The Dodd Frank Whistleblower Law– a critical new reporting tool to aid the SEC in preventing securities fraud
Federal securities laws are complicated statutes and regulations, but the underlying concept for all federal securities laws is that all investors– whether the smallest private investor or the largest institutional investor– should have access to certain basic facts about an investment prior to purchasing the investment and during the period of time the investor holds that investment. The United States Securities and Exchange Commission's (SEC) primary mission is to enforce these federal securities laws thereby protecting investors and maintaining an orderly, efficient and fair market. Industry observers have estimated that securities fraud costs investors $40 billion in losses each year.
The Dodd Frank Whistleblower Law is an important new tool for the SEC to ensure corporations and Wall Street do not commit fraud. Under the Dodd Frank Whistleblower Law, a securities fraud whistleblower can report to the SEC when that whistleblower has original information about a corporation that may have violated federal securities laws. To encourage whistleblower reporting, the Dodd Frank Whistleblower Law provides for a cash reward to whistleblowers of 10% to 30% should the reported information lead to an enforcement action.
The federal securities laws and therefore the Dodd Frank Whistleblower Law not only apply to those corporations that issue securities, but also to “market participants”. The SEC oversees the key market participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.
The Securities Fraud Whistleblower Law Applies to All Federal Securities Laws
Federal Securities laws consist of the six statutes listed below, and the Securities Fraud Whistleblower Law applies to violations of any of these six federal securities statutes.
- Securities Act of 1933- primarily regulates how a corporation issues and markets new securities to the investor public.
- Securities Exchange Act of 1934- which primarily regulates how a corporation discloses information to the investor public once that corporation has issued securities.
- Trust Indenture Act of 1939- which in conjunction with the Securities Act of 1933 regulates how a corporation issues debt securities, including debentures, bonds and notes.
- Investment Company Act of 1940- which regulates the organization and disclosure requirements of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public.
- Investment Advisors Act of 1940- which regulates investment advisors and those entities that are compensated for advising others about securities investments.