On July 23, 2010, the United States Securities and Exchange Commission (“SEC”) awarded $1 million to two individuals who provided crucial information and documents that led to the SEC’s insider trading cases against Pequot Capital. The award was the largest paid by the SEC for information in an insider trading case. However, a provision in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protect Act (“Dodd-Frank Act”) gives the SEC authority to further reward whistleblowers.
Under the new provisions, whistleblowers who provide “original information” to the SEC will be entitled to collect between 10 and 30 percent of the money the government recovers. According to the Dodd-Frank Act, “original information” is defined as “information that – (A) is derived from the independent knowledge or analysis of a whistleblower; (B) is not known to the Commission from any other source…; and (C) 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.” The act also protects whistleblowers by allowing them to provide the information through an intermediary, such as an attorney, so that not even the government is aware of their identity. Stephen Kohn, the executive director of the National Whistleblowers Center stated, “If the law works, whistleblowers should be rewarded with millions of dollars,” while further noting that, “those whistleblowers will save investors billions and billions of dollars.”
Finally, the Dodd-Frank Act enhances the retaliation penalties and procedures that protect whistleblowers. Unlike the Sarbanes-Oxley Act, which protects whistleblowers who are employees of public companies, the protections in the Dodd-Frank Act apply to employees of both public and private companies. Further, the Dodd-Frank Act gives whistleblowers protection from retaliation for making disclosures that are required under all rules, laws, and regulations subject to the SEC’s jurisdiction. Therefore, RIA Compliance Consultants recommends that all investment adviser firms implement a system to handle internal whistleblower complaints. If your investment adviser firm needs help implementing complaint procedures or would like help reviewing your existing system, any of our compliance consultants would be happy to assist your firm.
