the program should require employees to first
report possible violations through their employer's internal compliance
procedures before coming to the Commission? If not, should the program
provide other incentives to encourage
[[Page 34356]]
employees to report internally in appropriate circumstances?
In order to implement the program effectively, we addressed these
and other issues in our proposed rules, which defined and interpreted
various statutory provisions, and established procedures that
whistleblowers must follow both when submitting information to us and
when applying for awards.
We requested comments and empirical data on all aspects of the
economic analysis of the proposed rules, and received only a few
comments specifically directed to that analysis. Two commenters
recommended that we should consider the costs to companies and other
entities that would result if employees are not required to report
internally before coming to us.\434\ Likewise, two commenters
recommended that we should revise the rules to reduce the costs on
companies and the Commission that may result from ``false or spurious
claims'' or ``meritless complaints'' of possible securities law
violations.\435\ Although the commenter did not quantify these costs,
it noted these costs would include companies' legal and accounting
fees, and the Commission's costs to review and evaluate these frivolous
submissions.
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\434\ See letters from the Association of Corporate Counsel and
Edison Electric Institute. A number of other commenters also
generally raised the concern that companies would be burdened if we
did not require employees to report possible violations of the
securities laws internally either before or simultaneously with the
submission of information to the Commission. In our discussion of
Rule 21F-4(c)(3) above, we discuss our views on this issue and our
decision not to require whistleblowers to report internally.
\435\ See letters from the ABA and Edison Electric Institute.
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Below we consider the costs and benefits of the final rules, and
their effects on efficiency, competition, and capital formation. We
limit our analysis to those rules on which we exercised discretion.
A. Analysis of Benefits, Costs, and Economic Effects of the Rules
In promulgating these rules, we have sought to strike the right
balance in defining terms and otherwise implementing the whistleblower
program so as not to be overly restrictive or overly broad. Overly
restrictive definitions or requirements could render the program
ineffective if this meant that only a small fraction of whistleblowers
who provide us with significant information would qualify for monetary
rewards. This could discourage potential whistleblowers from coming
forward with information about possible securities law violations,
thereby depriving us of meritorious tips. This could in turn mean that
some securities law violations would continue unreported for longer
periods of time, with the result that overall enforcement and
deterrence of violations would be less effective.
By contrast, overly broad definitions and unduly permissive
provisions could result in inefficient use of the Investor Protection
Fund--especially in situations where the Commission is already well
into the process of obtaining sufficient information to bring a
successful enforcement action. An important effect of the whistleblower
program is reduced economic cost of collecting necessary information
about possible securities law violations. To achieve this, the rules
should incentivize the prompt and early submission of high-quality,
credible tips. From a cost-benefit perspective, doing so leverages the
Investor Protection Fund to obtain the maximum benefit from the
whistleblower program with respect to the twin goals of protecting
investors and increasing public confidence in the markets.
In addition to these considerations, we also assessed the economic
impact of our final rules on investors, companies, and other corporate
entities. We particularly focused on how the whistleblower program
could effectively and efficiently use internal compliance programs in
appropriate circumstances to best achieve the statutory objectives,
without imposing undue costs on whistleblowers, investors, our
enforcement efforts, or companies. We recognized that various policy
options presented different trade-offs with respect to the costs and
benefits imposed on these various interests.
With these considerations in mind, and after reviewing the public
comments we received, we have structured the definitions,
interpretations, and other rule provisions to seek to (i) encourage
high-quality submissions and discourage frivolous submissions, (ii)
encourage whistleblowers to provide information early, rather than
waiting to receive a request or inquiry from a relevant authority;
(iii) minimize unnecessary burdens on whistleblowers and establish
fair, transparent procedures; and (iv) promote the use of effective
internal compliance programs in appropriate circumstances.
1. Eligibility for Anti-Retaliation Protection
Rule 21F-2(b) states that anti-retaliation employment protection
will be provided to whistleblowers who have a ``reasonable belief''
that the information they provide reveals a possible securities law
violation. The ``reasonable belief'' standard provides a familiar legal
framework that puts potential whistleblowers on notice that meritless
submissions cannot be the basis for anti-retaliation protection.
Reducing frivolous submissions in this way should provide benefits.
First, Commission resources will be freed up to focus on more
meritorious submissions. Second, the costs that employers can be forced
to incur when employees abuse the anti-retaliation protections should
be lower. These costs can include not only litigation costs resulting
from bad faith claims of anti-retaliation, but also inefficiencies
stemming from some employers' decisions not to take legitimate
disciplinary action due to the threat of bad faith anti-retaliation
litigation.
2. The Penalty of Perjury
Rule 21F-9(b)--which requires whistleblowers who wish to
participate in the whistleblower program to declare, under penalty of
perjury, that their submission is truthful to the best of their
knowledge--should similarly discourage frivolous submissions. This
should reduce the costs incurred by the Commission from devoting
resources to review and evaluate frivolous submissions, and also create
efficiency gains by permitting the Commission to place greater reliance
on the accuracy of information that is received.\436\ By reducing false
and frivolous submissions, Rule 21F-9(b) should also reduce the costs
to companies and other persons that might otherwise result from the
Commission opening investigations based on false or spurious
allegations of wrongdoing.
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\436\ See, e.g., Alexander Dyck et al., Who Blows the Whistle on
Corporate Fraud?, J. Fin. (2011), available at http://www.afajof.org/afa/forthcoming/4820p.pdf. The staff will review and
evaluate all TCRs, regardless of whether the whistleblower has
completed the declaration portion. However, because the declaration
would aid in assessing reliability, the staff may consider whether a
whistleblower has executed a declaration in prioritizing the
investigation of TCRs and the allocation of the Division of
Enforcement's limited resources. As Rule 21F-9 provides, a
whistleblower will not be eligible for an award if he fails to
complete the declaration at the time he submitted his TCR form.
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3. Monetary Award Eligibility
Rule 21F-4 provides definitions for ``voluntary'' (e.g., before the
Commission issues a subpoena or makes a request) \437\ and
``information that leads
[[Page 34357]]
to successful enforcement.''\438\ These definitions are designed to
ensure that the Commission receives actionable whistleblower
information--tips indicating a high likelihood of a substantial
securities violation--in a timely manner. More specifically, the
definitions seek to incentivize submissions involving information that
is unobservable to the Commission, that is not likely to be uncovered
as part of any on-going investigations or examinations, that increases
the probability of a successful enforcement action, and that reduces
our enforcement costs in terms of time, effort, and resources. We
believe that paying awards for whistleblower information that satisfies
these criteria helps leverage the Investor Protection Fund to provide
the maximum law enforcement benefit. By contrast, however, we do not
believe that information provided by a whistleblower in instances where
the Commission is about to obtain the same information in the ordinary
course of an ongoing investigation would justify the expenditure of
funds from the Investor Protection Fund, thus warranting the exclusion
of such submissions from the definition of ``voluntary'' (so as to not
qualify for an award). This will provide the additional benefit of
incentivizing whistleblowers to report possible violations early--
before they receive a subpoena or are otherwise requested to provide
information by the Commission or other regulatory authority.\439\
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\437\ Rule 21F-4(a) defines ``Voluntary Submission of
Information'' to require that the whistleblower make his or her
submission before a request, inquiry, or demand that relates to the
subject matter of the submission is directed to the whistleblower or
anyone representing the whistleblower (i) by the Commission; (ii) in
connection with an investigation, inspection, or examination by the
PCAOB or any self-regulatory organization; or (iii) in connection
with an investigation by the Congress, any other authority of the
Federal government, or a state Attorney General or securities
regulatory authority. The rule further provides that a
whistleblower's submission will be deemed voluntary if it was
provided after a Commission request, inquiry, or demand directed to
the whistleblower, provided that the whistleblower had previously
disclosed the information voluntarily to one of the other
authorities identified in the rule. Finally, the rule provides that
a submission is not voluntary if the whistleblower was required to
report the information to the Commission as a result of a pre-
existing legal duty, a contractual duty that is owed to the
Commission or to one of the other authorities set forth in the rule,
or a duty that arises out of a judicial or administrative order.
\438\ Rule 21F-4(c) defines ``Information that Leads to
Successful Enforcement'' such that a whistleblower is only entitled
to an award if one of three general standards is satisfied. The
first standard is met if a whistleblower gave the Commission
original information that was sufficiently specific, credible, and
timely to cause the staff to commence an examination, open an
investigation, reopen an investigation that the Commission had
closed, or to inquire concerning different conduct as part of a
current examination or investigation, and the Commission brought a
successful judicial or administrative action based in whole or in
part on conduct that was the subject of the whistleblower's original
information. The second standard is met if the whistleblower gave
the Commission original information about conduct that was already
under examination or investigation by the Commission, or certain
other specified law enforcement or regulatory entities, and the
whistleblower's submission significantly contributed to the success
of the action. Finally, the third standard permits a whistleblower
to report original information through an entity's internal
whistleblower, legal, or compliance procedures for reporting
allegations of possible violations of law before or at the same time
he reports the information to the Commission (but no later than 120
days after the internal submission); this standard under the led-to
definition will be satisfied if the entity thereafter provided the
whistleblower's information to us, or provided results of an audit
or investigation initiated in response to the whistleblower's
report, and the information the entity provided to us satisfies
either (1) or (2) above.
\439\ We note that there may be an adverse incentive for would-
be whistleblowers to delay blowing the whistle on a violation in
progress in order to allow the magnitude of the harm to increase and
thus qualify the potential whistleblower for a larger amount. See,
e.g., Robert Howse & Ronald J. Daniels, Rewarding Whistleblowers:
The Costs and Benefits of an Incentive-Based Compliance Strategy,
UNIV. PENN. SCHOLARLY COMMONS, Departmental Paper (1995) 527 (``[I]t
is often suggested that the calibration of the amount of the reward
from whistleblowing directly to the amount of the penalty * * *
provides whistleblowers with an incentive to report wrongdoing later
rather than earlier, and to do so only after the corruption has
produced much more serious consequences, rather than disclosing
evidence of corruption in the corporation immediately.''). However,
we believe that other elements of the whistleblower program provide
additional incentives for whistleblowers to report information
early. For example, a potential whistleblower who does not report
information early runs the risk that another person may provide the
same information to the Commission thereby possibly denying the
dilatory whistleblower from receiving an award.
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The eligibility exclusions outlined in Rule 21F-4(b) under the
definitions of ``independent knowledge'' and ``independent analysis''
are similarly sensitive to cost-benefit considerations. Rule 21F-4(b)
excludes individuals in particular relations of trust from receiving
awards in certain limited situations where, in our view, doing so on
balance better promotes the overall enforcement of the Federal
securities laws. For example, we believe that we can achieve more
efficient enforcement of the securities laws by not creating incentives
for attorneys or others to breach the attorney-client privilege by
submitting tips disclosing privileged communications. Attorneys are
uniquely positioned to advise clients when conduct may violate the
Federal securities laws, and therefore they can plan a critical role in
preventing or stopping such conduct. Accordingly, we believe that
overall compliance with the Federal securities laws is better promoted
by generally excluding information that is shared in confidence with
attorneys by their clients so as to promote open attorney-client
consultations.
For similar reasons, we have placed certain limitations on the
ability of particular categories of individuals to receive awards based
on information that they learn in their professional capacity because
of the positions that they occupy--e.g., officers, directors, trustees,
or partners of an entity; employees with internal audit or compliance
responsibilities; and employees or associates of either firms that are
retained to investigate possible securities law violations, or
independent public accountants that are retained to conduct engagements
required by the securities laws. As a general matter, these individuals
occupy sensitive roles that can enable them to identify and stop
possible violations of the securities law, and their diligence in doing
so can be an important factor that companies or other entities achieve
compliance. Thus, we believe it is a more efficient and cost-effective
use of the Investor Protection Fund to provide further incentive to
these individuals to fulfill those responsibilities rather than
allowing them to use knowledge of possible wrongdoing to obtain an
award by reporting to the Commission. That said, we have recognized
certain exceptions to the exclusions that, in our view, reflect
situations where the benefit of paying an award--in terms of reducing
the harm to the entity and investors, and in preserving our enforcement
capacity--justifies the cost associated with a claim on the Investor
Protection Fund.\440\
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\440\ These exceptions, which are set forth in Rule 21F-
4(b)(4)(v), permit a submission where: (i) a report to the
Commission is necessary to prevent substantial harm to the entity or
investors; (ii) the entity is engaging in conduct that will impede
our investigation; or (iii) 120 days have elapsed.
