SEC Approves New Whistleblower Rules to Provide Cash Award to Insiders Who Report Securities Fraud

On Wednesday May 25, 2011, the SEC approved new rules to flesh out a provision of the Dodd-Frank Act which provides for large cash rewards for employees who report suspected securities fraud through internal compliance programs or directly to the SEC. Under the new law, employees who report securities fraud either directly to the SEC or internally may be eligible, provided the firm passes on the information to the agency. The provision is thought by many a victory for New York whistleblowers and whistleblower attorneys alike.

Many firms were concerned that direct reporting to the SEC would make the large compliance programs these firms put in place in response to Sarbanes-Oxley essentially obsolete. In response, the SEC agreed to consider an employee’s participation in her company’s internal compliance program as a factor that could increase the amount of the reward. Under these new rules, some rewards can be as high as 30% of the penalty paid.

To be eligible for the reward, an individual must be a whistleblower. To be treated as a whistleblower from the date they report violations internally, an employee must also report the information to the SEC within 120 days.

SEC Chairman Mary Schapiro properly recognized that these new rules “strike the correct balance” in giving the whistleblower the choice to report her suspicions internally or directly to the SEC.

While choosing to be a whistleblower can be a difficult decision to make, in many cases, it is the only way to effectively stop widespread fraud and wrongdoing. Therefore, by providing financial incentives to encourage people with knowledge to come forward, the SEC has made a large step in combating the fraud that compromises the integrity of our markets and hurts investors.