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Will Congress Weaken The Sec’s Whistleblower Program? It’s Not Out Of The Question

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  • Posted on: May 1 2017

After the 2016 presidential election, President Trump promised to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), and the regulations promulgated thereunder. (Here.) The president, however, was silent on whether he intended to alter the Securities and Exchange Commission’s whistleblower program. (Here.)

Last year, House Financial Services Committee Chairman Jeb Hensarling sponsored the Financial CHOICE Act, as a road map for the president’s promised effort to repeal the Dodd-Frank Act. In February of this year, Chairman Hensarling circulated a memo to senior members of the committee in which he outlined changes to the act, which includes a number of provisions that would impact the SEC and its enforcement program.

On April 19, 2017, Chairman Hensarling released an updated version of the Financial CHOICE Act (“CHOICE Act 2.0”), a discussion draft that builds on the previous version of the bill (H.R.5983 in the 114th Congress). Large portions of the legislative text remain unchanged from the original version of the act, though the CHOICE Act 2.0 provides more regulatory relief than its predecessor.  Notably, version 2.0 includes a provision that bars “co-conspirators” from recovering whistleblower awards. On April 26, 2017, the Financial Services Committee commenced hearings to discuss the amended and updated version of the act. The bill is expected to be marked-up in early-May.

Under the SEC’s whistleblower program, a person who provides “original information” that the SEC uses in furtherance of an enforcement action can recover a reward of between 10% – 30% of the total amount of money collected by the SEC.

In creating the whistleblower provisions under the Dodd-Frank Act, Congress recognized that employees with knowledge of a securities or commodities law violation often are participants in that violation.  Consequently, to further the purposes of the program, participants in the violation are eligible to receive an award as long as they are not convicted of criminal conduct relating to the violation.

Observers have noted that there is sufficient support in the House Financial Services Committee and the House to pass the CHOICE Act 2.0. However, passage of the bill in the Senate is less certain given Democratic opposition.

Takeaway

Barring rewards to whistleblowers who may be complicit in alleged wrongdoing is inimical to the SEC’s enforcement objectives.  Indeed, whistleblowers who come forward with original information about a violation of the securities laws should be encouraged, not discouraged, from doing so, even if they may have participated in the wrongdoing. Often, the information possessed by these individuals is valuable to law enforcement authorities, who, without the whistleblower, would not have known of the alleged violation. Therefore, by encouraging individuals who may have participated in the violation, but who are not criminally culpable, to come forward with information, the SEC can further its mission to protect investors and the financial markets.

This Blog will continue to monitor developments related to the CHOICE Act 2.0 as the proposed bill moves through the committee and Congress.

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