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Additionally, with respect to employees with internal audit or
compliance responsibilities, we believe the exclusion is appropriate
because to do otherwise would undermine the incentives for companies
and other entities to establish and maintain effective internal
compliance programs. As we discussed in more detail below in Part
(A)(7), effective internal compliance programs can in appropriate
circumstances provide significant benefits both in terms of reducing
the harm that entities and investors experience from securities law
violations, and in terms of efficiently assisting our own enforcement
efforts.
Finally, Rule 21F-4(d) interprets the statutory term ``action'' to
allow the Commission to aggregate the monetary sanction from two or
more closely
[[Page 34358]]
associated judicial or administrative proceedings.\441\ From a cost
perspective, this will result in more awards, as well as larger awards,
being paid from the Securities Investor Protection Fund. However, we
believe the benefits of these additional award expenditures justify
those costs. The ability to aggregate the monetary sanctions from two
or more closely associated Commission proceedings should enhance the
incentive for whistleblowers to come forward in a timely manner where
there is the potential for multiple closely-associated Commission
proceedings that collectively may reflect more than a million dollars
in monetary sanctions, but none of which would likely do so
individually. Without the ability to aggregate Commission proceedings
in these instances, a potential whistleblower might prefer to delay
reporting possible violations until he is sufficiently confident that
the Commission can bring at least one single proceeding that satisfies
the covered action threshold; this could lead to unnecessary additional
costs for entities and investors due to the delay in reporting on-going
violations.
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\441\ Rule 21F4(d) defines a Commission ``action'' generally as
a single captioned judicial or administrative proceeding brought by
the Commission. However, the rule identifies two exceptions to this
general definition to allow payment of an award in cases where we
may have chosen for various reasons to bring separate proceedings
against respondents or defendants involved in the same or closely
related conduct. The first exception to the general definition
provides that an action will constitute two or more Commission
proceedings arising from the same nucleus of operative facts for
purposes of making an award under Rule 21F-10; this will permit, for
example, considering two or more proceedings together to determine
that there are monetary sanctions in excess of $1,000,000 and that
an award may be paid. The second exception provides that, for
purposes of making payments under Rule 21F-14 on a Commission action
for which we have already made an award, we will treat as part of
the same action any subsequent Commission proceeding that,
individually, results in a monetary sanction of $1,000,000 or less,
and that arises out of the same nucleus of operative facts.
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4. Eligibility for Culpable Whistleblowers
Rule 21F-16 is designed to minimize the potential costs and enhance
the benefits of paying a culpable whistleblower an award.\442\ On the
one hand, we do not believe the Investor Protection Fund should pay
culpable whistleblowers for their own misconduct or with respect to
highly culpable whistleblowers, to also pay for the misconduct of
entities that they directly cause. On the other hand, we also recognize
that culpable whistleblowers can be a valuable source of information
about undetected securities law violations. Thus, we believe the
Investor Protection Fund should pay culpable whistleblowers for
information that leads to monetary sanctions against other participants
in the violation; indeed, to do otherwise could unduly reduce the
amount of useful information the Commission receives, thereby resulting
in some on-going violations remaining undetected to the detriment of
investors.
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\442\ Rule 21F-16 provides that, in determining whether the
required $1 million threshold for an award has been satisfied, the
Commission will not include any monetary sanctions (i) that the
whistleblower is ordered to pay, or (ii) that an entity is ordered
to pay if the entity's liability is based substantially on conduct
that the whistleblower directed, planned, or initiated. The rule
also provides that the Commission will not include any such amounts
in the total monetary sanctions collected for purposes of
calculating the amount of an award payment to a whistleblower.
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5. Award Amount Factor
The revisions to final Rule 21F-6, governing the criteria used in
determining the amount of an award, are designed to provide strong
incentives for the whistleblower to report violations with increasing
levels of quality, timeliness, and validity.\443\ Rule 21F-6 allows the
Commission to set the award percentage based, among other things, on
the significance of the information provided by the whistleblower and
any unreasonable delay by the whistleblower in making the
submission.\444\ Taken together, these rules provide for greater awards
for more timely and more useful information, and reduced awards for
whistleblowers whose dilatory or uncooperative conduct may impair our
enforcement efforts.
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\443\ Rule 21F-6 sets forth the factors for determining the
award percentage. Four general factors may lead to an increase in
the award percentage: the significance of the information provided
by the whistleblower; the assistance provided by the whistleblower;
the law enforcement and programmatic interests; and the
whistleblower's voluntary participation in internal compliance
systems. In addition, three general factors may lead to a decrease
in the award percentage: the whistleblower's culpability or
involvement in the matters associated with the Commission or related
action; a substantial and unreasonable reporting delay; or, in cases
where the whistleblower, while interacting with his entity's
internal compliance or reporting system, interferes with or
otherwise undermines the system's integrity.
\444\ See Ben Depoorter & Jef De Mot, Whistleblowing: An
Economic Analysis of the False Claims Act, 14 Sup. Ct. Econ. Rev.
135, 158 2006 (awards should be structured to align whistleblowers
private incentives with the public interest in timely reporting).
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The rules also encourage whistleblowers to work with the Commission
as we investigate and litigate enforcement actions, which should
provide the benefit of enhanced Commission enforcement of the Federal
securities. For example, Rule 21F-6(a)(2) provides that, in setting the
award percentage, we will consider the assistance the whistleblower
provided us. To complement this, Rule 21F-17(a) makes it unlawful for
another person to take action that impedes a whistleblower's efforts to
communicate with the Commission. Likewise, Rule 21F-17(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, has the benefit of encouraging
whistleblowers to communicate with us without the fear that their
communications will lead to disclosure of their identity to their
employer.\445\ We believe that these rules provide benefits by ensuring
that whistleblowers are able to work with the Commission as it takes
actions in response to possible securities law violations, and thus
justify any costs on companies.
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\445\ Rule 21F-17(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 possible 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.
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6. Procedures Required for a Whistleblower to Qualify for an Award
The procedural rules adopted also further the effective
implementation of the program.\446\ Form WB-APP requires the submission
of information that is necessary for the Commission to determine award
eligibility. The Commission recognizes that it will take time and
effort on the part of whistleblowers to complete and submit the forms.
While requiring an additional form imposes a cost on potential
whistleblowers, determining the appropriate level of award for each
instance of qualified whistleblower is
[[Page 34359]]
critical to successful implementation of the whistleblower rule. The
Commission needs to collect pertinent information from the
whistleblower to determine whether he or she should receive an award
and, if so, in what amount. This information will need to be evaluated
in conjunction with the Commission's enforcement action to determine
the significance of the whistleblower's contribution. While we have
simplified the procedures in the final rules, it is still possible that
some prospective whistleblowers could find the procedures burdensome,
and as a result, be deterred from coming forward to provide information
to the Commission.
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\446\ Rules 21F-9, 10 and 11 set forth the procedures for
submitting information and making a claim for an award. First, Rule
21F-9(a) provides that an individual qualifies as a whistleblower if
he submits a Form TCR electronically through the Commission's web
page or provides the Commission with a completed copy by mail or
facsimile. Second, Rule 21F-9(b) provides that, to qualify for an
award, the whistleblower must declare under penalty of perjury that
the information in the Form TCR is true, correct, and complete to
the best of his knowledge, information, and belief. The rules also
require potential whistleblowers to complete a second form in the
claims phase to establish potential eligibility for an award under
the program. Pursuant to 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.
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The procedural elements in the rules are structured to provide a
fair, transparent process for consideration of whistleblower award
claims. We believe that this should help incentivize individuals to
participate in the whistleblower award program by coming forward with
high-quality, timely information about possible securities law
violations.
There is also an additional cost on whistleblowers who wish to
participate anonymously in the whistleblower program--Rule 21F-9(c)
requires that these whistleblowers locate and retain counsel to make a
submission on their behalf.\447\ We recognize that this requirement
may, in some instances, discourage potential whistleblowers from making
submissions of valuable information. Nonetheless, we believe that on
balance this requirement is appropriate. For example, the attorney is
needed to serve as the point-of-contact for us when we need to elicit
additional information, while at the same time continuing to preserve
the confidentiality of the whistleblower. The involvement of an
attorney can also help to protect against the possibility that
anonymous whistleblowers are making frivolous or false submissions, can
help the whistleblower develop and draft his submission to maximize its
informational value to the Commission (and thus the whistleblower's
chance of an eventual award), and can assist in verifying the
whistleblower's eligibility for participation in the program early in
the process.
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\447\ The statute requires that a whistleblower who makes an
anonymous claim for an award must be represented by counsel. Section
21F(d)(2)(A) of the Exchange Act.
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The 120-day ``look back'' period for whistleblowers who make
submissions internally may also impose costs on whistleblowers in that
it requires them to act within a certain period of time to ensure that
their eligibility for an award under the program is not compromised.
The Commission has set the 120-day period based on a consideration of
those costs against the concern that a longer grace period could serve
to delay the Commission's receipt of valuable information that could be
used to protect investors.\448\
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\448\ As stated in the release discussion of Rule 21F-4(b)(7),
this 120-day period applies only to whistleblowers and does not
prescribe for companies the appropriate time limits for reporting
violations to the Commission, nor does it impose an obligation to
report.
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7. Incentives for Internal Reporting
As discussed above, we have built significant incentives into the
whistleblower award program that we believe will encourage
whistleblowers to report internally in appropriate circumstances. We
believe that this approach effectuates the general statutory purpose of
Section 21F of the Exchange Act--which is to enhance the enforcement of
the Federal securities laws by encouraging whistleblowers to come
forward to the Commission\449\ with quality tips regarding possible
securities law violations--in a manner that is consistent with, and
reflective of, cost-benefit considerations.
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\449\ 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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Our proposed rules solicited comment on the question of how, if at
all, to incorporate internal compliance reporting into the
whistleblower award program. The focus of the proposed rules was on the
principal purpose of the statute, which is ensuring that the Commission
receives quality tips as a result of the financial incentive created by
Section 21F of the Exchange Act.\450\
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\450\ Our proposing release did explain, however that
whistleblower reporting through internal compliance procedures can
complement or otherwise appreciably enhance our enforcement efforts
in appropriate circumstances. For instance, the subject company may
at times be better able to distinguish between meritorious and
frivolous claims, and may make such findings available for the
Commission. This would be particularly true in instances where the
reported matter entails a high level of institutional or company-
specific knowledge and/or the company has a well-functioning
internal compliance program in place. Screening allegations through
internal compliance programs may limit false and frivolous claims,
provide the entity an opportunity to resolve the violation and
report the result to the Commission, and allow the Commission to use
its resources more efficiently.
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In response to the proposed rules, many commenters from the
corporate community argued that whistleblowers would divert from
internal reporting in response to the financial incentive of a
potential whistleblower award from the Commission.\451\ These
commenters further argued that companies and other entities would
experience significant costs as a result. Among the costs that they
identified are the following: (i) Increased harm to entities and
investors due to the delay in entities learning about on-going
violations from the Commission rather than from internal
whistleblowing; (ii) increased defense and litigation costs in
responding to Commission enforcement proceedings from, among other
things, non-meritorious whistleblower complaints that could have been
resolved internally; (iii) increased harm to entities and investors
when non-securities law violations go unreported to the entity. These
commenters did not provide us with projections or estimations regarding
either the degree to which whistleblowers would likely be diverted from
internal reporting under our proposed rule, or the resulting costs to
companies or other entities.\452\
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\451\ See, e.g., letters from CAQ, Edison and GE Group. See also
letter from the CCMC (``In the absence of an affirmative restriction
on external reporting when effective internal compliance channels
are available, or provision of significant incentive for using those
internal channels, employees will face an irresistible temptation to
go to the SEC with their report.'').
