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Concerns Grow Over New Dodd-Frank Act Whistleblower Provisions


Corporate governance experts and other U.S. business interests are expressing deep concerns about the possible impact of the new bounty program authorized by Congress this year under which the Securities and Exchange Commission will pay awards to whistleblowers who provide the agency with information about securities law violations. The negative implications for the internal employee concerns programs that companies have put in place over the past two decades are potentially enormous.

The bounty program was authorized in a little-noticed provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, passed by Congress and signed into law by President Obama in July. Unlike much of the Dodd-Frank Act, this provision affects all companies subject to federal securities laws, not just companies in the financial services industry.

Section 922 of the Dodd-Frank Act added a new section 21F to the Securities Exchange Act of 1934 which provides that the SEC must pay rewards to whistleblowers who provide original information about violations of the federal securities laws that leads to successful enforcement actions resulting in more than $1 million in penalties. Awards, ranging between 10 and 30 percent of collected penalties, are to be paid from an Investor Protection Fund for which almost $452 million has already been budgeted. The Dodd-Frank Act also prohibits retaliation against informants in the SEC program and provides for redress in the federal courts. On November 3,  the SEC approved a 181-page Notice describing, and seeking public comment until December 17 on,  the agency's proposed rules for implementing the whistleblower program authorized by the legislation.  See  Under the Dodd-Frank Act, the SEC has until April 17, 2011, to adopt final rules.


All publicly-held companies now face new risks that their employees will bypass their companies' own internal compliance programs and go directly to the SEC in hope of winning huge Dodd-Frank awards (or, in some cases, seeking protection under Dodd-Frank's anti-retaliation provisions from discharge for their own work-related problems). The result could well diminish the effectiveness of the internal programs and leave companies facing the burden of defending against claims – many of which may be spurious – taken to the SEC that become the basis of investigations by the agency. The risks are exacerbated by the fact that members of the plaintiffs' bar already have launched aggressive marketing campaigns seeking to represent whistleblowers in their efforts to win awards from the SEC. See, for example, "The reality is that we've now set up a competing mechanism with an incentive structure that no honest and diligent board can compete with. Congress is potentially gutting the ability of every honest director in America to do his or her job," Stanford Law Professor and former SEC Commissioner Joseph Grundfest told attendees at an American Bar Association meeting in August. "The SEC has long advocated for corporate compliance programs, but this whistleblower-bounty program would essentially eviscerate them," U.S. Chamber of Commerce spokesman David Hirschmann commented after the SEC issued its proposed rules.

What should you do now?

The SEC's rulemaking process provides an opportunity for publicly-held companies, their trade associations and others to try to convince the SEC to adopt rules that will minimize the negative corporate governance implications of the new whistleblower program. We urge you to consider submitting comments to the SEC before the December 17 deadline. A large volume of thoughtful comments raising concerns could well have a positive impact on the SEC.     

In the meantime, we believe companies would be well-advised to expect the worst and to begin an assessment of their internal compliance programs in light of current best practices, as well as the evolution of those best practices likely to result in the near future from the Dodd-Frank provision. The internal "ethics hot line" processes for seeking and responding to employee concerns that have appeared to be sufficient in the past may no longer be adequate. Serious consideration should be given to enhancements that will encourage employees in more meaningful ways to use internal options for reporting their concerns about compliance with securities laws, as well as other laws applicable to their employers' operations. Given the significance of the issues raised by the government's new Dodd-Frank whistleblower program, senior management, as well as boards of directors, should be involved as reassessments are conducted.

We can help.

Troutman Sanders has assembled a team of lawyers, from a variety of disciplines and with extensive experience advising corporate clients in the establishment and administration of compliance programs, to provide assistance in responding to the new challenges presented by the Dodd-Frank whistleblower provision. In the near term, if you are interested in filing comments on the SEC's proposed rules, we can assist you in preparing them. For the longer term, we can bring our experience and unique outside perspective to bear in working with you on an assessment of your current compliance activities and of changes to them that might now be advisable.