SEC Adopts Whistleblower Rule by 3-2 Vote; Encouraging - But Not Requiring - Internal Reporting First
The SEC's whistleblower rule (final rule, press release) adopted in a 3-2 vote by the Commission yesterday, has received criticism in some circles mainly because it encourages - but does not require - whistleblowers to report their assertions internally within their company first, before going to the SEC.
As noted in the NYSE-Euronext Inside the Beltway blog, the proposed rule which preceded the final rule "received 240 comments and over 1300 form letters." That blog also notes: "Commissioners Casey and Paredes, the two Republicans on the Commission, voted against the final rules and argued that, despite this change, the regulations would diminish the effectiveness of internal compliance programs. Commissioner Casey predicted the SEC would be flooded with tips and that companies would face significant cost increases for legal fees required to respond. Schapiro said, however, that the final rules “expand upon the incentives for whistleblowers toreport internally where appropriate to do so.”
A major goal of the new whistleblower rule, as required under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is to authorize the SEC to pay a 'bounty' or reward to whistleblowers providing information on alleged securities law violations, who meet certain requirements.
Previously, only those whistleblowers alleging violations of insider trading laws were eligible for bounty payments; the lack of a broader whistleblower bounty program was emphasized in the course of the investigation of ponzi schemer Bernard Madoff, where whistleblower Harry Markopolous was not eligible for such a bounty (although that did not stop Markopolous from submitting detailed allegations to the SEC).
The change in the rule, as set forth in the Dodd-Frank Act, is to encourage more potential whistleblowers to come forward by providing them with a financial incentive.
However, one of the arguments against the SEC rule in its proposed, and now final, form, is that the rule fails to take advantage of internal compliance systems within companies, and in the view of some, could weaken those compliance systems, by not requiring whistleblowers to present their allegations through those existing compliance systems and going direct to the SEC. A counterargument put forth by others, however, is that a requirement to present a whistleblower complaint internally before going to the SEC is that the whistleblower may avoid making the complaint due to fear of retribution. The SEC tried to reach a compromise in the wording of the final rule to navigate this chasm involving the desire to, one the one hand, encourage but not require internal reporting, and on the other hand, discourage retribution:
- the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the Commission, including threatening to enforce a confidentiality agreement
- the rules... [p]rovide that a whistleblower’s voluntary participation in an entity’s internal compliance and reporting systems is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.
As reported earlier today by Broc Romanek in TheCorporateCounsel.net blog:
House Representative Michael Grimm (R-NY) has introduced a bill that seeks to change the whistleblower provision in Dodd-Frank. Some believe the bill was introduced to put pressure on the SEC ahead of its rulemaking. This May 24th letter from a group of groups asks Congress to leave the whistleblower provision intact.
Romanek's blog post also provides links to some law firm memos issued yesterday on the SEC's final whistleblower rule.
Here are some links to additional articles and points of view:
Association of Corporate Counsel Frustrated by Today’s SEC Ruling on Whistleblowing Bounty Provisions of Dodd-Frank Law -- In-house Counsel Warn of Adverse Effect on Corporate Compliance and Internal Reporting
Reactions to SEC Whistleblower Rules Fall Predictably (WSJ Corruption Currents blog)