Yesterday, the Securities and Exchange Commission issued long-awaited regulations implementing the Dodd-Frank Act’s securities whistleblower provisions. These provisions are now codified in Section 21F of the Securities Exchange Act of 1934.
The SEC’s Final Rule announcing the regulations consumes 305 pages, including explanatory material and five footnote citations to your correspondent. The regulations themselves, codified at 17 CFR Parts 240 and 241, occupy roughly 60 pages beginning at page 243 of the final rule.
At first glance, the now-final regulations contain a mix of plus and minus for whistleblowers. On the big plus side are final Rules 21F-17(a) and (b) which, respectively
(1) prohibit target entities from enforcing confidentiality agreements (or protective orders entered into in SRO proceedings) to prevent whistleblowers from communicating with the SEC, and
(2) authorize SEC staff to communicate directly (bypassing target counsel) with any director, officer, member, agent, or employee of a target entity who first initiates communication with the SEC.
In justifying Rule 21F-17(a), the SEC cites In re JDS Uniphase Corp. Sec. Litig., 238 F.Supp.2d 1127, 1137 (N.D.Cal.2002) (“To the extent that [the confidentiality] agreements preclude former employees from assisting in investigations of wrongdoing that have nothing to do with trade secrets or other confidential business information, they conflict with public policy in favor of allowing even current employees to assist in securities fraud investigations.”) and Chambers v. Capital Cities/ABC, 159 F.R.D. 441, 444 (S.D.N.Y.1995) (“it is against public policy for parties to agree not to reveal … facts relating to alleged or potential violations of [federal] law”).
More good news: the SEC rejected the U.S. Chamber of Commerce’s almost laughable request that whistleblowers be required to first utilize corporate internal fraud-control mechanisms before going to the SEC. While the Final Rule’s rejection of such fraud-coddling nonsense seems nominally a plus, it is such an obvious step for an agency dedicated to protecting investors that it doesn’t quite rate an “attaboy”. However, it is undoubtedly a good thing for whistleblowers and investors that the regs leaves whistleblowers free to go directly to the SEC with their concerns.
On the minus side, the Final Rule retained the Proposed Rule’s requirement that after going through all of the effort to complete the SEC’s onerous paperwork process to report fraud in the first place, SEC whistleblowers must thereafter constantly monitor the SEC’s website so as to file yet more paperwork to “claim” an award in the (admittedly unlikely) event that the SEC actually recovers in excess of $ 1 million from the subject entity. What is most disturbing about this feature of the regulations is the attitudinal posture that it signals to whistleblowers and potential targets that whistleblowers are somehow outsiders who should be kept at a distance.
More analysis and comment on the Final Rule will follow.