The Impact of the New SEC Whistleblower Rules
On May 25, 2011, the U.S. Securities and Exchange Commission (“SEC”) announced new regulations aimed at incentivizing individuals who have information about possible violations of SEC rules to come forward with this information. Created by Congress on July 21, 2010 in Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Whistleblower Program became effective as of August 12, 2011, after the SEC issued its final rules governing the program. The Dodd-Frank Act authorized the Whistleblower Program to reward individuals who offer information that leads to an SEC enforcement action.1 To be considered for an award, the SEC’s final rules state that a whistleblower must voluntarily provide the SEC with high quality, original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.2 Awards granted by the SEC can range from 10% to 30% of the money collected. The Dodd-Frank Act also included enhanced anti-retaliation employment protections for whistleblowers to protect their identity, specifying that the SEC cannot disclose any information, including information the whistleblower provided to the SEC, that could reveal a whistleblower’s identity.
The potential for individuals to receive large cash rewards for their information while being protected from retribution is expected to significantly impact corporate compliance.3 It may be too soon to tell what impact the Whistleblower Program will have in the long term; however, in the short term it seems to be benefitting shareholders, as the new rules have incentivized corporations to create a stronger culture of compliance within their organizations.4 Corporations are being encouraged by outside advisors to strengthen their culture of ethics, compliance and communication within their companies by setting the tone from the top, rewarding compliance-driven individuals and ensuring that the rules are well defined, known, and enforced. Corporations are even considering including compliance goals in their managers’ annual performance evaluation metrics and rewarding those managers who achieve their goals with higher compensation.5
While the new rules are seen by some as benefitting shareholders, certain corporations are arguing that the new rules are actually harming shareholders because enhancing their internal compliance programs is costing corporations and their shareholders a premium and undermining the compliance and reporting programs already developed and implemented under the rules of the Sarbanes-Oxley Act of 2002.6 In addition, they argue that the rules are causing management to spend an inordinate amount of time ensuring that the company maintains an effective internal reporting program and educating employees about the internal reporting mechanisms so that they are not compelled to run directly to the SEC. Clearly, the SEC’s incentives appear to have executives and directors on edge.
In addition to concerns about employees not reporting problems internally, many corporations are concerned that the award system incentivizes people to deliberately delay reporting in the hope that the issues grow in size and scope, in order to generate a more substantial SEC penalty and thus a larger payout for the whistleblower. This is a specious argument. Indeed, if there is no incentive to report the fraud to the SEC, employees may not report potential fraud at all.
In terms of receiving important tips, the Whistleblower Program has so far proven to be effective. Since the program was established in August 2011, the SEC reports that it is receiving about eight tips a day.7 On August 21, 2012, the SEC announced that it had issued its first award to an anonymous whistleblower who helped the SEC stop a multi-million dollar fraud.8 The award recipient, who does not wish to be identified, provided documents and other significant information that allowed the SEC’s investigation to “move at an accelerated pace and prevent the fraud from ensnaring additional victims.” The whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected thus far. Any increase in the sanctions ordered and collected will increase payments to the whistleblower, who has received an award of $50,000 thus far. The court is considering whether to issue a final judgment against other defendants in the matter.
Despite the concerns expressed by corporations, the Whistleblower Program appears to have already become a success for the SEC and shareholders.9 Not only has the program saved SEC investigators substantial time and resources, it has also incentivized corporations to strengthen internal reporting processes and encouraged the development of strong internal compliance cultures. The costs associated with these changes are minimal compared to the costs associated with being caught for engaging in fraud. In the long term, it appears as though the impact of the Whistleblower Program will, in fact, be beneficial for corporations and their shareholders.
In keeping up with the new Whistleblower Program, and increased administrative and court actions, Robbins Geller Rudman & Dowd LLP has expanded its whistleblower practice to include several former federal prosecutors. The firm has added attorneys Jonah H. Goldstein, James E. Barz, Jason A. Forge and Robert K. Lu, just to name a few. These attorneys have decades of experience dealing with confidential witnesses and sensitive investigations and are dedicated to protecting shareholders and holding large corporations accountable.
1 See U.S. Securities and Exchange Commission Annual Report on the Dodd-Frank Whistleblower Program Fiscal Year 2011 (Nov. 2011), available at: http://sec.gov/about/offices/owb/whistleblower-annual-report-2011.pdf.
3 See Robert S. Khuzami, Speech by SEC Staff: Remarks at Open Meeting – Whistleblower Program (May 25, 2011), available at: http://www.sec.gov/news/speech/2011/spch052511rk.htm.
4 See Obiamaka P. Madubuko and Rick Firestone, New SEC Whistleblower Program and Added Disclosure Rules in Dodd-Frank Act: Will These New Regulations Help or Hinder FCPA Compliance Efforts? Bloomberg Law Reports, available at: http://www.mwe.com/info/pubs/firestone_madubuko_dodd-frank.pdf.
6 See Brendan Sheehan, SEC Whistleblower Rules Cause Alarm, Business Insider (June 2, 2011), available at: http://articles.businessinsider.com/2011-06-02/wall_street/30081374_1_sec-chairman-mary-schapiro-troy-paredes-new-rules.