In a blow to the efforts of internal compliance, the SEC will let corporate whistle-blowers collect a percentage of penalties when they report financial wrongdoing, even when they bypass companies’ internal complaint systems.
“For an agency with limited resources like the SEC, it is critical to be able to leverage the resources of people who may have first-hand information about violations of the securities laws,” said SEC Chairman Mary L. Schapiro. “While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law. We expect this trend to continue, and these final rules map out simplified and transparent procedures for whistleblowers to provide us critical information.”
The small life ring the SEC threw to internal compliance is that the amount of the amount will be affected by how the person dealt with internal compliance. The amount of the award can be increased if the person reported the problem through internal compliance procedures and decreased if the person interfered with internal compliance or reporting systems.
A May 4 opinion from Judge Leonard Sand held that Dodd-Frank says a person has to report wrongdoing to the SEC — or be able to seek protection under other laws — before receiving legal sanctuary.
The final rule won’t provide protections to those who don’t report to the SEC, reinforcing the court’s interpretation.
While there is lots of discussion around provision providing the incentive to go to the SEC, there is also a question of the anti-retaliation protections. In the recent Egan v. TradingScreen case, a court found that the employee needs to go to the SEC get the statutory anti-retaliation protection.
For private companies, the Egan case also emphasized the point that the whistleblower provisions of Section 806 only apply to public companies subject to the Exchange Act. The employee alleged that Trading Screen was planning to public and should be subject. That didn’t work. He tried to another tactic that since it was a SEC registered broker-dealer it should be subject. The judge didn’t accept that argument either.
Sources:
- SEC Adopts Rules to Establish Whistleblower Program – SEC Press Release
- SEC Release 34-64545 Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934 (.pdf) – Final Rule
- “Whistleblower skirmish by Kaja Whitehouse in the New York Post
- SEC Approves Whistle-Blower Rules Letting Workers Bypass Internal Systems By Jesse Hamilton in Bloomberg
- Whistleblower Advocates Flip The Script On Internal Reporting by Joe Palazzolo in WSJ.com’s Corruption Currents
- The Word is “Whistleblower” Kevin LaCroix in the D&O Diary
- Opinion and Order in Egan v. Trading Screen (.pdf)
Image: Qiqi Green Whistle 8-16-09 3 by Steven Depolo
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