Wednesday, May 27, 2020

NASAA offers states a model act to award and protect whistleblowers

By Anne Sherry, J.D.

The North American Securities Administrators Association (NASAA) released for comment a proposed model whistleblower act. Like the Dodd-Frank provisions that inspired it, the act would award whistleblowers between 10 and 30 percent of the recovery in a successful enforcement action, as well as prohibit employers from retaliating against individuals who report misconduct to the state securities regulator. Comments are due June 30.

Whistleblower award. Utah and Indiana, the only two states to have enacted whistleblower statutes, have each issued an award to one whistleblower. NASAA President Christopher W. Gerold said the model legislation is meant “to incentivize individuals who have knowledge of potential securities law violations to report it to state regulators in the interest of investor protection.” Accordingly, the act authorizes the state securities administrator to award a whistleblower no less than 10 percent, and as much as 30 percent, of the sanctions collected (excluding restitution).

The model act’s list of factors in setting the award amount is similar to the SEC rules, but the factors are described in much less detail. The securities administrator is to consider the significance of the information to the action’s success, the degree of assistance provided, the regulator’s interest in deterring securities violations, and any other factors it deems relevant. Among other things, a whistleblower’s culpability in the matter or submission of false information may preclude an award.

As with the federal program, the whistleblower awards are to be paid from a separate fund. NASAA notes that the source of the payment will vary from state to state. Indiana pays awards from its securities restitution fund while Utah uses its Securities Investor Education, Training, and Enforcement Fund.

Anti-retaliation. The model law also bars employers from retaliating against a whistleblower who lawfully provided information to the securities regulator, assisted in an investigation or action, or made disclosures protected under the federal securities laws. An individual may sue for retaliation, and the court may award reinstatement, double back pay, legal fees and costs, actual damages, or a combination of these.

In the interest of clarity and brevity, the model legislation defines only three terms. These definitions of “original information,” “monetary sanction,” and “whistleblower” largely track the equivalent terms in the Dodd-Frank Act and implementing rules. Notably, the definition of “whistleblower” specifically requires reporting to the regulator. This tracks the federal statute but not the SEC’s implementing rules, which purported to protect internal whistleblowers and became the focus of an appeal to the Supreme Court (the Court ruled that the statute controlled).

The NASAA act is drafted so that it can be implemented immediately without the need for any complementary rulemaking, although it does contain an optional provision authorizing the securities regulator to promulgate rules.