SEC Adopts Rules to Establish Whistleblower Program

Washington, D.C., May 25, 2011 – The Securities and Exchange Commission today adopted rules to create a whistleblower program that rewards individuals who provide the agency with high-quality tips that lead to successful enforcement actions.


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The new SEC whistleblower program, implemented under Section 922 of the Dodd-Frank Act, is primarily intended to reward individuals who act early to expose violations and who provide significant evidence that helps the SEC bring successful cases.

To be considered for an award, the SEC’s rules require that a whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.

“For an agency with limited resources like the SEC, it is critical to be able to leverage the resources of people who may have first-hand information about violations of the securities laws,” said SEC Chairman Mary L. Schapiro. “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.”

The SEC’s rules will be effective 60 days after they are submitted to Congress or published in the Federal Register.

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FACT SHEET

Establishing a Whistleblower Program
SEC Open Meeting
May 25, 2011

Background

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the SEC to pay rewards to individuals who provide the Commission with original information that leads to successful SEC enforcement actions and certain related actions.

In passing the Dodd-Frank Act, Congress substantially expanded the agency’s authority to compensate individuals who provide the SEC with information about violations of the federal securities laws. Prior to the Act, the agency’s bounty program was limited to insider trading cases and the amount of an award was capped at 10 percent of the penalties collected in the action.

Rules Requirements

The final rules define a whistleblower as a person who provides information to the SEC relating to a possible violation of the securities laws that has occurred, is ongoing or is about to occur.

To be considered for an award, the final rules require that a whistleblower must:

Voluntarily provide the SEC …

  • In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it directly from the whistleblower or the whistleblower’s representative.

… with original information …

  • Original information must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources.

… that leads to the successful enforcement by the SEC of a federal court or administrative action …

  • A whistleblower’s information can be deemed to have led to a successful enforcement action if:
    1. The information is sufficiently specific, credible and timely to cause the Commission to open a new examination or investigation, reopen a closed investigation, or open a new line inquiry in an existing examination or investigation.
    2. The conduct was already under investigation when the information was submitted, and the information significantly contributed to the success of the action.
    3. The whistleblower reports original information through his or her employer’s internal whistleblower, legal, or compliance procedures before or at the same time it is passed along to the Commission; the employer provides the whistleblower’s information (and any subsequently-discovered information) to the Commission; and the employer’s report satisfies prongs (1) or (2) above.

… in which the SEC obtains monetary sanctions totaling more than $1 million.

  • The rules permit aggregation of multiple Commission cases that arise out of a common nucleus of operative facts as a single action. These may include proceedings involving the same or similar parties, factual allegations, alleged violations of the federal securities laws, or transactions or occurrences.

The final rules further define and explain these requirements.

Key Concepts

Avoiding Unintended Consequences:

Certain people generally will not be considered for whistleblower awards under the final rules.

These include:

  • People who have a pre-existing legal or contractual duty to report their information to the Commission.
  • Attorneys (including in-house counsel) who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules).
  • People who obtain the information by means or in a manner that is determined by a U.S. court to violate federal or state criminal law.
  • Foreign government officials.
  • Officers, directors, trustees or partners of an entity who are informed by another person (such as by an employee) of allegations of misconduct, or who learn the information in connection with the entity’s processes for identifying, reporting and addressing possible violations of law (such as through the company hotline).
  • Compliance and internal audit personnel.
  • Public accountants working on SEC engagements, if the information relates to violations by the engagement client.

However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers when:

  • The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
  • The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
  • At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.

Certain other people – such as employees of certain agencies and people who are criminally convicted in connection with the conduct – are already excluded by Dodd-Frank.

Under the final rules, the Commission also will not pay culpable whistleblowers awards that are based upon either:

  • The monetary sanctions that such culpable individuals themselves pay in the resulting SEC action.
  • The monetary sanctions paid by entities whose liability is based substantially on conduct that the whistleblower directed, planned or initiated.

The purpose of this provision is to prevent wrongdoers from benefitting by, in effect, blowing the whistle on themselves.

Providing Information to the Commission and Seeking a Reward:

The rules also describe the procedures for submitting information to the SEC and for making a claim for an award after an action is brought. The claim procedures provide opportunities for whistleblowers to fairly present their claim before the Commission makes a final award determination.

Under the final rules, the SEC also will pay an award based on amounts collected in related actions brought by certain agencies that are based upon the same original information that led to a successful SEC action.

Clarifying Anti-Retaliation Protection:

Under the rules, a whistleblower who provides information to the Commission is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. In addition, the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the Commission, including threatening to enforce a confidentiality agreement.

Supporting Internal Compliance Programs:

The final rules do not require that employee whistleblowers report violations internally in order to qualify for an award. However, the rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to utilize their own company’s internal compliance programs when appropriate to do so.