\452\ We do note, however, that other commenters provided some
evidence to counter the assertion that whistleblowers would be
diverted from reporting internally in significant numbers. For
example, one commenter cited an empirical study of the False Claims
Act (FCA)--which requires no mandatory internal reporting--stating
that ``the overwhelming majority of employees voluntarily utilize
internal reporting processes, despite the fact that they were
potentially eligible for a large reward under the FCA.'' Letter from
NWC at 4. This study claims that ``89.7 percent of employees who
eventually filed False Claims Act cases had made an internal report,
despite the absence of a legal requirement that they do so.'' See
supra discussion in footnote 232. See also letter from TAF at 22
(``[I]t is our membership's experience that the vast majority of
whistleblowers do, in fact, report their concerns first to either
their superiors or compliance officers, and only avail themselves of
statutory whistleblower programs when their concerns have been
dismissed or unaddressed, or when they suffer retaliation.'')
(emphasis in original). See generally Aaron S. Kesselheim et al.,
Whistle-Blowers' Experiences in Fraud Litigation Against
Pharmaceutical Companies, 362 New England J. Med. 1832, 1834 & 1836
(2010) (a study of qui tam cases involving pharmaceutical companies
that showed ``[n]early all (18 of 22) insiders first tried to fix
matters internally by talking to their superiors, filing an internal
complaint, or both'' despite the fact that the ultimate monetary
awards from external reporting were large, ranging from $100,000 to
$42 million, with a median of $3 million.''); id. at 1839
(discussing possible limitations with the study).
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Analysis of the academic literature, although not wholly
conclusive, provides reason to believe that a sizable percentage of
whistleblowers who currently report internally are motivated
[[Page 34360]]
by non-monetary reasons.\453\ Thus, we anticipate that many
whistleblowers would continue to report internally.
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\453\ Whistleblowers are often willing to report notwithstanding
the absence of financial incentives and the potential for costs to
them in terms of time, money, social stigma, and a possible job
loss. Non-monetary incentives that often motivate individuals to
whistleblow include: (i) Cleansing the conscience, (ii) punishing
wrongdoers (in some cases out of spite), (iii) simply ``doing the
right thing'' for the sake of a general increase in social welfare,
or (iv) motive for self-preservation. See Anthony Heyes & Sandeep
Kapur, An Economic Model of Whistleblower Policy, 25 J. L. Econ. &
Org. 157, 159 (2009) (providing a short review of academic
literature on sociology and psychology and listing non-monetary
motives for whistleblowing); see also Aaron S. Kesselheim et al.,
Whistle-Blower's Experience in Fraud Litigation Against
Pharmaceutical Companies, 362 New England J. Med. 1832, 1834 (2010)
(listing as primary motivations for qui tam lawsuit self-
preservation, justice, integrity, altruism or public safety) (cited
by letter from NWC). Research has also shown that the likelihood of
internal whistleblowing increases when ethical and legal compliance
policies exist in an organization, particularly if specific
whistleblowing procedures are in place. Richard E. Moberly,
Sarbanes-Oxley's Structural Model to Encourage Corporate
Whistleblowers, 2006 B.Y.U. L. Rev. 1107, 1142-43 (2006) (``A
disclosure channel also harmonizes with a whistleblower's tendency
to report misconduct internally--by this sense of loyalty. * * *
[Internal reporting] fits well with the psyche of the American
employee, whose sense of loyalty to the organization keeps her from
reporting misconduct externally, but who may report internally if
encouraged by the organization.'') (cited in letter from CCMC).
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Nonetheless, we recognize that there could be a sizeable percentage
of whistleblowers who, under our rules, could now be more motivated to
report to the Commission in lieu of reporting internally because of the
financial incentives created by the whistleblower program. In response
to this possibility, we have tailored the final rules to provide
whistleblowers who are otherwise pre-disposed to report internally, but
who may also be affected by financial incentives, with additional
economic incentives to continue to report internally. The final rules
provide that a whistleblower who reports internally can collect a
whistleblower award from the Commission if his internal report to the
company or entity results in a successful covered action. In addition,
the final rules provide that when determining the amount of an award,
the Commission will consider as a plus-factor the whistleblower's
participation in an entity's internal compliance procedures.
We believe these provisions should substantially reduce the degree
of diversion of whistleblower reporting from companies. Assuming that
some significant percentage of whistleblowers who were pre-disposed to
report internally prior to the whistleblower program are inclined to
change their behavior in response to financial incentives, these
provisions should mitigate any diversion effect. These provisions do so
by providing that an internal report can be an additional path to a
whistleblower award. Indeed, to the extent that this sub-set of
potential whistleblowers is responsive to economic incentives, they
should be motivated to report internally by the final rules because by
doing so they can increase both the probability and the magnitude of a
potential recovery. Specifically, if they submit their tip internally,
and either simultaneously or within 120 days make the same submission
to the Commission, it is conceivable that they can increase the
probability of an award because they now have two paths to a recovery--
a Commission investigation, or an internal corporate investigation.
They can increase the magnitude of a potential award because of the
award criteria that provides a plus-factor for participation in an
entity's internal compliance procedures.\454\
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\454\ We believe that the final rules' financial incentives to
report internally should be particularly attractive to
whistleblowers who may be uncertain that their information is
sufficiently compelling to cause the Commission staff to open an
investigation. Where this is the case, whistleblowers may reasonably
view internal compliance as the more likely path for an eventual
award on the belief that an effective internal compliance process
will investigate the information.
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These additional financial incentives for whistleblowers to report
internally should make it less likely that significant numbers of tips
will be diverted from internal reporting.\455\ This in turn should
mitigate companies' costs from lost internal whistleblower reports.
Moreover, while some whistleblower tips may nonetheless be diverted to
the Commission,\456\ any decrease in internal reporting should be
offset at least in part by the fact that our final rules will
incentivize other individuals who might not have reported internally
prior to the whistleblower program to do so now. The financial
incentives offered by the final rules to report internally should
induce individuals to report who, absent any financial incentive, would
never have reported either internally or to the Commission.\457\ As a
result, companies and other entities should now receive some
information related to possible violations that they would not have
otherwise received, which in turn may allow these entities to stop on-
going violations, thereby limiting the harm to the entities and
investors sooner than might otherwise have been the case.
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\455\ A commenter suggested that some whistleblowers could still
decline to report a violation internally based on the strategic
calculation that the company could reduce the monetary sanctions
through remediation, self-reporting, cooperation, etc., which in
turn might reduce the whistleblower's award. See letter from CCMC.
Although the commenter provided neither anecdotal nor empirical
evidence to support this proposition, we think the incidence of this
(if it should occur) would be relatively small for several reasons.
Cf. letter from NWC at 7. First, no whistleblower can safely assume
that his decision to bypass internal compliance will in fact lead to
larger monetary sanctions. We will make our own assessment of the
circumstances--indeed, as noted at pp. 92, sometimes our first step
will be to contact the company--and good cooperation by the company
overall, even in response to contact from the Commission staff,
might mean that the monetary sanctions will not be any greater than
if the whistleblower had simultaneously reported internally. Second,
various factors in Rule 21F-6 allow us to account for a reduced
monetary sanction by providing for an upward adjustment in the award
determination where the internal reporting potentially resulted in a
lower monetary sanction. Finally, to the extent there is any impact
on whistleblower behavior, we believe it will generally mean that
whistleblowers decide to report simultaneously, rather than availing
themselves of the 120-day look-back period, out of concern that the
latter course might afford companies an increased opportunity to
take actions that could possibly result in a reduced monetary
sanction.
\456\ For example, we recognize that, notwithstanding the strong
financial incentives to report internally, whistleblowers may bypass
internal compliance procedures in cases involving clear fraud or
other instances of serious securities law violations by senior
management. In these cases, however, we believe the benefits of
coming to the Commission, both in terms of our enforcement efforts
and in terms of investors' interests, will often be quite
significant, so as to justify any potential costs to the entity.
\457\ See Elletta Sanrey Callahan & Terry Morehead Dworkin, Do
Good and Get Rich: Financial Incentives for Whistleblowing and the
False Claims Act, 37 Vill. L. Rev. 273, 284 (finding that ``money
rewards for whistleblowing may produce the desired result of
increasing the number of individuals willing to report activity''
and stating that ``financial incentives should encourage a new type
of whistleblower to step forward''). See generally Geoffrey
Christopher Rapp, Beyond Protection: Invigorating Incentives for
Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87
Boston Univ. L. Rev. 91, 118-26 (2007) (discussing reasons that
insiders may not report information about ongoing corporate and
financial fraud in the absence of significant financial incentives
to do so).
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In addition to considering the benefits and costs of the final
rules on companies and other entities, we considered the benefits and
costs of the final rules on our own enforcement program. As we stated
in our proposing release, internal reporting to effective compliance
programs can provide valuable assistance to our own enforcement
efforts. By providing a strong financial incentive for whistleblower to
report internally when appropriate, we are leveraging the Investor
Protection Fund established by Section 21F of the Exchange Act to
obtain the benefit of effective internal compliance programs that can
respond to whistleblower tips by, among other
[[Page 34361]]
things, undertaking prompt investigations that can lead to timely,
well-documented reports of violations to the Commission.
As alternatives to the significant incentives approach that we have
adopted, we considered the suggestions from commenters that we adopt
some form of a mandatory internal reporting requirement as a condition
on whistleblowers for award eligibility. Such an approach could take
the following forms: (1) Mandatory internal pre-reporting, where the
whistleblower's eligibility would be conditioned on his first making a
report internally and providing the company's internal compliance
function a meaningful period of time to respond; or (2) mandatory
simultaneous reporting, under which the whistleblower's eligibility is
conditioned upon a simultaneous report to internal compliance and the
Commission. We evaluated these alternatives by analyzing how
whistleblowers' expected behavior might change relative to the
significant incentives approach adopted in the final rules, and what
those changes might mean for the resulting costs and benefits to
companies as well as the Commission's enforcement efforts.
We believe that either a mandatory pre-reporting or a simultaneous
reporting requirement would not achieve an appreciable cost-benefit
advantage over the approach we are adopting, and indeed a mandatory
internal reporting requirement could be less advantageous because it
could result in less overall whistleblowing. With respect to those
whistleblowers who are already pre-disposed to report internally, a
mandatory internal reporting requirement should have little or no net
difference from the significant financial incentives approach that we
are adopting.\458\ To the extent that these whistleblowers respond to
the financial incentives of a potential whistleblower award, we would
expect them to report internally under a mandatory internal reporting
requirement to be eligible for a whistleblower award from us, or to
report internally under our final rules so as to seek to increase the
probability and magnitude of any potential award.
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\458\ Some commenters suggested that a mandatory internal pre-
reporting requirement could reduce the Commission's cost of
information processing by filtering out frivolous or low quality
tips from being submitted to us. See Americans for Limited
Government. However, we believe other mechanisms in the final rules
are reasonably designed to discourage frivolous submissions and thus
reduce the attendant costs. See supra discussion in Parts IV.A (1)-
(2).
