Larenz Devaren

In December of 2018, New York State Department of Financial Services completed an investigation involving Barclays’ Chief Executive James E. Staley. The Empire State’s primary regulator of banking and insurance companies fined Barclays $15 million over Mr. Staley’s attempt to uncover the author(s) of two letters from a whistleblower claiming to be a shareholder. The letters concerned the hiring of a new executive, Tim Main, who was a “friend and colleague” to Mr. Staley. While the $15 million fine was connected to the bank’s “unsafe and unsound manner by failing to implement effective governance and controls,” it has given members of the finance sector an opportunity to reflect on their whistleblowing procedures, and the regulation that governs them.

What is the Dodd-Frank SEC Whistleblower Program?

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (The Act) was passed by the U.S. Congress in the aftermath of the bursting of the U.S. housing bubble in 2008, and the resulting financial crisis, often referred to as the Great Recession. The purpose of the Act was to provide new and stricter regulations of financial institutions, and by doing so, promote financial stability by improving accountability and transparency in the financial system. The Act included measures which directed the SEC to reward corporate whistleblowers, as well as extending the protections whistleblowers receive into new areas (such as commodities and consumer protection).

Who is a whistleblower?

A whistleblower is “[a]n employee who discloses information that s/he reasonably believes is evidence of illegality, gross waste or fraud, mismanagement, abuse of power, general wrongdoing, or a substantial and specific danger to public health and safety.” A whistleblower is a “valuable information source that the government or the public cannot get from any oversight systems, because they are insiders of the organizations. They are most knowledgeable about what their agencies are doing.” Whistleblowers are generally protected by law from retaliation.

Section 15 U.S.C. § 78u-6(a)(6) of the Dodd-Frank Act defines “whistleblower” as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission [SEC], in a manner established, by rule or regulation, by the Commission [SEC].” 

What is original information?

The term “original information,” as defined in Section 15 U.S.C. § 78u-6(a)(3) of the Dodd-Frank Act, means “information that is derived from the independent knowledge or analysis of a whistleblower; is not known to the Commission [SEC] from any other source, unless the whistleblower is the original source of the information; and is 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.”

What type of reward does a whistleblower receive?

5 U.S.C. § 78u-6(b)(1) of the Dodd-Frank Act gives the SEC the power to give whistleblowers who provide original information that leads to a successful SEC enforcement 10% to 30% of the monetary sanctions over $1 million. If the SEC sanctions a company/individual at least $1 million, the “related action” provisions of the law kick in. Under the related action provisions, a whistleblower can also obtain a reward of 10%-30% on sanctions obtained by other government agencies, if these agencies relied upon the information the whistleblower provided to the SEC.

Regulations which provide rewards and protection for whistleblowers often narrow the scope of applicability. In the United States for example, section 922 of the Dodd-Frank act defines a whistleblower as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” “The final rules make clear that a corporation or other such entity is not eligible for whistleblower status.” Therefore, in order to qualify for an award by the SEC, the whistleblower must report “information relating to a violation of the securities law” and this report must be made “to the Commission.”

Another domestic example includes the Securities and Exchange Commission’s (SEC) refusal to reward attorneys and other individuals who possess attorney-client-privileged information. “Consistent with its goal of promoting enforcement of securities laws while also encouraging corporate efforts to maintain effective corporate-governance and internal-compliance programs, the SEC has designated information in the possession of certain categories of individuals as not being derived from independent knowledge or analysis, making these individuals presumptively ineligible for participation in the whistleblower reward program.”

Can the firm retaliate against the whistleblower?

Title 15 U.S.C. § 78u-6(h) of the Dodd-Frank Act prohibits retaliation against any employee who filed a claim for a reward under the Exchange Act and/or assists the Commission in an investigation of any such claim. Whistleblower allegations filed internally with the company, however, are not protected under the anti-retaliation provision. Therefore, to ensure protection against retaliation, whistleblowers should file an official claim or compliant under the reward law. However, the Sarbanes-Oxley Act has an anti-retaliation provision covering whistleblowers who expose violations of the Securities and Exchange Act, including internal whistleblowers.