For instance, the rules:

  • Make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations.
  • Treat an employee as a whistleblower, under the SEC program, as of the date that employee reports the information internally – as long as the employee provides the same information to the SEC within 120 days. Through this provision, employees are able to report their information internally first while preserving their “place in line” for a possible award from the SEC.
  • Provide that a whistleblower’s voluntary participation in an entity’s internal compliance and reporting systems is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.

Other Recent Actions

Office of the Whistleblower:

In addition to whistleblower rules, the Dodd-Frank Act called upon the SEC to create an Office of the Whistleblower. That office, now headed by Sean McKessy, works with whistleblowers, handles their tips and complaints, and helps the Commission determine the awards for each whistleblower. The initial staffing of the office has been completed and the Investor Protection Fund, which will be used to pay awards to eligible whistleblowers, has been fully funded.

http://www.sec.gov/news/press/2011/2011-116.htm

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4closureFraud.org

Comments
14 Responses to “SEC Adopts Rules to Establish Whistleblower Program”
  1. Tim Bryant says:

    This is absolute BS. The SEC does not want to know about these issues, as displayed in the email I received from them…..

    Your complaint to the U.S. Securities and Exchange Commission
    Sent By: “Corpfin-ENFLiaison” On: May 05/23/11 9:50 AM

    Dear Mr. Bryant:

    I appreciate your taking the time to talk to me and provide me with information regarding your concerns about mortgages that are securitized through mortgage-backed securities. The US Securities and Exchange Commission is always interested in hearing from members of the public, and you may be assured that the matters you have raised are being given careful consideration in view of the Commission’s overall enforcement responsibilities under the US federal securities laws. It is, however, the Commission’s policy to conduct its inquiries on a confidential basis — so this may be the only response that you receive regarding the matter.

    The Commission conducts its investigations on a confidential basis to preserve the integrity of its investigative process as well as to protect persons against whom unfounded charges may be made or against whom the Commission determines that enforcement action is not necessary or appropriate.

    If you want to learn more about how the SEC handles inquiries and complaints, please visit the SEC Complaint Center at http://www.sec.gov.

    I also note your email asking for exemption from Section 29 of the Exchange Act dated April 8, 2011 and subsequent emails regarding the same matter. Section 29 addresses the validity of contracts that are made in violation of the securities laws. As discussed in our phone conversation, a waiver of Section 29 would not result in the relief you are seeking—namely, an exemption for borrowers from any obligations under a mortgage loan. Under federal law, the SEC’s jurisdiction is limited to requiring full and fair disclosure of material information about transactions so that investors can make informed investment decisions.

    We appreciate your interest in the work of the Commission. We also appreciate your taking the time to send us your suggestions and comments. We hope that you will bring to our attention any other matters which you believe might warrant our interest. To the extent that you would like to report a tip or complaint, please consider directly forwarding that information through the SEC’s Website (http://www.sec.gov/complaint/select.shtml) dedicated to efficiently processing such information.

    Sincerely,

    Katherine Hsu
    Chief
    Office of Structured Finance

    • Tim Bryant says:

      This was my response to that….

      Your complaint to the U.S. Securities and Exchange Commission
      Sent By: tbryant80@comcast.net On: May 05/23/11 11:55 AM

      Thank you for your response. I still take the stance that RMBS contracts are made in violation of Securities laws. The applicable law of mortgage contracts are the laws of the jurisdiction in which the property resides, not New York or wherever the RMBS is sold. This, to me, is a material misrepresentation to investors, and is creating major havoc to them. Also, in my case, the origination docs created to secure the loan were falsified to show that I 100% owned a property that does not, and has never, existed. These same docs were changed after the loan origination to show the actual status. This occurred because of the “no doc” loans that were allowed to happen. The banks and originators were allowed to put down whatever information they wanted to, and because no one ever saw the originals, nobody was the wiser. In my case, the attorney’s office sent the original docs, I would imagine, by accident. Not to continue my argument, but to just condense it, this loan was a packaged, premeditated fraud, that was to be sold in the securitization market. This was perpetuated by the numerous purchasers throughout the process, that violated the original terms and conditions of the mortgage documentation. None, have ever disclosed, as per the mortgage docs, that they were purchasers or holders of the debt obligation. This continues to this very day, even at the request of my attorney. This created an estoppel of the debt, which has not been paid since October 2010, because there is no entity claiming to owe any fiduciary responsibility to the account. Whatever money, if any, investors are receiving on my loan, is 100% being paid by Bank of America, who has never shown they ever owned any interest in the loan.

      I have been trying to assist you in preventing investors from continuing to be defrauded. I will assume that you are looking into it, and I will cease and desist from providing you any additional materials to support my claim. Under 29(c), I was not seeking exemption from my mortgage obligation. I was seeking exemption from any entity claiming to hold a security interest on my loan under any RMBS, which I have not been made party to, in direct violation of the terms and conditions of the original contract. This contract’s applicable law is Massachusetts law, which requires public recording of changes in property records. This has not occurred because of MERS, and I believe, the specific language listed in the RMBS I believe my mortgage was pooled into.

