In January 2010, the Securities and Exchange Commission (“SEC”) announced a new cooperation initiative intended to encourage and incentivize individuals and companies to cooperate with and assist the SEC in its investigations and enforcement actions. That initiative, which was characterized as a “potential game-changer” for the SEC’s Enforcement Division by its new director, Robert Khuzami, gave the SEC a new set of tools for its “enforcement toolbox”, including cooperation agreements, deferred prosecution agreements and non-prosecution agreements. These options, while employed by the Department of Justice, were not previously available in SEC enforcement matters. In addition to outlining those tools in a revision to the SEC’s Enforcement Manual, the Commission provided a policy statement detailing the factors the SEC considers when evaluating cooperation by individuals and by companies.

The SEC evidenced its latest expression of interest in obtaining cooperation with its July 23, 2010 announcement that it had awarded a $1 M bounty to two whistleblowers for their substantial assistance in providing information and documents leading to the imposition and collection of civil penalties in the Commission’s May 2010 insider trading actions brought against Pequot Capital Management, Inc. and various individuals. The award was made pursuant to the Commission’s then-existing authority under the Securities Exchange Act of 1934 to award bounties to whistleblowers in insider trading cases. Significantly, in the twenty years since the SEC received its bounty authority, it had only awarded a total of $160,000 to five claimants. All of that appears to have changed with the adoption of the Dodd-Frank Act.

Among the many provisions of Dodd-Frank are specific provisions designed to significantly expand the SEC’s authority to reward whistleblowers for information beyond insider trading cases. The Act provides for the payment of potentially large awards as well as for the protection of employees who provide information to or assist the SEC relating to any violation of the securities laws. To be sure, in order to qualify for a whistleblower award, the information provided to the SEC by the whistleblower must be “original” information; in other words, the information must not previously have been known to the SEC. But if that information provides substantial assistance and leads to a successful enforcement action resulting in over $1,000,000 of monetary sanctions imposed on the wrongdoer, then the SEC has the discretion to award the whistleblower not less than 10 percent and not more than 30 percent of the monetary sanctions collected.

On November 3, the Commission published its proposed rules for implementing the whistleblower provisions of Dodd-Frank. Comments on the rules, which total over 180 pages, are due by December 17, 2010.

Have these developments changed the landscape for clients and their counsel in considering whether, and when, to self-report a potential FCPA or other securities law violation to the SEC or other regulators? Certainly the past five years have seen an uptick in enforcement activity in FCPA investigations and actions, and many of those investigations began with a self-report. The confluence of increased pressure to cooperate early in order to obtain full cooperation “credit” with Dodd-Frank’s whistleblower protections mandates that companies must even more carefully evaluate how they will conduct internal investigations at the first sign of possible wrongdoing. Does an e-mail or an anonymous tip of suggested wrongdoing automatically trigger a full blown investigation? How early companies must share their concerns, preliminary or otherwise, if not their findings, with the SEC and other regulators in order to get cooperation credit, becomes an even more critical decision under the new regulatory regime.

One obvious risk of holding back is that the SEC will receive information from a company employee who in years past might have gone to an in-house compliance officer to voice her concerns. Instead, she went directly to the SEC. Such conduct raises significant issues for companies that have installed significant compliance programs and which now must deal with risk management where the government’s financial incentives may undermine their efforts. In the end, every decision as to whether and when to self-report, and the nature and extent of an internal investigation, are fact-intensive, and there isn’t a one-size fits all prescription. It remains to be seen how the SEC will parse the “race” to disclose and cooperate, in terms of either rewarding an early disclosure or penalizing a company for failing to timely cooperate by, for example, imposing a more significant penalty and other remedies against a company in a subsequent enforcement action.

At a minimum, the dynamics have changed at the SEC and, when combined with Dodd-Frank, present new challenges in navigating the cooperation waters.