The US Securities and Exchange Commission (SEC), which has been working on a whistleblower bounty program since the Dodd-Frank Act mandated one last July, recently adopted final rules designed to incentivize employees to report original information about a violation of the federal securities laws by rewarding them with between 10 and 30 percent of any judgment or combination of related judgments exceeding $1 million. This new regime, which offers potentially huge awards for reporting alleged violations of the securities laws to the SEC without a requirement of first resorting to existing corporate compliance programs, threatens to undermine the role and effectiveness of corporate compliance procedures that companies have put in place after Sarbanes-Oxley (for more information, see “SEC Solicits Comments on Effect of Whistleblower Bounty Program on Existing Corporate Compliance Programs”).
Responding to the many comments and critics of the proposed whistleblower regime following enactment of Dodd-Frank, the Commission’s rules include several provisions designed to encourage whistleblowers to utilize their companies’ internal compliance and reporting systems. First, if the employee reports original information to the company’s internal compliance program, and the company passes the information to the SEC, the whistleblower will get credit—“and potentially a greater award”—for any additional information generated by the company in its investigation. Second, a whistleblower is permitted 120 days from the time of first reporting internally to report directly to the SEC and still be treated as if he or she had reported to the SEC on the earlier date. Finally, a whistleblower’s voluntary participation in a company’s internal compliance procedures “is a factor that can increase the amount of an award.” Conversely, interference with internal compliance procedures may decrease the award.
Even so, corporate compliance directors have good reason to worry that these new rules do not do enough to incentivize whistleblowers to report information internally. Critics raise a number of problems, including: the length of the 120-day “look back period,” as four months leaves companies inadequate time to conduct the sort of far-reaching and complicated investigations often needed to assess and resolve allegations; the vagueness of the SEC’s promise that first complying with internal procedures will be a “factor” that “can” increase a tipster’s reward; and the massive scale of the incentives offered tipsters—up to 30 percent of any resulting judgment or penalty—may cause a wave of frivolous “tips.” There is also concern that a wave of frivolous “tips” and continued lack of clarity about the definition of a “possible violation” could overwhelm the resources of corporate compliance programs and the SEC, alike.
To what extent these changes may affect, or even undermine, corporate compliance programs is yet to be seen. But companies are advised to consider taking the following steps to better position themselves when the new whistleblower rules go into effect:
For more information about the topics raised in this Legal Update, please contact at +1 312 701 7146, at +1 212 506 2559, at +1 312 701 7953, or at +1 312 701 7163.
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