      I thank you for your time and consideration in this matter. I hope and pray that the SEC takes this seriously. From the disgorgement penalties on behalf of the investors for fraud and misrepresentation in the sale of securities, levied against Countrywide executives, I know you do for the investors sake. Hopefully, the SEC will take a harder look at how the third-party beneficiaries, and holders of the collateral securing the debt, had frauds and misrepresentations perpetuated against them, concerning the securitizations of their loans. To aid you in this endeavor, if you had an “open period” for public discussion, we could show you the extent of the problems. These will ultimately effect the investors, when they are reviewed in court. We could be invaluable to the SEC in any future proposed rule-making efforts, to avoid the mistakes of the past. I, as well as many others, are not looking to seek relief from our debt obligations under our mortgage loans. We are looking to have the original contracts remain valid, and not subjugated to any pooling and servicing agreements which void the original debt obligations. More specifically, it is relief from any debt obligations under a residential mortgage-backed security which is in violation of the applicable laws of the original contracts. This creates title claims issues for not only us, but the investors. I believed that the SEC had authority under Section 29 to this issue. If I am mistaken, forgive me for my ignorance.

      Once again, thank you for your time and consideration.

      Sincerely,
      Tim A. Bryant
      80 Bradford Drive
      Feeding Hills, MA 01030

      • Tim Bryant says:

        Just sent this to my state legislators about the SEC….

        Complaint to the U.S. Securities and Exchange Commission
        Sent By: tbryant80@comcast.net On: May 05/26/11 12:48 PM
        To: “Sen. Brown, Scott” ; “Sen. Kerry, John” ; Nicholas – State Rep. Baldyga

        Dear MA Legislators,

        I would like to make you privy to an exemption request I have made under Rule 29(c) of the Securities Exchange Act. I addressed the property authority, the SEC, and submitted numerous documents in this matter. I am appalled that the SEC does not want to honestly look at the Pooling and Servicing Agreements which constitute securities contracts. These agreements are written, with clauses to violate state law, void clauses in the original mortgage contracts, and to hide true ownership “to avoid liabilities and creditors of the sellers”. They even have MERS clauses in them.

        What is sickening is, the SEC wants to consider these securities as valid, when if you wipe out the terms and conditions of the original mortgages, there is no more debt obligation to be held as the security. They just don’t get it, and frankly, I really don’t think they care. The US Government bought some of these toxic assets dollar-for-dollar to bail out Wall Street. Shouldn’t the government care if the securities are even any good?

        The SEC turning their back to this issue is going to cost the taxpayers, of course, in the long run. When the government takes losses because they bought worthless securities, is the SEC then going to charge in? They already blew it on Bernie Madoff. That fraud would be pennies compared to the problems the government is facing. The courts around the country understand the fraud in securitization, and are siding with homeowners. Government inaction to hold Wall Street accountable for anything is increasing the ire of the country. The SEC needs to be properly addressed in this matter, and Attorney General Eric Holder needs to come out of hiding as well.

        The SEC just announced a new Whistleblower Program. How can anyone have confidence in the program, when they want to stick their heads in the sand about information that is reported to them?

        Thank you for your time and consideration in this matter.

        Sincerely,
        Tim Bryant
        80 Bradford Drive
        Feeding Hills, MA 01030-2728

  2. henri Jordan says:

    Fret not thyself because of evildoers, neither be thou envious against the workers of iniquity. For they shall soon be cut down like the grass, and wither as thou green herb. Psalm 37:1-2 It’s corruption in the government so before I whistle blow only thing my requirement is litigation.

  3. Maggie May says:

    hhhaaaaaaaaaaaaaahhhhhhhhhhhhhhhaaaaaaaaaaaaaaaahhhhhhhhhhhhhhhhhaaaaaaaaaaaaahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhaaaaaaaaaaaaaaaaaaaaahhhhhhhhhhhhhhaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

  4. Pamela says:

    Amazing …brought to you by the people that have no answers for you and won’t do anything for you either.I’m surprised they are even getting involved at all.Helpless as teats on a boar hog.

  5. talktotennessee says:

    Ha, cash cow opportunist SEC. Of course we need to talk it up as there is an ill wind that does not blow some good to all. The more negative publicity generated against big banking fraud and their mickey mouse methods I will label MM&Ms the better for us. Public opinion falls over into the courts to a limited extent and into the politicians in a large measure. I have already seen a large sway of opinion change from those early moral hazard charges in early blogs to a new dominance of “those dirty banker scoundrals.”

  6. angry & NOT TAKING IT! says:

    the sec should start with Glass-Steagall Act

  7. l vent says:

    Wow. Like they did not know about the Mortgage Fraud? The FBI blew the whistle on the rampant Mortgage Fraud in 2004 and told the Bush Administration that there was still ample time to fix the problem and avert a catastrophic financial collapse.

  8. housemanrob says:

    Right! We should all be rewarded for being honest americans. We can’t turn them in for free…………we should receive cash rewards……….I shudder when I read this stuff!

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