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SEC’s Safe-Harbor Whistleblower Provision Proves Treacherous to Companies

The U.S. Securities and Exchange Commission (“SEC”) made additional waves since last month’s post, by recently announcing the first monetary award under the Dodd-Frank safe-harbor provisions. The Dodd-Frank Act allows individuals who report information about possible securities violations to the SEC to recover an award of between 10 and 30 percent of any sanctions levied of more than $1 million. To qualify for an award as a whistleblower, the information provided must be “original.” This means that the SEC needed to receive the information from the whistleblower first, and not from another agency. There is an exception to this rule however (called the “safe harbor”): As long as the whistleblower sends the information to the SEC within 120 days after first reporting the same information to another agency, then the SEC will treat the information as original.

In making their first monetary award under the safe-harbor provision, the SEC awarded more than $2.2 million (see their press release). The SEC stated expressly that it relied on Dodd-Frank’s safe-harbor provision, finding the information provided by the whistleblower to be “original information” despite that it was first provided to another agency. In touting the award, the SEC noted a reality of whistleblowing: that whistleblowers, especially non-lawyer whistleblowers, may not always know where to report information. This issue, in effect, is what the safe-harbor provision seeks to remedy.

Companies should consider strengthening training programs which focus on or encourage first reporting concerns through internal legal and compliance channels and ensure that those compliance- and legal-reporting mechanisms are well-advertised within the company. In addition, even with well-publicized reporting procedures, given that the safe-harbor provision only provides 120 days for a whistleblower to come forward to the SEC after making an internal report, companies should ensure that they have clear investigation procedures in place that will allow a company to efficiently assess the nature of a complaint, effectively investigate the same, and respond to any whistleblower who might otherwise take his or her concerns directly to the SEC.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.