SEC whistleblower programme could impact PE firms

The programme, which was introduced under the Dodd-Frank Act, requires the US Securities and Exchange Commission to create an office that works with whistleblowers, handles their tips and helps the SEC determine the awards for each whistleblower.

The US Securities and Exchange Commission on 25 May adopted rules under the Dodd-Frank Act that create a whistleblower programme that rewards individuals who provide the agency with tips that lead to successful enforcement actions.

The new programme could have an impact on private equity firms, said a New York-based lawyer.

“It’s no secret that the SEC has stepped up interest in the private equity world,” he said. “By creating this department, and creating this incentive, while it impacts the corporate world at large, private equity GPs should feel the heat. Well-placed sources could have a field day.”

Under the programme, prospective whistleblowers must provide the SEC with original information that leads to the successful enforcement in which the SEC obtains sanctions totaling more than $1 million.

Dodd-Frank expanded the SEC’s authority to compensate individuals who provide the SEC with information about violations. Prior to Dodd-Frank, the SEC’s whistleblower programme was limited to insider trading cases and the amount of an award was capped at 10 percent of the penalties collected.

Under the new rules, those providing information would be paid between 10 and 30 percent of sanctions over $1 million for original and useful information.

“Opening [the programme] beyond insider trading is significant in itself,” said the lawyer. “But, upping the cap to 30 percent is quite an incentive. That said, if PE firms operate in an honest fashion, what’s there to worry about?”

Close vote

The SEC voted 3-2 to finalise the measure.

Two commissioners voted against the rule, criticising its potential impact on internal compliance as well as concerns the SEC will have to field numerous complaints that ultimately do not prove to be fruitful.

“It significantly underestimates the negative impact on internal compliance programs and significantly overestimates our capacity to effectively triage and manage whistleblower complaints,” said SEC Commissioner Kathleen Casey, in a statement.

The measure is expected to take effect 60 days after it is published in the Federal Register.