Much has been made, since the Trump administration took office backed by a Republican-controlled Congress, about the potential repeal of The Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Many interested in Wall Street regulation and reform expressed concern over this prospect, given that Dodd-Frank was passed in the wake of the Financial Crisis in an effort to prevent some of the more egregious financial excesses that led to the market collapse.
For securities whistleblowers, the repeal effort is cause for particular concern, because the SEC’s successful Whistleblower Program owes its existence to Dodd-Frank. The Whistleblower Program provides an important deterrent to financial fraud by incentivizing the timely and accurate reporting of securities violations. Eligible whistleblowers may be awarded between 10% and 30% of the monetary sanctions collected in actions brought by the SEC as well as certain related actions brought by other authorities. According to the SEC’s Office of the Whistleblower, as of May 2, 2017, since the program’s inception in [2010] “[a]pproximately $154 million has now been awarded to 44 whistleblowers who voluntarily provided the SEC with original and useful information that led to a successful enforcement action.”
Whistleblowers have long played a vital role in not only exposing fraud, but also assisting shareholder litigants in private action. Whistleblowers and other confidential informants often provide insightful information into fraudulent conduct, unbury truths and provide key, specific insider details necessary for shareholder-plaintiffs to meet their heightened burdens under the Private Securities Litigation Reform Act.
Congress recently took its first concrete steps to re-write Dodd-Frank. On June 8, 2017, the House of Representatives passed the Financial CHOICE Act of 2017, a broad bill designed to dismantle many of the well-known protective provisions of Dodd-Frank applicable to banks, such as the Volcker Rule and the Conflict of Interest Rule applicable to financial advisors. If the bill became law in its current form, it would also significantly limit the Consumer Financial Protection Bureau’s authority.
News reports suggest that the CHOICE Act is unlikely to pass the Senate in its current form, and even the White House failed to strongly champion the bill. Still, the CHOICE Act provides a preview of what future efforts to curtail Dodd-Frank might look like.
A close reading of the CHOICE Act, however, reveals that the Whistleblower Program and its protections will largely remain in place, albeit with some potentially significant new restrictions. Chief among the changes is a provision that purports to deny awards to “culpable” securities whistleblowers. The CHOICE Act would add a provision to the existing text of the Securities Exchange Act of 1934 (where Dodd-Frank is codified) denying an award “to any whistleblower who is responsible for, or complicit in, the violation of the securities laws for which the whistleblower provided information to the Commission.” The CHOICE Act’s definition of a culpable whistleblower is broad and extends not only to those who intentionally promote or assist the violation, or aid and abet it, but also to anyone who has a “duty to prevent the violation” and fails to make an effort that the person is required to make. Currently, an SEC whistleblower who was involved in activities reported to the SEC may recover an award, provided he or she was not charged with a crime in connection with the scheme.
To be sure, the proposed rule would prohibit rewarding wrongdoers who blow the whistle after the fact. However, many securities fraud schemes may now go completely unaddressed, because the CHOICE Act dis-incentivizes individuals with first-hand knowledge of fraudulent conduct to report it to the SEC. This concern is amplified by the troublingly broad definition of who is “culpable” for purposes of denying an award. Potential insider whistleblowers and their counsel would be wise to closely analyze the potential impact of this rule before submitting to the SEC, should it pass in some form.
As for the Whistleblower Program as a whole, if the CHOICE Act is any guide, its protections are likely to remain largely in place. This is consistent with the views expressed by former SEC Chair Mary Jo White, who recently stated that she does not foresee significant changes for the Whistleblower Program. This is encouraging, given the success of the Whistleblower Program over the past few years in addressing securities fraud and uncovering schemes that would otherwise not see the light of day.