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The most likely difference between a mandatory regime and the
significant financial incentives approach is with respect to the
category of whistleblowers who, prior to the whistleblower award
program, were not predisposed to report either internally or to the
Commission, but who are now willing to come forward in response to a
financial inducement. Within this category of whistleblowers, we
believe there is some subset who would respond to the financial
incentive offered by our final rules by reporting only to us, but who
would not come forward either to us or to the entity if the financial
incentive were coupled with a mandatory internal reporting
requirement.\459\ Requiring internal reporting would have several
adverse consequences: The Commission would lose critical information
about some possible securities law violations, and companies and
investors in turn would suffer as on-going violations remained
undetected and unremedied.\460\
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\459\ We believe that the fear of retaliation and other forms of
harassment, as well as other social and psychological factors, can
have a chilling effect on certain whistleblowers who, absent a
mandatory internal reporting requirement, would respond to the
financial incentive offered by the whistleblower program by
providing the Commission with information about possible securities
law violations. A number of commenters who have experience dealing
with whistleblowers support this assessment. See, e.g., letters from
TAF at 21-23 (Dec. 17, 2010); POGO at 4-5 (Dec. 17, 2010); Grohovsky
Group at 4 (Dec. 16, 2010). Our review of the academic literature
further supports this assessment. See generally Luigi Zingales, Want
to Stop Corporate Fraud? Pay Off Those Whistle-Blowers, AEI-
Brookings Joint Center Policy Matters (January 18, 2004); Geoffrey
Christopher Rapp, Beyond Protection: Invigorating Incentives for
Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, 87
Boston Univ. L. Rev. 91; Pamela H. Bucy, Information as a Commodity
in the Regulatory World, 39 Hous. L. Rev. 905, 948-959; Aaron S.
Kesselheim et al., Whistle-Blowers' Experiences in Fraud Litigation
Against Pharmaceutical Companies, 362 New England J. Med. 1832, 1834
(2010); see also Letter from Eric Dixon LLC (Dec. 19, 2010)
(``[W]histleblowers expose them[selves] to serious risk, including
harm to them and their families, professional or career reprisals
and community ostracization. Whistleblowers may also face
retaliation from alleged wrongdoers or their associates, including
civil suits'').
\460\ There are additional costs that could follow from a
mandatory internal pre-reporting requirement where the company or
entity's internal compliance process is ineffective and thus
unlikely to respond properly to the violation. In these situations,
the mandatory internal pre-reporting requirement would result in
delays before the violation can be addressed by the Commission,
resulting in potentially increased injuries to the company and
investors. See letter from CCMC at 6 (``Of course, when internal
reporting systems are nonexistent or illusory, it is appropriate and
beneficial for employees to report information of wrongdoing
directly to the SEC.''). In other cases, mandatory internal
reporting could result in spoliation or other interference with our
ability to investigate.
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Finally, we have considered the alternative of mandating that a
whistleblower report internally within a specified period of time after
reporting to us, unless upon reviewing the submission we direct the
whistleblower not to report internally. Conceptually, this approach
could allow the Commission an opportunity to review a whistleblower's
submission and direct him not to report internally in situations where,
among other things, (i) we identify a basis to believe that he might in
fact suffer retaliation, or (ii) there would be no benefit to reporting
internally either because the entity might engage in a cover-up or the
internal compliance program is ineffective. This approach could
encourage some whistleblowers who might otherwise be discouraged from
reporting to us under a pure mandatory reporting regime because these
whistleblowers could perceive an opportunity to persuade the Commission
that they should be excused from making the mandatory internal
report.\461\
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\461\ We believe that many whistleblowers would still elect not
to participate in the whistleblower program because of the
uncertainty ahead of time regarding whether we would tell them not
to report internally. As a result, we believe that it remains the
case even under this approach that many whistleblowers would not
report possible securities law violations to us due to the internal
reporting requirement, and thus on-going violations would continue
undetected resulting in further harms to entities and investors.
---------------------------------------------------------------------------
Notwithstanding this potential benefit, however, we do not believe
that this approach would have any significant cost-benefit advantage
over the approach that we have adopted. In fact, this alternative
approach would have significant disadvantages over the adopted rules.
Simply put, for this approach to operate effectively and efficiently,
the Commission would need to be in a position to meaningfully assess
within a very short time--likely a few weeks--whether a whistleblower
should be excused from reporting internally. However, the Commission is
not in a position to make the necessary fact-intensive assessments
identified above in a considered and reliable manner, especially within
this short time frame.\462\ Moreover, this could
[[Page 34362]]
divert limited resources from the primary objective of investigating
allegations of wrongdoing.
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\462\ In contrast to any of the alternative mandatory reporting
regimes, we believe that the financial incentives approach has the
additional advantage that it allows whistleblowers to select the
proper reporting procedures under the specific circumstances.
Whistleblowers can balance the potential increase in the probability
and magnitude of an award by participating in an effective internal
compliance mechanism, against the particular risks that may result
from doing so, which could include retaliation, loss of anonymity
(for those companies that may not have effective anonymous reporting
procedures), delay due to an ineffective or questionable internal
compliance mechanism, and destruction of evidence based on the
nature of the allegations or the corporate environment. On balance,
we believe that, from a law-enforcement perspective, overall
efficiency is better promoted by allowing whistleblowers to make
this assessment on a case-by-case basis.
---------------------------------------------------------------------------
As stated earlier, Congress did not include an internal reporting
requirement in the statute, which is modeled upon the DOJ and IRS
whistleblower program.\463\ Instead, Congress enacted a requirement
that provides financial incentives and employment retaliation
protections for reporting directly to the Commission. Internal
compliance programs are valuable, and under appropriate circumstances,
these rules provide financial encouragement for whistleblowers to
utilize those programs. At the same time, however, internal compliance
programs cannot serve as adequate substitutes for our obligation to
identify and remedy violations of the Federal securities laws. In
addition, there are circumstances where whistleblowers may have
legitimate reasons for not wanting to report information internally,
even if the company provides an avenue for anonymous reporting. For
these reasons, the adopted approach encourages the whistleblower to
report allegations internally, yet ultimately and appropriately leaves
that decision to the whistleblower.
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\463\ See S. Rep. No. 111-176 at 111 (2010).
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B. Additional Considerations of Competition, Efficiency, and Capital
Formation
Section 23(a)(2) \464\ 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 \465\ 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.
---------------------------------------------------------------------------
\464\ 15 U.S.C. 78w(a)(2).
\465\ 15 U.S.C. 78c(f).
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We expect that the impact of the final rules on capital formation
and efficiency will be generally positive. As discussed above, the
final rules are structured to encourage the submission of more
actionable information both to the Commission and to internal
compliance programs regarding possible securities law violations. This
will have several positive effects on capital formation. First, to the
extent that more effective enforcement leads to earlier detection of
violations and increased deterrence of potential future violations,
this should assist in a more efficient allocation of investment funds.
Serious securities frauds, for example, can cause inefficiencies in the
economy by diverting investment funds from more legitimate, productive
uses. Second, the deterrent effect of our rules should result in a
higher level of investors' trust in the securities markets. We believe
that this increased investor trust in the fairness of the market will
promote lower capital costs as more investment funds enter the market,
and as investors generally demand a lower risk premium due to a reduced
likelihood of securities fraud.\466\ This, too, should promote the
efficient allocation of capital formation.
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\466\ 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.
---------------------------------------------------------------------------
In addition, there will be certain gains and losses in efficiency
due to our rules, most of which were discussed in our cost-benefit
analysis. As stated above, we believe that the final rules, by
encouraging internal reporting without mandating it, allow
whistleblowers to balance the potential increase in the probability and
magnitude of an award by participating in an effective internal
compliance mechanism against the particular risks that may result from
doing so. By allowing potential whistleblowers to make this assessment
and encouraging them to report internally in situations where their
tips will be appropriately addressed, the final rules should promote
efficiency in how violations are reported and resolved. Furthermore,
issuers who previously may have underinvested in internal compliance
programs may respond to our rules by making improvements in corporate
governance generally,\467\ and strengthening their internal compliance
programs in particular. While these improvements will involve costs on
companies, there should be an overall increased efficiency from the
perspective of investors to the extent that these companies achieve a
more optimal investment in these programs.
---------------------------------------------------------------------------
\467\ See Robert M. Bowen et al., ``Whistle-Blowing: Target Firm
Characteristics and Economic Consequences,'' working paper (2009) at
29, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=890750 (cited in letter from CCMC) (documenting that firms
respond to external whistleblowing with subsequent governance
changes).
---------------------------------------------------------------------------
We do not believe the final rules will impose undue burdens on
competition and, indeed, we believe the rules may have a potential pro-
competitive effect. Specifically, by increasing the likelihood that
misconduct will be detected, of securities law violations, the rules
should reduce the unfair competitive advantages that some companies can
achieve by engaging in undetected violations.
We are aware of the possible concern that smaller companies may
bear a disproportionately greater cost under the final rules than
larger companies. We do not believe this is likely for several reasons,
however. First, we believe that the relative likelihood that any
particular employee will blow the whistle on a possible violation
should not significantly vary between smaller and larger companies, and
thus we believe that the incidence of whistleblowing and the resulting
costs borne by companies should be relatively consistent on a per-
employee basis irrespective of a company's size. Second, because the
final rules do not dictate the structure of effective compliance
processes for internal reporting by employees under Rule 21F-4(c)(iii),
including allowing companies to utilize upward reporting practices, we
believe that companies of all sizes should be able to design cost-
effective processes that meet their particular needs based on company
size and structure. Overall, we do not believe these effects will
result in undue burdens on competition.
V. Regulatory Flexibility Act Certification
In our proposing release, we certified that a regulatory
flexibility analysis is not required because the persons that would be
subject to the rules--individuals--are not ``small entities'' for
purposes of the Regulatory Flexibility Act and the rules therefore
would not have a significant economic impact on a substantial number of
small entities. One commenter disagreed with this conclusion,
contending that our proposal not to require mandatory internal
reporting will cause small businesses to experience significant costs
and disruptions.\468\ Notwithstanding the possibility of such indirect
impacts, we disagree with the comment's conclusion that this means a
[[Page 34363]]
Regulatory Flexibility Act analysis is required. These rules do not
directly affect or impose responsibilities on small entities.\469\
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\468\ See letter from Association for Corporate Counsel.
\469\ In advancing the argument, the commenter relies on
Aeronautical Repair Station Association v. Federal Aviation
Administration, 494 F.3d 161 (DC Cir. 2007). This case is
inapposite, however, because there the agency's own rulemaking
release expressly stated that the rule imposed responsibilities
directly on certain small business contractors. The court reaffirmed
its prior holdings that the Regulatory Flexibility Act limits its
application to small entities ``which will be subject to the
proposed regulation--that is, those small entities to which the
proposed rule will apply.'' Id. at 176 (emphasis and internal
quotations omitted). See also Cement Kiln Recycling Coal v. EPA, 255
F. 3d 855, 869 (DC Cir. 2001).
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VI. Statutory Authority
The Commission is adopting 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 Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
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, 78n-1, 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).
* * * * *
0
2. Add an undesignated center heading and Sec. Sec. 240.21F-1 through
Sec. 240.21F-17 to read as follows:
Securities Whistleblower Incentives and Protections
Sec.
240.21F-1 General.
240.21F-2 Whistleblower status and retaliation protections.
240.21F-3 Payment of award.
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 Materials that may be used as the basis for an award
determination and that may comprise the record on appeal.
240.21F-13 Appeals.
240.21F-14 Procedures applicable to the payment of awards.
240.21F-15 No amnesty.
240.21F-16 Awards to whistleblowers who engage in culpable conduct.
240.21F-17 Staff communications with individuals reporting possible
securities law violations.
* * * * *
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 Office of the Whistleblower administers our whistleblower
program. Questions about the program or these rules should be directed
to the SEC Office of the Whistleblower, 100 F Street, NE., Washington,
DC 20549-5631.
Sec. 240.21F-2 Whistleblower status and retaliation protection.
(a) Definition of a whistleblower. (1) You are a whistleblower if,
alone or jointly with others, you provide the Commission with
information pursuant to the procedures set forth in Sec. 240.21F-9(a)
of this chapter, and the information relates to a possible violation of
the Federal securities laws (including any rules or regulations
thereunder) that has occurred, is ongoing, or is about to occur. A
whistleblower must be an individual. A company or another entity is not
eligible to be a whistleblower.
(2) To be eligible for an award, you must submit original
information to the Commission in accordance with the procedures and
conditions described in Sec. Sec. 240.21F-4, 240.21F-8, and 240.21F-9
of this chapter.
