SEC whistleblower office could impact PE firms

The programme requires the US Securities and Exchange Commission to create an office that works with whistleblowers, who could set their sights on private equity firms.

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

According to one New York-based lawyer, the new programme could have an impact on private equity firms. “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, 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 a successful enforcement, in which the SEC obtains sanctions totaling more than $1 million. 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.

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.

“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.