The False Claims Act protects whistleblowers in cases where the government has been defrauded, but what happens when fraud is committed against individual investors? The Dodd-Frank Wall Street Reform and Consumer Act is the answer. The SEC implemented the act in 2010 to protect investors and maintain a fair market. There is also a section that protects whistleblowers who seek to expose their employers unlawful conduct.
The Dodd-Frank Act
Hedge funds developed in response to a desire for investors to get a high return through high quality trading strategies. Investors contribute money and the manager takes a 1-2% management fee and 20% of the fund’s profits. Hedge funds in the United States were historically privately owned and run, and exempt from federal securities regulation giving them substantial freedom in their activities. These funds made careful calculations in their business models to ensure they could operate outside of these regulations. Many see these funds as an exclusive club for America’s wealthiest, and enables them to profit more than the average investor. There is also fear that hedge funds mislead their investors by guaranteeing easy monetary gain, and conduct fraudulent activity behind closed doors. The recent surge in hedge fund activity since the 1980s has caused the Securities Exchange Commission (SEC) to try to regulate them. There actions have been moderately successful.
The Dodd-Frank Act, or the Private Fund Investment Advisers Registration Act of 2010, is a recent effort to allow the SEC to register hedge fund managers and therefore regulate their activities.
- Funds worth more than $150 million are required to register with SEC and disclose certain metrics.
- SEC should set up rules for registration and reporting for previously exempt funds.
- Investment advisors must maintain records and other information the SEC may deem necessary.
- Managers are required to disclose investment strategies, performance, financing information, risks metrics, counterparties and credit exposure, positions held by advisors, percent of assets traded using algorithms, percent of equity and debt, and even more.
New Whistleblower Protections
Funds are now required to be more transparent with their activities, however fraud is still a large concern. There are often instances of fraud that cannot be easily identified, even with these additional disclosures. For that reason, company insiders are in an extraordinary position to expose this misconduct. Section 922 of the Dodd-Frank reform provides rewards to whistleblowers who provide information to the SEC. Company insiders who provide original information which leads to sanctions over $1 million are entitled to 10-30% of the sanctions recovered by the SEC. Any information provided on or after July 22, 2010 is eligible for the award. The act prohibits any retaliation by their employer for reporting misconduct. Dodd-Frank whistleblowers file their complaints with the SEC, as opposed to the federal court.