(b) Prohibition against retaliation: (1) For purposes of the anti-
retaliation protections afforded by Section 21F(h)(1) of the Exchange
Act (15 U.S.C. 78u-6(h)(1)), you are a whistleblower if:
(i) You possess a reasonable belief that the information you are
providing relates to a possible securities law violation (or, where
applicable, to a possible violation of the provisions set forth in 18
U.S.C. 1514A(a)) that has occurred, is ongoing, or is about to occur,
and;
(ii) You provide that information in a manner described in Section
21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u-6(h)(1)(A)).
(iii) The anti-retaliation protections apply whether or not you
satisfy the requirements, procedures and conditions to qualify for an
award.
(2) Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)),
including any rules promulgated thereunder, shall be enforceable in an
action or proceeding brought by the Commission.
Sec. 240.21F-3 Payment of awards.
(a) Commission actions: Subject to the eligibility requirements
described in Sec. Sec. 240.21F-2, 240.21F-8, and 240.21F-16 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) Related actions: The Commission will also pay an award based on
amounts collected in certain related actions.
(1) A related action is a judicial or administrative action that is
brought by:
(i) The Attorney General of the United States;
[[Page 34364]]
(ii) An appropriate regulatory authority;
(iii) A self-regulatory organization; or
(iv) 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.
Note to paragraph (b)(1): The terms appropriate regulatory
authority and self-regulatory organization are defined in Sec.
240.21F-4 of this chapter.
(2) 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. The Commission will deny an award in connection with the
related action if:
(i) The Commission determines that the criteria for an award are
not satisfied; or
(ii) The Commission is unable to make a determination because the
Office of the Whistleblower could not obtain sufficient and reliable
information that could be used as the basis for an award determination
pursuant to Sec. 240.21F-12(a) of this chapter. Additional procedures
apply to the payment of awards in related actions. These procedures are
described in Sec. Sec. 240.21F-11 and 240.21F-14 of this chapter.
(3) 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 precluded from
relitigating any issues before the Commission that the CFTC resolved
against you as part of the award 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. Sec.
240.21F-1 through 240.21F-17 of this chapter if you provide your
submission before a request, inquiry, or demand that relates to the
subject matter of your submission is directed to you or anyone
representing you (such as an attorney):
(i) By the Commission;
(ii) In connection with an investigation, inspection, or
examination by the Public Company Accounting Oversight Board, or any
self-regulatory organization; or
(iii) In connection with an investigation by Congress, any other
authority of the Federal government, or a state Attorney General or
securities regulatory authority.
(2) If the Commission or any of these other authorities direct a
request, inquiry, or demand as described in paragraph (a)(1) of this
section 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. However, your submission of information to the Commission will be
considered voluntary if you voluntarily provided the same information
to one of the other authorities identified above prior to receiving a
request, inquiry, or demand from the Commission.
(3) In addition, your submission will not be considered voluntary
if you are required to report your original information to the
Commission as a result of a pre-existing legal duty, a contractual duty
that is owed to the Commission or to one of the other authorities set
forth in paragraph (a)(1) of this section, or a duty that arises out of
a judicial or administrative order.
(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 publicly 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 in any of the
following circumstances:
(i) If you obtained the information through a communication that
was subject to the attorney-client privilege, unless disclosure of that
information would otherwise be permitted by an attorney pursuant to
Sec. 205.3(d)(2) of this chapter, the applicable state attorney
conduct rules, or otherwise;
(ii) If you obtained the information in connection with the legal
representation of a client on whose behalf you or your employer or firm
are providing services, and you seek to use the information to make a
whistleblower submission for your own benefit, unless disclosure would
otherwise be permitted by an attorney pursuant to Sec. 205.3(d)(2) of
this chapter, the applicable state attorney conduct rules, or
otherwise; or
(iii) In circumstances not covered by paragraphs (b)(4)(i) or
(b)(4)(ii) of this section, if you obtained the information because you
were:
(A) An officer, director, trustee, or partner of an entity and
another person informed you of allegations of misconduct, or you
learned the information in connection with the entity's processes for
identifying, reporting, and addressing possible violations of law;
(B) An employee whose principal duties involve compliance or
internal audit responsibilities, or you were employed by or otherwise
associated with a firm retained to perform compliance or internal audit
functions for an entity;
(C) Employed by or otherwise associated with a firm retained to
conduct an inquiry or investigation into possible violations of law; or
(D) An employee of, or other person associated with, a public
accounting firm, if you obtained the information through the
performance of an engagement required of an independent public
accountant under the Federal securities laws (other than an audit
subject to Sec. 240.21F-8(c)(4) of this chapter), and that information
related to a violation by the engagement client or the client's
directors, officers or other employees.
[[Page 34365]]
(iv) If you obtained the information by a means or in a manner that
is determined by a United States court to violate applicable Federal or
state criminal law; or
(v) Exceptions. Paragraph (b)(4)(iii) of this section shall not
apply if:
(A) You have a reasonable basis to believe that disclosure of the
information to the Commission is necessary to prevent the relevant
entity from engaging in conduct that is likely to cause substantial
injury to the financial interest or property of the entity or
investors;
(B) You have a reasonable basis to believe that the relevant entity
is engaging in conduct that will impede an investigation of the
misconduct; or
(C) At least 120 days have elapsed since you provided the
information to the relevant entity's audit committee, chief legal
officer, chief compliance officer (or their equivalents), or your
supervisor, or since you received the information, if you received it
under circumstances indicating that the entity's audit committee, chief
legal officer, chief compliance officer (or their equivalents), or your
supervisor was already aware of the information.
(vi) If you obtained the information from a person who is subject
to this section, unless the information is not excluded from that
person's use pursuant to this section, or you are providing the
Commission with information about possible violations involving that
person.
(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 authority of the Federal
government, a state Attorney General or securities regulatory
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 the Congress, any other authority
of the Federal government, a state Attorney General or securities
regulatory authority, any self-regulatory organization, or the Public
Company Accounting Oversight Board, or to an entity's internal
whistleblower, legal, or compliance procedures for reporting
allegations of possible violations of law, and you, within 120 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 any of the following circumstances:
(1) You gave the Commission original information that was
sufficiently specific, credible, and timely to cause the staff to
commence an examination, open an investigation, reopen an investigation
that the Commission had closed, or to inquire concerning different
conduct as part of a current examination or investigation, and the
Commission brought a successful judicial or administrative action based
in whole or in part on conduct that was the subject of your original
information; or
(2) You gave the Commission original information about conduct that
was already under examination or investigation by the Commission, the
Congress, any other authority of the Federal government, a state
Attorney General or securities regulatory authority, any self-
regulatory organization, or the PCAOB (except in cases where you were
an original source of this information as defined in paragraph (b)(4)
of this section), and your submission significantly contributed to the
success of the action.
(3) You reported original information through an entity's internal
whistleblower, legal, or compliance procedures for reporting
allegations of possible violations of law before or at the same time
you reported them to the Commission; the entity later provided your
information to the Commission, or provided results of an audit or
investigation initiated in whole or in part in response to information
you reported to the entity; and the information the entity provided to
the Commission satisfies either paragraph (c)(1) or (c)(2) of this
section. Under this paragraph (c)(3), you must also submit the same
information to the Commission in accordance with the procedures set
forth in Sec. 240.21F-9 within 120 days of providing it to the entity.
(d) An action generally means a single captioned judicial or
administrative proceeding brought by the Commission. Notwithstanding
the foregoing:
(1) For purposes of making an award under Sec. 240.21F-10 of this
chapter, the Commission will treat as a Commission action two or more
administrative or judicial proceedings brought by the Commission if
these proceedings arise out of the same nucleus of operative facts; or
(2) For purposes of determining the payment on an award under Sec.
240.21F-14 of this chapter, the Commission will deem as part of the
Commission action upon which the award was based any subsequent
Commission proceeding that, individually, results in a monetary
sanction of $1,000,000 or less, and that arises out of the same nucleus
of operative facts.
(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
[[Page 34366]]
Section 3(a)(34) of the Exchange Act (15 U.S.C. 78c(a)(34)).
(g) Appropriate regulatory authority means an appropriate
regulatory agency other than the Commission.
(h) 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) The determination of the amount of an award is in the
discretion of the Commission.
(b) 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 percentage amount of the award applying the
criteria set forth in Sec. 240.21F-6 of this chapter and 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.
(c) 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 in
the aggregate 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 exercising its discretion to determine the appropriate award
percentage, the Commission may consider the following factors in
relation to the unique facts and circumstances of each case, and may
increase or decrease the award percentage based on its analysis of
these factors. In the event that awards are determined for multiple
whistleblowers in connection an action, these factors will be used to
determine the relative allocation of awards among the whistleblowers.
(a) Factors that may increase the amount of a whistleblower's
award. In determining whether to increase the amount of an award, the
Commission will consider the following factors, which are not listed in
order of importance.
(1) Significance of the information provided by the whistleblower.
The Commission will assess the significance of the information provided
by a whistleblower to the success of the Commission action or related
action. In considering this factor, the Commission may take into
account, among other things:
(i) The nature of the information provided by the whistleblower and
how it related to the successful enforcement action, including whether
the reliability and completeness of the information provided to the
Commission by the whistleblower resulted in the conservation of
Commission resources;
(ii) The degree to which the information provided by the
whistleblower supported one or more successful claims brought in the
Commission or related action.
(2) Assistance provided by the whistleblower. The Commission will
assess the degree of assistance provided by the whistleblower and any
legal representative of the whistleblower in the Commission action or
related action. In considering this factor, the Commission may take
into account, among other things:
(i) Whether the whistleblower provided ongoing, extensive, and
timely cooperation and assistance by, for example, helping to explain
complex transactions, interpreting key evidence, or identifying new and
productive lines of inquiry;
(ii) The timeliness of the whistleblower's initial report to the
Commission or to an internal compliance or reporting system of business
organizations committing, or impacted by, the securities violations,
where appropriate;
(iii) The resources conserved as a result of the whistleblower's
assistance;
(iv) Whether the whistleblower appropriately encouraged or
authorized others to assist the staff of the Commission who might
otherwise not have participated in the investigation or related action;
(v) 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; and
(vi) Any unique hardships experienced by the whistleblower as a
result of his or her reporting and assisting in the enforcement action.
(3) Law enforcement interest. The Commission will assess its
programmatic interest in deterring violations of the securities laws by
making awards to whistleblowers who provide information that leads to
the successful enforcement of such laws. In considering this factor,
the Commission may take into account, among other things:
(i) The degree to which an award enhances the Commission's ability
to enforce the Federal securities laws and protect investors; and
(ii) The degree to which an award encourages the submission of high
quality information from whistleblowers by appropriately rewarding
whistleblowers' submission of significant information and assistance,
even in cases where the monetary sanctions available for collection are
limited or potential monetary sanctions were reduced or eliminated by
the Commission because an entity self-reported a securities violation
following the whistleblower's related internal disclosure, report, or
submission.
(iii) Whether the subject matter of the action is a Commission
priority, whether the reported misconduct involves regulated entities
or fiduciaries, whether the whistleblower exposed an industry-wide
practice, 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; and
(iv) 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.
(4) Participation in internal compliance systems. The Commission
will assess whether, and the extent to which, the whistleblower and any
legal representative of the whistleblower participated in internal
compliance systems. In considering this factor, the Commission may take
into account, among other things:
(i) Whether, and the extent to which, a whistleblower reported the
possible securities violations through internal whistleblower, legal or
compliance procedures before, or at the same time as, reporting them to
the Commission; and
(ii) Whether, and the extent to which, a whistleblower assisted any
internal investigation or inquiry concerning the reported securities
violations.
(b) Factors that may decrease the amount of a whistleblower's
award. In determining whether to decrease the amount of an award, the
Commission
[[Page 34367]]
will consider the following factors, which are not listed in order of
importance.
