June 30, 2011

The SEC Adopts Final Whistleblower Rules Under Dodd-Frank Act

By Aneezal H. Mohamed

On May 25, 2011, the SEC adopted rules creating significant financial incentives and protection from retaliation for whistleblowers in compliance with the Dodd-Frank Act. Under the final rules, the SEC will reward whistleblowers who provide the SEC with original information about securities law violations leading to SEC enforcement actions resulting in monetary sanctions exceeding $1 million. Whistleblowers can be eligible for rewards ranging from 10% to 30% of the total monetary sanctions collected. Under prior rules, the SEC had been generally limited to rewards for insider trading cases and rewards were capped at 10%.

The final rules also protect a whistleblower from employment retaliation if the whistleblower has a reasonable belief that the information he or she provides relates to a possible securities law violation. In addition, the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the SEC, including threatening to enforce a confidentiality agreement.

The final rules provide a methodology for the SEC to determine awards to whistleblowers with certain factors weighing in favor of an increased reward and certain other factors weighing in favor of a reduced reward. One of the most controversial aspects of the final rules relates to whether whistleblowers should first report possible violations through a company’s internal compliance program before reporting it to the SEC. Many investor advocacy groups, companies and professional organizations had suggested that whistleblowers should be required to report possible violations to the company first so that the company has an opportunity to investigate and address possible violations before whistleblowers report violations to the SEC, but the SEC chose not to mandate internal reporting first. However, the new rules provide certain incentives for whistleblowers to utilize the company’s internal compliance programs when appropriate to do so, including the following:

• A whistleblower’s voluntary participation in a company’s internal compliance program is a factor that can increase the amount of an award, and a whistleblower’s interference with a company’s internal compliance program is a factor that can decrease the amount of an award.
• A whistleblower who reports original information to the company’s internal compliance program will get credit even when the company informs the SEC about the violations.
• Treat an employee as a whistleblower as of the date the employee reports the information internally, as long as the employee or the company reports the information to the SEC within 120 days of the initial internal report.

Notwithstanding the potential benefits under the new rules for whistleblowers to circumvent a company’s well-established internal compliance program, it is imperative for a company to maintain a robust internal compliance program. A company’s internal compliance program will continue to be an integral part of good corporate governance, and it is essential for companies to effectively monitor and deter corporate misconduct that can have significant consequences to the company and its shareholders. To create greater incentives for employees to first report through the company’s internal compliance program before reporting to the SEC, the company should take this opportunity to review its internal compliance program to determine whether it comports with industry best practices and make any necessary modifications.