Business in the. Dodd-Frank Era: Whistleblowers, Compliance Issues, and SEC Bounties. May 8, Moderator: Todd Murray, Partner

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1 Business in the Moderator: Todd Murray, Partner Presenters: Bryan Erman, Partner John Wilcox, Of Counsel Dodd-Frank Era: Whistleblowers, Compliance Issues, and SEC Bounties May 8, 2013

2 Scope of Dodd-Frank Act For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy. --Remarks by the President at Signing of Dodd-Frank Wall Street Reform and Consumer Protection Act 2

3 Scope of Dodd-Frank Act In the end, our financial system only works - our market is only free - when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. And that s what these reforms are designed to achieve -- no more, no less. Because that s how we will ensure that our economy works for consumers, that it works for investors, that it works for financial institutions - that it works for all of us --Remarks by the President at Signing of Dodd-Frank Wall Street Reform and Consumer Protection Act 3

4 Scope of Dodd-Frank Act By Glenn Foden - April 27, 2010; Published at TownHall.com 4

5 Scope of Dodd-Frank Act Published in SaucyUSABlogSpot.com 5

6 Some Regulatory Areas Affected by Dodd-Frank Financial Stability Reform Agencies and Agency Oversight Reform Securitization Reform Derivatives Regulation Investor Protection Reform Credit Agency Rating Reform The Volcker Rule Capital Requirements Corporate Governance Compensation Private Fund Advisors 6

7 Corporate Governance Proxy Access Compensation Committee and Advisors National Security Exchange Listing Standards Committee members must be independent Committee must have the ability to retain independent advisers Disclosure must be made if there is a conflict of interest with a compensation consultant Broker Discretionary Voting 7

8 Compensation Say-on-Pay Shareholder vote on executive compensation Frequency Advisory- but the company must explain how it has considered the results of the most recent vote Golden parachutes Smaller Companies and Emerging Growth Companies Executive Compensation Comparison Describe the relationship between executive compensation and company performance Describe the relationship of employee compensation to CEO compensation Disclosure regarding hedging transactions by directors and employees Compensation claw-back 8

9 Private Fund Advisors Form PF Applies to advisers of private funds; including, hedge funds, private equity funds and liquidity funds Reporting Threshold Frequency of filing varies depending upon fund size 9

10 Burden of Compliance Cost of compliance ranges from $50,000 to $200,000 Hedge-fund managers typically spend less than 500 hours per year on compliance SEC and the Financial Stability Oversight Council (FSOC) empowered to expand regulatory oversight to address systemic concerns posed by the private fund industry. --Who s Afraid of the Dodd-Frank Act? Not Wall Street; Feb, by Wulf A. Kaal in St. Thomas Lawyer 10

11 Effects of Dodd-Frank on Whistleblowers New bounty program for whistleblowers Will significant monetary incentives to report violations result in increase in whistleblowers? Will whistleblowers now go to the gov t rather than reporting internally? Increased protection for whistleblowers 11

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14 Dodd-Frank Bounty Program 10% - 30% of amount recovered by the government State Street SEC settlement in 2010 for $314 million could have produced $31- $94 million reward Plus factors include ongoing cooperation and encouraging others to cooperate 14

15 Dodd-Frank Bounty Program Requirements for whistleblower bounty: Voluntarily provide to gov t Original information Which leads to successful enforcement action In which recovery is over $1 million 15

16 Voluntary Requirement Not voluntary if made after request, inquiry, or demand by the gov t Still voluntary if tip comes after request or demand made on someone else Not voluntary if required to report under pre-existing legal or contractual duty 16

17 Original Information Requirement Must be from whistleblower s independent knowledge or analysis Can t be information already known by SEC But, even if SEC has information about issue, whistleblower can get award by providing additional information 17

18 Qualifying Enforcement Action Includes both information that leads to opening of investigation and that contributes to ongoing investigation Can combine recoveries from multiple actions to reach $1 million threshold if based on same facts 18

19 Exclusions From Bounties Accounting firms that gain information during engagement Person with compliance function, who gains information through compliance program/internal report Firm retained to conduct investigation 19

20 Exclusions From Bounties But exclusions do NOT apply if: Whistleblower has reasonable basis to believe tip was necessary to prevent injury to the entity/investors or that entity is impeding investigation 120 days have passed since audit committee, GC, compliance officer, or supervisor received information 20

21 Dodd-Frank Arguably Discourages Internal Reporting No reward for internal reporting No requirement to report internally first Significant amount of comments criticizing this Arguably discourages internally reporting due to race to bounty 21

22 Dodd-Frank Arguably Discourages Internal Reporting Rather than make internal reporting a requirement, SEC added incentives to report internally Can receive award for internal report if company reports to gov t Plus factor in determining amount of award Whistleblower gets benefit of additional information discovered by company as the result of internal report Internal report holds place in line for bounty if violation reported to SEC within 120 days 22

23 SEC Annual Report on Dodd-Frank Whistleblower Program 1,540 letters received regarding rules $453 million in fund In 2012, SEC received 3,001 tips (8+ per day) 143 cases were eligible for award 23

24 Location of Tips 24

25 Categories of Tips Received 25

26 Survey of Hedge Fund Employees 87% would report wrongdoing to the government for an award 83% were specifically aware of SEC whistleblower program 26

27 First Bounty Payment Made Tip regarding ongoing multi-million dollar fraud Whistleblower received maximum 30% bounty $1 MM in sanctions $300,000 bounty $50,000 paid thus far Shows that we are open for business and ready to pay people who bring us good, timely information Sean McKessy 27

28 Dodd-Frank Whistleblower Protections No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any manner discriminate against a whistleblower Whistleblower must only have reasonable belief that violation occurred/is about to occur Whistleblower must provide information to SEC, initiate/testify/assist in SEC investigation, or make disclosure required/protected under other federal statutes (including internal report if company is governed by SOX) 28

29 Why Maintain Internal Fraud Detection Program After Dodd-Frank? 41% of fraud at public companies is detected by tips Still required if governed by SOX Will lessen the impact from the Dodd- Frank changes 29