(1) Culpability. The Commission will assess the culpability or
involvement of the whistleblower in matters associated with the
Commission's action or related actions. In considering this factor, the
Commission may take into account, among other things:
(i) The whistleblower's role in the securities violations;
(ii) The whistleblower's education, training, experience, and
position of responsibility at the time the violations occurred;
(iii) Whether the whistleblower acted with scienter, both generally
and in relation to others who participated in the violations;
(iv) Whether the whistleblower financially benefitted from the
violations;
(v) Whether the whistleblower is a recidivist;
(vi) The egregiousness of the underlying fraud committed by the
whistleblower; and
(vii) Whether the whistleblower knowingly interfered with the
Commission's investigation of the violations or related enforcement
actions.
(2) Unreasonable reporting delay. The Commission will assess
whether the whistleblower unreasonably delayed reporting the securities
violations. In considering this factor, the Commission may take into
account, among other things:
(i) Whether the whistleblower was aware of the relevant facts but
failed to take reasonable steps to report or prevent the violations
from occurring or continuing;
(ii) Whether the whistleblower was aware of the relevant facts but
only reported them after learning about a related inquiry,
investigation, or enforcement action; and
(iii) Whether there was a legitimate reason for the whistleblower
to delay reporting the violations.
(3) Interference with internal compliance and reporting systems.
The Commission will assess, in cases where the whistleblower interacted
with his or her entity's internal compliance or reporting system,
whether the whistleblower undermined the integrity of such system. In
considering this factor, the Commission will take into account whether
there is evidence provided to the Commission that the whistleblower
knowingly:
(i) Interfered with an entity's established legal, compliance, or
audit procedures to prevent or delay detection of the reported
securities violation;
(ii) Made any material false, fictitious, or fraudulent statements
or representations that hindered an entity's efforts to detect,
investigate, or remediate the reported securities violations; and
(iii) Provided any false writing or document knowing the writing or
document contained any false, fictitious or fraudulent statements or
entries that hindered an entity's efforts to detect, investigate, or
remediate the reported securities violations.
Sec. 240.21F-7 Confidentiality of submissions.
(a) Section 21F(h)(2) of the Exchange Act (15 U.S.C. 78u-6(h)(2))
requires that the Commission not disclose information that could
reasonably be expected to reveal the identity of a whistleblower,
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 (15 U.S.C. 78a) and to
protect investors, it may provide your information to the Department of
Justice, an appropriate regulatory authority, 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 will 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 to the Commission and your identity must be
verified by the Commission 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 through 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. 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 Office of the Whistleblower, covering any non-public information
that the Commission provides to you, and including a provision that a
violation of the agreement 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 the original
information provided to the Commission, a member, officer, or employee
of the Commission, the Department of Justice, an appropriate regulatory
agency, a self-regulatory organization, the Public
[[Page 34368]]
Company Accounting Oversight Board, or any law enforcement
organization;
(2) You are, or were at the time you acquired the original
information provided to the Commission, 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 original information that you gave the
Commission through an audit of a company's financial statements, and
making a whistleblower submission would be contrary to requirements of
Section 10A of the Exchange Act (15 U.S.C. 78j-a).
(5) 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;
(6) You acquired the original information you gave the Commission
from a person:
(i) Who is subject to paragraph (c)(4) of this section, unless the
information is not excluded from that person's use, or you are
providing the Commission with information about possible violations
involving that person; or
(ii) With the intent to evade any provision of these rules; 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 with intent to mislead or otherwise
hinder the Commission or another authority.
Sec. 240.21F-9 Procedures for submitting original information.
(a) To be considered a whistleblower under Section 21F of the
Exchange Act (15 U.S.C. 78u-6(h)), you must submit your information
about a possible securities law violation by either of these methods:
(1) Online, through the Commission's Web site located at http://www.sec.gov; or
(2) By mailing or faxing a Form TCR (Tip, Complaint or Referral)
(referenced in Sec. 249.1800 of this chapter) to the SEC Office of the
Whistleblower, 100 F Street NE., Washington, DC 20549-5631, Fax (703)
813-9322.
(b) Further, to be eligible for an award, you must declare under
penalty of perjury at the time you submit your information pursuant to
paragraph (a)(1) or (2) of this section that your information is true
and correct to the best of your knowledge and belief.
(c) Notwithstanding paragraphs (a) and (b) of this section, if you
are providing your original information to the Commission anonymously,
then your attorney must submit your information on your behalf pursuant
to the procedures specified in paragraph (a) of this section. Prior to
your attorney's submission, you must provide your attorney with a
completed Form TCR (referenced in Sec. 249.1800 of this chapter) that
you have signed under penalty of perjury. When your attorney makes her
submission on your behalf, your attorney will be required to certify
that he or she:
(1) Has verified your identity;
(2) Has reviewed your completed and signed Form TCR (referenced in
Sec. 249.1800 of this chapter) for completeness and accuracy and that
the information contained therein is true, correct and complete to the
best of the attorney's knowledge, information and belief;
(3) Has obtained your non-waivable consent to provide the
Commission with your original completed and signed Form TCR (referenced
in Sec. 249.1800 of this chapter) in the event that the Commission
requests it due to concerns that you may have knowingly and willfully
made false, fictitious, or fraudulent statements or representations, or
used any false writing or document knowing that the writing or document
contains any false fictitious or fraudulent statement or entry; and
(4) Consents to be legally obligated to provide the signed Form TCR
(referenced in Sec. 249.1800 of this chapter) within seven (7)
calendar days of receiving such request from the Commission.
(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, your submission will be deemed to
satisfy the requirements set forth in paragraphs (a) and (b) of this
section. If you were an anonymous whistleblower, however, you must
provide your attorney with a completed and signed copy of Form TCR
(referenced in Sec. 249.1800 of this chapter) within 60 days of the
effective date of these rules, your attorney must retain the signed
form in his or her records, and you must provide of copy of the signed
form to the Commission staff upon request by Commission staff prior to
any payment of an award to you in connection with your submission.
Notwithstanding the foregoing, you must follow the procedures and
conditions for making a claim for a whistleblower award described in
Sec. Sec. 240.21F-10 and 240.21F-11 of this chapter.
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 Office of the Whistleblower 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
subsequent to 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 ninety (90) 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 Section 21F of the Securities Exchange Act of 1934
(referenced in Sec. 249.1801 of this chapter). You must sign this form
as the claimant and submit it to the Office of the Whistleblower by
mail or fax. All claim forms, including any attachments, must be
received by the Office of the Whistleblower within ninety (90) 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. 249.1801 of this chapter), and your identity must
be verified in a form and manner that is acceptable to the Office of
the Whistleblower prior to the payment of any award.
[[Page 34369]]
(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
staff designated by the Director of the Division of Enforcement
(``Claims Review Staff'') will evaluate all timely whistleblower award
claims submitted on Form WB-APP (referenced in Sec. 249.1801 of this
chapter) in accordance with the criteria set forth in these rules. In
connection with this process, the Office of the Whistleblower 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 Office of the Whistleblower 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 Office of
the Whistleblower setting forth the grounds for your objection to
either the denial of an award or the proposed amount of an award. The
response must be in the form and manner that the Office of the
Whistleblower shall require. 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 Office of the Whistleblower make
available for your review the materials from among those set forth in
Sec. 240.21F-12(a) of this chapter that formed the basis of the Claims
Review Staff's Preliminary Determination.
(ii) Within thirty (30) calendar days of the date of the
Preliminary Determination, request a meeting with the Office of the
Whistleblower; 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 sixty
(60) 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 sixty (60) calendar days of the Office of the
Whistleblower 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-13 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 Office of the Whistleblower 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 Office of the Whistleblower, and issue its Final
Order.
(i) The Office of the Whistleblower 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. 249.1801 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 Office of the
Whistleblower 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. 249.1801 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. 249.1801 of this chapter)
within ninety (90) days of the issuance of a final order imposing
sanctions in the related action.
(c) The Office of the Whistleblower 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 Office of the Whistleblower 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. 249.1801 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 Office of the Whistleblower 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 Office of the Whistleblower 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 Office of
the Whistleblower setting forth the grounds for your objection to
either the denial of
[[Page 34370]]
an award or the proposed amount of an award. The response must be in
the form and manner that the Office of the Whistleblower shall require.
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 Office of the Whistleblower make
available for your review the materials from among those set forth in
Sec. 240.21F-12(a) of this chapter that formed the basis of the Claims
Review Staff's Preliminary Determination.
(ii) Within thirty (30) days of the date of the Preliminary
Determination, request a meeting with the Office of the Whistleblower;
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 sixty
(60) 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 sixty (60) calendar days of the Office of
the Whistleblower 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-13 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 Office of the Whistleblower will 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 Office of the Whistleblower, and issue its Final
Order.
(i) The Office of the Whistleblower will provide you with the Final
Order of the Commission.
Sec. 240.21F-12 Materials that may form the basis of an award
determination and that may comprise the record on appeal.
(a) The following items constitute the materials that the
Commission and the Claims Review Staff may rely upon to make an award
determination pursuant to Sec. Sec. 240.21F-10 and 240.21F-11 of this
chapter:
(1) Any publicly available materials from the covered action or
related action, including:
(i) The complaint, notice of hearing, answers and any amendments
thereto;
(ii) The final judgment, consent order, or final administrative
order;
(iii) Any transcripts of the proceedings, including any exhibits;
(iv) Any items that appear on the docket; and
(v) Any appellate decisions or orders.
(2) The whistleblower's Form TCR (referenced in Sec. 249.1800 of
this chapter), including attachments, and other related materials
provided by the whistleblower to assist the Commission with the
investigation or examination;
(3) The whistleblower's Form WB-APP (referenced in Sec. 249.1800
of this chapter), including attachments, and any other filings or
submissions from the whistleblower in support of the award application;
(4) Sworn declarations (including attachments) from the Commission
staff regarding any matters relevant to the award determination;
(5) With respect to an award claim involving a related action, any
statements or other information that the entity provides or identifies
in connection with an award determination, provided the entity has
authorized the Commission to share the information with the claimant.
(Neither the Commission nor the Claims Review Staff may rely upon
information that the entity has not authorized the Commission to share
with the claimant); and
(6) Any other documents or materials including sworn declarations
from third-parties that are received or obtained by the Office of the
Whistleblower to assist the Commission resolve the claimant's award
application, including information related to the claimant's
eligibility. (Neither the Commission nor the Claims Review Staff may
rely upon information that the entity has not authorized the Commission
to share with the claimant).
(b) These rules do not entitle claimants to obtain from the
Commission any materials (including any pre-decisional or internal
deliberative process materials that are prepared exclusively to assist
the Commission in deciding the claim) other than those listed in
paragraph (a) of this section. Moreover, the Office of the
Whistleblower may make redactions as necessary to comply with any
statutory restrictions, to protect the Commission's law enforcement and
regulatory functions, and to comply with requests for confidential
treatment from other law enforcement and regulatory authorities. The
Office of the Whistleblower may also require you to sign a
confidentiality agreement, as set forth in Sec. 240.21F-(8)(b)(4) of
this chapter, before providing these materials.
Sec. 240.21F-13 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 principal place of business. Where the
Commission makes an award based on the factors set forth in Sec.
240.21F-6 of this chapter of 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, and any factual findings, legal conclusions, policy
judgments, or discretionary assessments involving the Commission's
consideration of the factors in Sec. 240.21F-6 of this chapter) is not
appealable.
(b) The record on appeal shall consist of the Preliminary
Determination, the Final Order of the Commission, and any other items
from those set forth in Sec. 240.21F-12(a) of this chapter that either
the claimant or the Commission identifies for inclusion in the record.
[[Page 34371]]
The record on appeal shall not include any pre-decisional or 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-14 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-15 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
Investigations and Related Enforcement Actions (17 CFR 202.12).
Sec. 240.21F-16 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-17 Staff communications with individuals reporting
possible securities law violations.
