Tuesday, July 14, 2009
Yesterday I examined the provisions of the proposed Investor Protection Act of 2009 (Download InvestorProtectionAct2009) that deal with the Investor Advisory Committee (sec. 911), the Establishment of a Fiduciary Duty for Brokers, Dealers and Investment Advisers and the Harmonization of the Regulation of Brokers, Dealers and Investment Advisers (sec. 913), and the Authority to Restrict Mandatory Pre-Dispute Arbitration[sic] (sec. 921). This posting will discuss the provisions dealing with Securities Whistleblower Incentives and Protection (sec. 922).
This provision gives the SEC the authority to pay to whistleblowers awards not exceeding 30% of the monetary sanctions imposed in SEC enforcement actions (either judicial or administrative) in excess of $1 million. The determination of the amount of the award is in the sole discretion of the SEC and is not reviewable by the courts. The whistleblower is someone (not an employee of the SEC, DOJ, an SRO or other "appropriate regulatory agency") who voluntarily provided original information to the SEC that led to the successful enforcement of the action. Someone who was convicted of a criminal violation related to the SEC action is not eligible for an award. While claims for awards can be made anonymously, prior to the payment, the whistleblower must disclose his identity.
The proposed statute also provides for the establishment of an Investor Protection Fund (IPF) that the SEC can use for paying awards to whistleblowers and for funding investor education initiatives. Since enactment in SOX of the Fair Funds provision, the SEC has prided itself in paying out penalties it has collected to investors harmed by the fraud. This proposed IPF, if adopted, thus creates a tension among competing interests for the fraud, including the cash-strapped federal government that otherwise would be the recipient of the penalties. Moreover, the SEC's previous foray into funding investor education initiatives (as contemplated in the Conflicted Analysts Settlement) ended with embarrassment as the SEC folded its program into FINRA's, the latter being recently admonished by a federal district judge for its dilatory approach toward funding projects.
The statute provides that the IPF will consist of (1) penalties that are not added to the Fair Fund, (2) penalties added to a Fair Fund that are not distributed to the victims, and (3) accumulated interest on the investments in U.S. obligations. The IPF is not to exceed $100 million.
The information provided by the whistleblower is deemed confidential and privileged and not subject to civil discovery and exempt from disclosure under the FOIA.
Once a year the SEC is to account to Congress on the whistleblower program, including the number of awards made and the investor education initiatives that were funded.
The statute also provides for protection of whistleblowers from retaliation, including reinstatement and damages.