Current State of Dodd-Frank Whistleblower Provision

One of the most important features of Dodd-Frank is the award system for whistleblowers who provide original information to the SEC that leads to a penalty for securities violations under certain circumstances. There are also anti-retaliatory provisions in Dodd-Frank. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains a whistleblower incentive program, similar in some ways to the Federal False Claims Act. It provides incentives to whistleblowers who provide “original information” regarding violations of the securities laws, under specific circumstances: Section 21F, 15 U.S.C. § 78u-6. Under Dodd-Frank, whistleblowers who provide the SEC with original information that leads to a successful enforcement action resulting in $1,000,000 or more in monetary sanctions may be eligible for a reward of between 10% and 30% of the amount of the monetary sanction collected.

Even though tens of millions of dollars have already been awarded to whistleblowers, it would appear that this is just the tip of the iceberg. Mr. Sean McKessey, head of the SEC’s whistleblower program, was quoted by the Wall Street Journal as saying that the numbers will soon grow and that a “’critical mass of tips will soon yield more investigations, fines and bounties.” According to Mr. McKessey, “we’re getting close to the sweet spot.” Maxwell Murphy, Meet the SEC’s 6,500 Whistleblowers, Wall St. Journal, July 28, 2014.

Whistleblowers in New York often have varied reasons to call attention to actions they believe are violative of state or federal laws. Whether for non-monetary or monetary reasons, these individuals may be protected by the anti-retaliatory provisions of New York Labor Law § 740 (“Section 740”), the Sarbanes-Oxley Act of 2002 (“SOX”) and possibly the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

Though often described as a “whistleblower law,” Section 740 provides protection from retaliation for blowing the whistle but does not provide any incentives. SOX provides both incentives as well as retaliatory protection, as does Dodd-Frank.

Many wrongly believe that only employees or other insiders can make an effective whistleblower. However, that could not be further from the truth. Although employees and insiders may have access to particularly useful pieces of information, others such as investors or victims may also have come across the same. This makes such individuals prime candidates to file a whistleblower complaint. Even those who have settled a lawsuit with a wrongdoer in a FINRA arbitration and signed a confidential settlement agreement would still likely be able to provide a whistleblower tip thanks in part to the protections outlined in Regulatory Notice 14-40.

Dodd-Frank’s whistleblower provision is harsher on criminals who participated in the fraud and casts a wider net in its prohibitions and exclusions. Under Dodd-Frank, “no award . . . shall be made . . . to any whistleblower who is convicted of a criminal violation related to” 15 USCS § 78u-5(c)(2)(B) securities enforcement proceeding which results in a collection of sanctions. This language is significantly broader than the IRS’s “planned and initiated” language. While the IRS seems to require an element of leadership and/or scienter, the Dodd-Frank language seems to only require involvement though it remains to be seem just how this language will be interpreted in prohibiting a whistleblower from collecting an award.

The Whistleblower reward money is paid from the Investor Protection Fund (“IPF”), which is a separate fund created for the purpose of paying rewards to whistleblowers under this provision. Congress created the IPF to ensure that the rewards paid to whistleblowers would not reduce the amount available to compensate victims of the fraud or other securities law violation, although under Dodd-Frank, a whistleblower does not need to be an employee, independent contractor, or related to the company in any way to blow the whistle.

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