(a) No person may take any action to impede an individual from
communicating directly with the Commission staff about a possible
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 Sec. 240.21F-
4(b)(4)(ii) of this chapter related to the legal representation of a
client) with respect to such communications.
(b) If you are a director, officer, member, agent, or employee of
an entity that has counsel, and you have initiated communication with
the Commission relating to a possible securities law violation, the
staff is authorized to communicate directly with you regarding the
possible securities law violation without seeking the consent of the
entity's counsel.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
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 Public Law 111.203, Sec.
922(a), 124 Stat 1841 (2010).
Section 249.1801 is also issued under Public Law 111.203, Sec.
922(a), 124 Stat 1841 (2010).
* * * * *
0
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-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 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-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
[[Page 34372]]
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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Privacy Act Statement
This notice is given under the Privacy Act of 1974. This form may
be used by anyone wishing to provide the SEC with information
concerning a possible violation of the federal securities laws. We are
authorized to request information from you by various laws: Sections 19
and 20 of the Securities Act of 1933, Sections 21 and 21F of the
Securities Exchange Act of 1934, Section 321 of the Trust Indenture Act
of 1939, Section 42 of the Investment Company Act of 1940, Section 209
of the Investment Advisers Act of 1940 and Title 17 of the Code of
Federal Regulations, Section 202.5.
Our principal purpose in requesting information is to gather facts
in order to determine whether any person has violated, is violating, or
is about to violate any provision of the federal securities laws or
rules for which we have enforcement authority. Facts developed may,
however, constitute violations of other laws or rules. Further, if you
are submitting information for the SEC's whistleblower award program
pursuant to Section 21F of the Securities Exchange Act of 1934
(Exchange Act), the information provided will be used in connection
with our evaluation of your or your client's eligibility and other
factors relevant to our determination of whether to pay an award to you
or your client.
The information provided may be used by SEC personnel for purposes
of investigating possible violations of, or to conduct investigations
authorized by, the federal securities law; in proceedings in which the
federal securities laws are in issue or the SEC is a party; to
coordinate law enforcement activities between the SEC and other
federal, state, local or foreign law enforcement agencies, securities
self regulatory organizations, and foreign securities authorities; and
pursuant to other routine uses as described in SEC-42 ``Enforcement
Files.''
Furnishing the information requested herein is voluntary. However,
a decision not provide any of the requested information, or failure to
provide complete information, may affect our evaluation of your
submission. Further, if you are submitting this information for the SEC
whistleblower program and you do not execute the Whistleblower
Declaration or, if you are submitting information anonymously, identify
the attorney representing you in this matter, you may not be considered
for an award.
Questions concerning this form maybe directed to the SEC Office of
the Whistleblower, 100 F Street, NE, Washington, DC 20549, Tel. (202)
551-4790, Fax (703) 813-9322.
Submission Procedures
After manually completing this Form TCR, please send it by
mail or delivery to the SEC Office of the Whistleblower, 100 F. Street,
NE, Washington, DC 20549, or by facsimile to (703) 813-9322.
You have the right to submit information anonymously. If
you are submitting anonymously and you want to be considered for a
whistleblower award, however, you must be represented by an attorney in
this matter and Section B of this form must be completed. Otherwise,
you may, but are not required, to have an attorney. If you are not
represented by an attorney in this matter, you may leave Section B
blank.
If you are submitting information for the SEC's
whistleblower award program, you must submit your information either
using this Form TCR or electronically through the SEC's Electronic Data
Collection System, available on the SEC web site at www.sec.gov.
Instructions for Completing Form TCR:
Section A: Information about You
Questions 1-3: Please provide the following information about
yourself:
Last name, first name, and middle initial
Complete address, including city, state and zip code
Telephone number and, if available, an alternate number
where you can be reached
Your e-mail address (to facilitate communications, we
strongly encourage you to provide your email address),
Your preferred method of communication; and
Your occupation
[[Page 34378]]
Section B: Information about Your Attorney. Complete this section only
if you are represented by an attorney in this matter. You must be
represented by an attorney, and this section must be completed, if you
are submitting your information anonymously and you want to be
considered for the SEC's whistleblower award program.
Questions 1-4: Provide the following information about the attorney
representing you in this matter:
Attorney's name
Firm name
Complete address, including city, state and zip code
Telephone number and fax number, and
E-mail address
Section C: Tell Us about the Individual and/or Entity You Have a
Complaint Against. If your complaint relates to more than two
individuals and/or entities, you may attach additional sheets.
Question 1: Choose one of the following that best describes the
individual or entity to which your complaint relates:
For Individuals: accountant, analyst, attorney, auditor,
broker, compliance officer, employee, executive officer or director,
financial planner, fund manager, investment advisor representative,
stock promoter, trustee, unknown, or other (specify).
For Entity: bank, broker-dealer, clearing agency, day
trading firm, exchange, Financial Industry Regulatory Authority,
insurance company, investment advisor, investment advisor
representative, investment company, Individual Retirement Account or
401(k) custodian/administrator, market maker, municipal securities
dealers, mutual fund, newsletter company/investment publication
company, on-line trading firm, private fund company (including hedge
fund, private equity fund, venture capital fund, or real estate fund),
private/closely held company, publicly held company, transfer agent/
paying agent/registrar, underwriter, unknown, or other (specify).
Questions 2-4: For each subject, provide the following information,
if known:
Full name
Complete address, including city, state and zip code
Telephone number,
E-mail address, and
Internet address, if applicable
Section D: Tell Us about Your Complaint
Question 1: State the date (mm/dd/yyyy) that the alleged conduct
began.
Question 2: Choose the option that you believe best describes the
nature of your complaint. If you are alleging more than one violation,
please list all that you believe may apply. Use additional sheets if
necessary.
Theft/misappropriation (advance fee fraud; lost or stolen
securities; hacking of account)
Misrepresentation/omission (false/misleading marketing/
sales literature; inaccurate, misleading or non-disclosure by Broker-
Dealer, Investment Adviser and Associated Person; false/material
misstatements in firm research that were basis of transaction)
Offering fraud (Ponzi/pyramid scheme; other offering
fraud)
Registration violations (unregistered securities offering)
Trading (after hours trading; algorithmic trading; front-
running; insider trading, manipulation of securities/prices; market
timing; inaccurate quotes/pricing information; program trading; short
selling; trading suspensions; volatility)
Fees/mark-ups/commissions (excessive or unnecessary
administrative fees; excessive commissions or sales fees; failure to
disclose fees; insufficient notice of change in fees; negotiated fee
problems; excessive mark-ups/markdowns; excessive or otherwise improper
spreads)
Corporate disclosure/reporting/other issuer matter (audit;
corporate governance; conflicts of interest by management; executive
compensation; failure to notify shareholders of corporate events;
false/misleading financial statements, offering documents, press
releases, proxy materials; failure to file reports; financial fraud;
Foreign Corrupt Practices Act violations; going private transactions;
mergers and acquisitions; restrictive legends, including 144 issues;
reverse stock splits; selective disclosure--Regulation FD, 17 CFR 243;
shareholder proposals; stock options for employees; stock splits;
tender offers)
Sales and advisory practices (background information on
past violations/integrity; breach of fiduciary duty/responsibility
(IA); failure to disclose breakpoints; churning/excessive trading; cold
calling; conflict of interest; abuse of authority in discretionary
trading; failure to respond to investor; guarantee against loss/promise
to buy back shares; high pressure sales techniques; instructions by
client not followed; investment objectives not followed; margin; poor
investment advice; Regulation E (Electronic Transfer Act); Regulation
S-P, 17 CFR 248, (privacy issues); solicitation methods (non-cold
calling; seminars); suitability; unauthorized transactions)
Operational (bond call; bond default; difficulty buying/
selling securities; confirmations/statements; proxy materials/
prospectus; delivery of funds/proceeds; dividend and interest problems;
exchanges/switches of mutual funds with fund family; margin (illegal
extension of margin credit, Regulation T restrictions, unauthorized
margin transactions); online issues (trading system operation);
settlement (including T+1 or T=3 concerns); stock certificates; spam;
tax reporting problems; titling securities (difficulty titling
ownership); trade execution.
Customer accounts (abandoned or inactive accounts; account
administration and processing; identity theft affecting account; IPOs:
problems with IPO allocation or eligibility; inaccurate valuation of
Net Asset Value; transfer of account)
Comments/complaints about SEC, Self-Regulatory
Organization, and Securities Investor Protection Corporation processes
& programs (arbitration: bias by arbitrators/forum, failure to pay/
comply with award, mandatory arbitration requirements, procedural
problems or delays; SEC: complaints about enforcement actions,
complaints about rulemaking, failure to act; Self-Regulatory
Organization: failure to act; Investor Protection: inadequacy of laws
or rules; SIPC: customer protection, proceedings and Broker-Dealer
liquidations;
Other (analyst complaints; market maker activities;
employer/employee disputes; specify other).
Question 3a: State whether you or your counsel have had any prior
communications with the SEC concerning this matter.
Question 3b: If the answer to question 3a is yes, provide the name
of the SEC staff member with whom you or your counsel communicated.
Question 4a: Indicate whether you or your counsel have provided the
information you are providing to the SEC to any other agency or
organization.
Question 4b: If the answer to question 4a is yes, provide details.
Question 4c: Provide the name and contact information of the point
of contact at the other agency or organization, if known.
Question 5a: Indicate whether your complaint relates to an entity
of which you are, or were in the past, an officer, director, counsel,
employee, consultant, or contractor.
Question 5b: If the answer to question 5a is yes, state whether you
have reported this violation to your
[[Page 34379]]
supervisor, compliance office, whistleblower hotline, ombudsman, or any
other available mechanism at the entity for reporting violations.
Question 5c: If the answer to question 5b is yes, provide details.
Question 5d: Provide the date on which you took the actions
described in questions 5a and 5b.
Question 6a: Indicate whether you have taken any other action
regarding your complaint, including whether you complained to the SEC,
another regulator, a law enforcement agency, or any other agency or
organization; initiated legal action, mediation or arbitration, or
initiated any other action.
Question 6b: If you answered yes to question 6a, provide details,
including the date on which you took the action(s) described, the name
of the person or entity to whom you directed any report or complaint
and contact information for the person or entity, if known, and the
complete case name, case number, and forum of any legal action you have
taken. Use additional sheets if necessary.
Question 7a: Choose from the following the option that you believe
best describes the type of security or investment at issue, if
applicable:
1031 exchanges
529 plans
American Depositary Receipts
Annuities (equity-indexed annuities, fixed annuities,
variable annuities)
Asset-backed securities
Auction rate securities
Banking products (including credit cards)
Certificates of deposit (CDs)
Closed-end funds
Coins and precious metals (gold, silver, etc.)
Collateralized mortgage obligations (CMOs)
Commercial paper
Commodities (currency transactions, futures, stock index
options)
Convertible securities
Debt (corporate, lower-rated or ``junk'', municipal)
Equities (exchange-traded, foreign, Over-the-Counter,
unregistered, linked notes)
Exchange Traded Funds
Franchises or business ventures
Hedge funds
Insurance contracts (not annuities)
Money-market funds
Mortgage-backed securities (mortgages, reverse mortgages)
Mutual funds
Options (commodity options, index options)
Partnerships
Preferred shares
Prime bank securities/high yield programs
Promissory notes
Real estate (real estate investment trusts (REITs))
Retirement plans (401(k), IRAs)
Rights and warrants
Structured note products
Subprime issues
Treasury securities
U.S. government agency securities
Unit investment trusts (UIT)
Viaticals and life settlements
Wrap accounts
Separately Managed Accounts (SMAs)
Unknown
Other (specify)
Question 7b: Provide the name of the issuer or security, if
applicable.
Question 7c: Provide the ticker symbol or CUSIP number of the
security, if applicable.
Question 8: State in detail all the facts pertinent to the alleged
violation. Explain why you believe the facts described constitute a
violation of the federal securities laws. Attach additional sheets if
necessary.
