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SEC’s Final Rules Reject Requirement That Whistleblowers Report Internally Before Going to the SEC
SEC’s Final Rules Reject Requirement That Whistleblowers Report Internally Before Going to the SEC
V&E's Dodd-Frank Whistleblower Provisions Update, May 26, 2011
On May 25, 2011, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) adopted final rules governing the new whistleblower program implemented under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”). Under Section 922, whistleblowers providing original information to the SEC are entitled to between 10 and 30 percent of penalties collected by the SEC in a resulting successful enforcement, as well as penalties imposed by certain additional agencies, including the Department of Justice (DOJ), in related enforcement matters.
Since its passage, Section 922 has been met with much concern from companies with established compliance programs designed to allow them to identify, investigate, remediate, and where appropriate disclose, potential securities law violations. Many of the more than 240 comment letters submitted to the SEC urged the Commission to require whistleblowers to first make use of existing internal compliance reporting mechanisms and procedures before becoming eligible to collect any reward under the new bounty program.
The final rules impose no such requirement. And while the Commission noted in issuing the final rules that it does not intend to undermine corporate compliance programs, it chose not to accept numerous proposals put forth by companies and individuals that were designed to safeguard companies’ internal compliance processes. The SEC did, however, adopt certain provisions to allow would-be whistleblowers to invoke internal compliance mechanisms while preserving status as whistleblowers under the Act. For example, the rules treat individuals who first report information internally as whistleblowers under the Act, provided that they report that information to the SEC within 120 days of disclosure to the company. The Commission increased this “grace period” from 90 to 120 days in response to the many comments arguing that 90 days left companies with too little time to conduct a meaningful investigation. The final rules also provide that an individual may be eligible as a whistleblower if he or she reports information internally, and the company receiving the allegation subsequently reports the information to the Commission. Although the final rules provide that the fact of initial internal disclosure could increase a potential reward, and conversely, failure to make use of internal compliance procedures could decrease an award, the amount of any whistleblower reward remains solely within the SEC’s discretion. In addition, the final rules, like the proposed rules, also eliminate from eligibility for whistleblower rewards legal and audit personnel, as well compliance and internal audit personnel, under certain circumstances.
The final rules may fall well short of satisfying companies with robust compliance programs that Section 922 will not undermine their efforts. While rejecting countless protections recommended by concerned companies, the Commission has made clear that it stands ready to take immediate action to implement the whistleblower program. Although the final rules do not become effective until 60 days after submission to Congress or publication in the Federal Register, the SEC explained that the newly created SEC Office of the Whistleblower has been staffed and that the Investor Protection Fund, the source for any potential whistleblower reward, has been fully funded. SEC Chairperson Mary L. Shapiro also highlighted that since Dodd-Frank became law, the quality of the tips provided to the SEC has improved. Companies should anticipate that regardless of whether the number of whistleblower reports doubles or triples, as originally anticipated by the Commission and industry participants, the simplified and transparent procedures for reporting announced under the final rules, coupled with newly minted, dedicated SEC resources, will greatly increase the SEC’s ability to initiate and conduct meaningful reviews of securities laws violations.
V&E’s Whistleblower Task Force assists companies to address the multidisciplinary legal issues presented by the whistleblower provisions. V&E’s Task Force is comprised of attorneys drawn from several of the firm's practice areas, including Employment, Labor and OSHA, Securities Litigation and Enforcement, Corporate Compliance, and Government Investigations and White Collar Criminal Defense, who together provide comprehensive counsel on issues arising from the Act. For further information about V&E's Whistleblower Task Force, please contact Ari Berman, Carl Jordan, Craig Margolis, Steven Paradise, Amy Riella, or Cliff Thau.
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