Last week the SEC adopted final rules to reward whistleblowers who provide information leading to successful enforcement of securities law violations. In an attempt to address objections from many business groups, the final version included an incentive to report through mechanisms internal to their own company but also expanded from 90 to 120 days the time they have to report to the SEC and still qualify for a reward.
- Chairman Shapiro’s opening remarks
- Commissioner Kathleen L. Casey statement
- Commissioner Elisse B. Walter statement
- Commissioner Troy A. Paredes statement
- Commissioner Luis A. Aguilar statement
- Remarks of Robert S. Khuzami, Director, Division of Enforcement
While Casey and Paredes argued internal compliance programs mandated by SOX would be eviscerated, Khuzami provide four basic reasons why the was advised not to incorporate a requirement that employee-whistleblowers report possible violations of the federal securities laws to their companies before contacting the SEC
- No one submitted any empirical data supporting the view that the absence of mandatory internal reporting would undermine internal compliance programs.
- Companies that take their fiduciary obligations and corporate citizenship responsibilities seriously will design and implement effective compliance programs regardless of whether a whistleblower is required to internally report wrongdoers to qualify for an award.
- Congress intended the statute to incentivize insiders to provide the SEC with high-quality tips that reveal fraud and other wrongdoing, and to protect them from retaliation in the process. As such, the requirement is, first and foremost, for a tool designed to increase the effectiveness of the enforcement program… building stronger cases more quickly, stopping frauds early, returning more money to victim-investors, and preventing small frauds from growing into bigger frauds.
- Nothing in the statute requires internal reporting as a condition of eligibility. Where the compliance function is not effective or is controlled by managers that are the subject of the whistleblower’s claims, such a requirement could easily undercut the purpose of the statute.
The new rule would award any individual who voluntarily provides the government or a self-regulatory organization with original information, based on independent knowledge or analysis not already known to the Commission, up to 30% of the penalties collected in the enforcement action.
The final rule streamlines how tip are submitted, strengthens anti-retaliation protection and excludes some from eligibility, including in-house counsel—unless the attorney-whistleblower has a reasonable basis to believe that disclosure of the information would significantly protect the financial interest or property of investors.
In my opinion companies should not only institute their own whistleblower programs, but as Mark Rome noted in a recent guest post (The Board’s Role in Safeguarding Reputation), should engage an independent party to survey and solicit input from every employee to identify material weaknesses in internal control, compliance and reporting systems. Disclosure: Rome’s associated firm has become an advertiser on CorpGov.net. Learn about their programs through the Business Integrity Alliance and read their blog for some interesting posts.