Question 9: Describe all supporting materials in your possession
and the availability and location of additional supporting materials
not in your possession. Attach additional sheets if necessary.
Question 10: Describe how you obtained the information that
supports your allegation. If any information was obtained from an
attorney or in a communication where an attorney was present, identify
such information with as much particularity as possible. In addition,
if any information was obtained from a public source, identify the
source with as much particularity as possible. Attach additional sheets
if necessary.
Question 11: You may use this space to identify any documents or
other information in your submission that you believe could reasonably
be expected to reveal your identity. Explain the basis for your belief
that your identity would be revealed if the documents or information
were disclosed to a third party.
Question 12: Provide any additional information you think may be
relevant.
Section E: Eligibility Requirements
Question 1: State whether you are currently, or were at the time
you acquired the original information that you are submitting to the
SEC, a member, officer, or employee of the Department of Justice; the
Securities and Exchange 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; the
Public Company Accounting Oversight Board; any law enforcement
organization; or any national securities exchange, registered
securities association, registered clearing agency, the Municipal
Securities Rulemaking Board
Question 2: State whether you are, or were you at the time you
acquired the original information you are submitting to the SEC, 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 Securities Exchange Act of
1934.
Section 3(a)(52) of the Exchange Act (15 U.S.C. Sec.
78c(a)(52)) currently defines ``foreign financial regulatory
authority'' as ``any (A) foreign securities authority, (B) other
governmental body or foreign equivalent of a self-regulatory
organization empowered by a foreign government to administer or enforce
its laws relating to the regulation of fiduciaries, trusts, commercial
lending, insurance, trading in contracts of sale of a commodity for
future delivery, or other instruments traded on or subject to the rules
of a contract market, board of trade, or foreign equivalent, or other
financial activities, or (C) membership organization a function of
which is to regulate participation of its members in activities listed
above.''
Question 3: State whether you acquired the information you are
providing to the SEC through the performance of an engagement required
under the securities laws by an independent public accountant.
Question 4: State whether you are providing the information
pursuant to a cooperation agreement with the SEC or with any other
agency or organization.
Question 5: State whether you are a spouse, parent, child or
sibling of a member or employee of the SEC, or whether you reside in
the same household as a member or employee of the SEC.
Question 6: State whether you acquired the information you are
providing to the SEC from any individual described in Question 1
through 5 of this Section.
Question 7: If you answered ``yes'' to questions 1 though 6, please
provide details.
Question 8a: State whether you are providing the information you
are submitting to the SEC before you (or anyone representing you)
received any request, inquiry or demand that relates
[[Page 34380]]
to the subject matter of your submission in connection with: (i) an
investigation, inspection or examination by the SEC, the Public Company
Accounting Oversight Board, or any self-regulatory organization; or
(ii) an investigation by Congress, or any other authority of the
federal government, or a state Attorney General or securities
regulatory authority?
Question 8b: If you answered ``no'' to questions 8a, please provide
details. Use additional sheets if necessary.
Question 9a: State whether you are the subject or target of a
criminal investigation or have been convicted of a criminal violation
in connection with the information you are submitting to the SEC.
Question 9b: If you answered ``yes'' to question 9a, please provide
details, including the name of the agency or organization that
conducted the investigation or initiated the action against you, the
name and telephone number of your point of contact at the agency or
organization, if available and the investigation/case name and number,
if applicable. Use additional sheets, if necessary.
SECTION F: Whistleblower's Declaration.
You must sign this Declaration if you are submitting this
information pursuant to the SEC whistleblower program and wish to be
considered for an award. If you are submitting your information
anonymously, you must still sign this Declaration, and you must provide
your attorney with the original of this signed form.
If you are not submitting your information pursuant to the SEC
whistleblower program, you do not need to sign this Declaration.
SECTION G: COUNSEL CERTIFICATION
If you are submitting this information pursuant to the SEC
whistleblower program and are doing so anonymously, your attorney must
sign the Counsel Certification section.
If you are represented in this matter but you are not submitting
your information pursuant to the SEC whistleblower program, your
attorney does not need to sign the Counsel Certification Section.
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Privacy Act Statement
This notice is given under the Privacy Act of 1974. We are
authorized to request information from you by Section 21F of the
Securities Exchange Act of 1934. Our principal purpose in requesting
this information is to assist in our evaluation of your eligibility and
other factors relevant to our determination of whether to pay a
whistleblower award to you under Section 21F of the Exchange Act.
However, the information provided may be used by SEC personnel for
purposes of investigating possible violations of, or to conduct
investigations authorized by, the federal securities law; in
proceedings in which the federal securities laws are in issue or the
SEC is a party; to coordinate law enforcement activities between the
SEC and other federal, state, local or foreign law enforcement
agencies, securities self regulatory organizations, and foreign
securities authorities; and pursuant to other routine uses as described
in SEC-42 ``Enforcement Files.''
[[Page 34383]]
Furnishing this information is voluntary, but a decision not do so,
or failure to provide complete information, may result in our denying a
whistleblower award to you, or may affect our evaluation of the
appropriate amount of an award. Further, if you are submitting this
information for the SEC whistleblower program and you do not execute
the Declaration, you may not be considered for an award.
Questions concerning this form may be directed to the SEC Office of
the Whistleblower, 100 F Street, NE, Washington, DC 20549-5631, Tel.
(202) 551-4790, Fax (703) 813-9322.
General
This form should 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. In order to be deemed
eligible for an award, you must meet all the requirements set forth in
Section 21F of the Securities Exchange Act of 1934 and the rules
thereunder.
You must sign the Form WB-APP as the claimant. If you
provided your information to the SEC anonymously, you must now disclose
your identity on this form and your identity must be verified in a form
and manner that is acceptable to the Office of the Whistleblower prior
to the payment of any award.
[cir] If you are filing your claim in connection with information
that you provided to the SEC, then your Form WB-APP, and any
attachments thereto, must be received by the SEC Office of the
Whistleblower within sixty (60) days of the date of the Notice of
Covered Action to which the claim relates.
[cir] If you are filing your claim in connection with information
you provided to another agency in a related action, then your Form WB-
APP, and any attachments thereto, must be received by the SEC Office of
the Whistleblower as follows:
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 that
you use for the Commission action.
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 within sixty (60) days of the issuance of a final
order imposing sanctions in the related action.
You must submit your Form WB-APP to us in one of the
following two ways:
[cir] By mailing or delivering the signed form to the SEC Office of
the Whistleblower, 100 F Street NE, Washington, DC 20549-5631; or
[cir] By faxing the signed form to (703) 813-9322.
Instructions for Completing Form WB-APP
Section A: Applicant's Information
Questions 1-3: Provide the following information about yourself:
First and last name, and middle initial
Complete address, including city, state and zip code
Telephone number and, if available, an alternate number
where you can be reached
E-mail address
Section B: Attorney's Information. If you are represented by an
attorney in this matter, provide the information requested. If you are
not representing an attorney in this matter, leave this Section blank.
Questions 1-4: Provide the following information about the attorney
representing you in this matter:
Attorney's name
Firm name
Complete address, including city, state and zip code
Telephone number and fax number, and
E-mail address.
Section C: Tip/Complaint Details
Question 1: Indicate the manner in which your original information
was submitted to the SEC.
Question 2a: Include the TCR (Tip, Complaint or Referral) number to
which this claim relates.
Question 2b: Provide the date on which you submitted your
information to the SEC.
Question 2c: Provide the name of the individual(s) or entity(s) to
which your complaint related.
Section D: Notice of Covered Action
The process for making a claim for a whistleblower award begins
with the publication of a ``Notice of a Covered Action'' on the
Commission's Web site. This notice is published whenever a judicial or
administrative action brought by the Commission results in the
imposition of monetary sanctions exceeding $1,000,000. The Notice is
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.
Question 1: Provide the date of the Notice of Covered Action to
which this claim relates.
Question 2: Provide the notice number of the Notice of Covered
Action.
Question 3a: Provide the case name referenced in Notice of Covered
Action.
Question 3b: Provide the case number referenced in Notice of
Covered Action.
Section E: Claims Pertaining to Related Actions
Question 1: Provide the name of the agency or organization to which
you provided your information.
Question 2: Provide the name and contact information for your point
of contact at the agency or organization, if known.
Question 3a: Provide the date on which that you provided your
information to the agency or organization referenced in question E1.
Question 3b: Provide the date on which the agency or organization
referenced in question E1 filed the related action that was based upon
the information you provided.
Question 4a: Provide the case name of the related action.
Question 4b: Provide the case number of the related action.
Section F: Eligibility Requirements
Question 1: State whether you are currently, or were at the time
you acquired the original information that you submitted to the SEC a
member, officer, or employee of the Department of Justice; the
Securities and Exchange 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; the
Public Company Accounting Oversight Board; any law enforcement
organization; or any national securities exchange, registered
securities association, registered clearing agency, the Municipal
Securities Rulemaking Board
Question 2: State whether you are, or were you at the time you
acquired the original information you submitted to the SEC, 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 Securities Exchange Act of 1934.
Section 3(a)(52) of the Exchange Act (15 U.S.C. Sec.
78c(a)(52)) currently defines
[[Page 34384]]
``foreign financial regulatory authority'' as ``any (A) foreign
securities authority, (B) other governmental body or foreign equivalent
of a self-regulatory organization empowered by a foreign government to
administer or enforce its laws relating to the regulation of
fiduciaries, trusts, commercial lending, insurance, trading in
contracts of sale of a commodity for future delivery, or other
instruments traded on or subject to the rules of a contract market,
board of trade, or foreign equivalent, or other financial activities,
or (C) membership organization a function of which is to regulate
participation of its members in activities listed above.''
Question 3: Indicate whether you acquired the information you
provided to the SEC through the performance of an engagement required
under the securities laws by an independent public accountant.
Question 4: State whether you provided the information submitted to
the SEC pursuant to a cooperation agreement with the SEC or with any
other agency or organization.
Question 5: State whether you are a spouse, parent, child or
sibling of a member or employee of the Commission, or whether you
reside in the same household as a member or employee of the Commission.
Question 6: State whether you acquired the information you are
providing to the SEC from any individual described in Question 1
through 5 of this Section.
Question 7: If you answered ``yes'' to questions 1 though 6, please
provide details.
Question 8a: State whether you provided the information identified
submitted to the SEC before you (or anyone representing you) 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 about a matter to
which the information your submission was relevant.
Question 8b: If you answered ``no'' to questions 8a, please provide
details. Use additional sheets if necessary.
Question 9a: State whether you are the subject or target of a
criminal investigation or have been convicted of a criminal violation
in connection with the information upon which your application for
award is based.
Question 9b: If you answered ``yes'' to question 9a, please provide
details, including the name of the agency or organization that
conducted the investigation or initiated the action against you, the
name and telephone number of your point of contact at the agency or
organization, if available and the investigation/case name and number,
if applicable. Use additional sheets, if necessary. If you previously
provided this information on Form WB- DEC, you may leave this question
blank, unless your response has changed since the time you submitted
your Form WB-DEC.
Section G: Entitlement to Award
This section is optional. Use this section to explain the basis for
your belief that you are entitled to an award in connection with your
submission of information to us or to another agency in connection with
a related action. Specifically address how you believe you voluntarily
provided the Commission with original information that led to the
successful enforcement of a judicial or administrative action filed by
the Commission, or a related action. Refer to Rules 21F-3 and 21F-4
under the Exchange Act for further information concerning the relevant
award criteria. You may attach additional sheets, if necessary.
Rule 21F-6 under the Exchange Act provides that in determining the
amount of an award, the Commission will evaluate the following factors:
(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. Address these factors in your response as well.
Additional information about the criteria the Commission may
consider in determining the amount of an award is available on the
Commission's Web site at www.sec.gov/complaint/info_whistleblowers.shtml.
Section H: Declaration
This section must be signed by the claimant.
Dated: May 25, 2011.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-13382 Filed 6-10-11; 8:45 am]
BILLING CODE 8011-01-P