The US Securities and Exchange Commission has proposed new rules
to implement the whistleblower provisions of the recently passed
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010.
Among other things, the proposed rules, announced on November 3,
2010, attempt to address the substantial incentives for employees
to bypass their own company's internal compliance programs.
The proposed whistleblower rules
The significant incentives under the whistleblower provisions of
Dodd-Frank are bound to result in increased whistleblower activity,
which may lead to action by US law enforcement authorities. Since
the passage of the Dodd-Frank Act, parties potentially affected by
whistleblower activity, including public companies, have expressed
concerns regarding the scope of the new law. As written, the
whistleblower law could undermine a company's internal
compliance program. Additional concerns have been raised regarding
the eligibility requirements for bounties and the claims
process.
In presenting the proposed rules, the SEC acknowledged these
legitimate concerns, stating, "[t]he proposed rule reflects
the consideration of a number of potentially competing interests,
and balances the need to encourage whistleblowers to come forward
without promoting unintended consequences."
One unintended consequence may be the erosion of internal
compliance programs. The SEC attempts to address this issue by
proposing rules that apply specifically to employees who report
internally first. The proposed rules would treat an employee as a
whistleblower as of the date that employee reports the information
internally – as long as the employee provides the same
information to the SEC within 90 days. The SEC's intent is to
preserve an employee's "place in line" for a possible
award from the SEC where the employee reports their information
internally first. The proposed rules also permit the SEC to
consider higher percentage awards for whistleblowers who first
report their information through effective company compliance
programs.
While well-intentioned, the proposed rules stop short of requiring
whistleblowers to utilize internal complaint and reporting
procedures before making a whistleblower submission to the SEC. The
SEC considered this requirement, but rejected it out of concern
that not all companies have robust compliance procedures and
protections. Thus, whistleblowers are free to bypass internal
compliance programs, and their eligibility for a bounty is not
affected by pursuing a path that leads to the SEC first.
The SEC acknowledges the difficulty in balancing the need for a
strong and effective whistleblower program, and the importance of
preserving corporate structures for self-policing and
self-reporting. As a result, the SEC has asked for public comment
on whether the SEC should consider other ways to reconcile
corporate compliance with the whistleblower law, whether the rules
should require whistleblowers to utilize employer-sponsored
complaint and reporting procedures and for guidance on how to
minimize the potential negative impact on compliance
programs.
Less controversial are proposed rules that exclude certain people
from eligibility for awards, including those who have a
pre-existing legal or contractual duty to report information,
attorneys and independent public accountants who attempt to use
information obtained from client engagements to make whistleblower
claims for themselves, foreign government officials, and people who
learn about violations through a company's internal compliance
program. In addition, the proposed rules outline a detailed claims
process. The proposed rules are
available on the SEC's website.
Practical considerations
The SEC is seeking public comment on the proposed whistleblower rules through December 17. Entities at risk of increased whistleblower activity should consider submitting comments to the SEC, particularly on the issue of whether the proposed rules go far enough to protect internal compliance programs. Well-framed comments, including alternative rule proposals and follow-up communications with the SEC, may result in necessary revisions to the proposed rules.
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