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SEC Adopts New 'Bounty Hunter' Rules Designed to Encourage Whistleblowers

BY Darrick M. Mix
June 27, 2011

The U.S. Securities and Exchange Commission (SEC) recently adopted “bounty hunter” whistleblower rules under section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that are likely to encourage employees of public companies to report potential violations of securities laws directly to the SEC, rather than in accordance with established internal company compliance and reporting procedures. In a controversial move, the SEC did not include a provision in the final rules that would require whistleblowers to first report a claim pursuant to internal company procedures prior to being eligible for a bounty.

The final rules create a whistleblower program that rewards individuals who provide the agency with tips that lead to successful enforcement actions. The SEC will pay awards to whistleblowers who voluntarily provide the SEC with original information about a violation of securities laws that leads to a successful enforcement action brought by the SEC that results in monetary sanctions exceeding $1 million. The size of the bounty payments may range from 10% to 30% of the total monetary sanctions collected.

Adopted by the SEC in a 3-2 vote, the final rules are designed to encourage private citizens to assist federal regulators in their enforcement efforts, potentially turning employees and others into government informants. As SEC Chairman Mary Schapiro acknowledged, “it is critical [for the SEC] to be able to leverage the resources of people who may have first-hand information about violations of the securities laws. While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law. We expect this trend to continue, and these final rules map out simplified and transparent procedures for whistleblowers to provide us critical information.”

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