SEC’s Safe-Harbor Whistleblower Provision Proves Treacherous to Companies
The U.S.
Securities and Exchange Commission (“SEC”) made additional waves since last
month’s post,
by recently announcing the first monetary award under the Dodd-Frank safe-harbor
provisions. The Dodd-Frank Act allows individuals who report information about
possible securities violations to the SEC to recover an award of between 10 and
30 percent of any sanctions levied of more than $1 million. To qualify for an
award as a whistleblower, the information provided must be “original.” This means
that the SEC needed to receive the information from the whistleblower first,
and not from another agency. There is an exception to this rule however (called
the “safe harbor”): As long as the whistleblower sends the information to the
SEC within 120 days after first reporting the same information to another
agency, then the SEC will treat the information as original.
In making their
first monetary award under the safe-harbor provision, the SEC awarded more than
$2.2 million (see their press
release). The SEC stated expressly that it relied on Dodd-Frank’s safe-harbor
provision, finding the information provided by the whistleblower to be
“original information” despite that it was first provided to another agency. In
touting the award, the SEC noted a reality of whistleblowing: that whistleblowers,
especially non-lawyer whistleblowers, may not always know where to report
information. This issue, in effect, is what the safe-harbor provision seeks to
remedy.
Companies should consider
strengthening training programs which focus on or encourage first reporting
concerns through internal legal and compliance channels and ensure that those
compliance- and legal-reporting mechanisms are well-advertised within the
company. In addition, even with well-publicized reporting procedures, given
that the safe-harbor provision only provides 120 days for a whistleblower to
come forward to the SEC after making an internal report, companies should ensure
that they have clear investigation procedures in place that will allow a
company to efficiently assess the nature of a complaint, effectively
investigate the same, and respond to any whistleblower who might otherwise take
his or her concerns directly to the SEC.