This morning, the SEC adopted a final set of rules implementing its Whistleblower Incentives and Protection program. The implications of the rulemaking – among the most eagerly anticipated of any rules promulgated under the Dodd-Frank Act – are significant. A comprehensive analysis of the final rules is in McGuireWoods’ white paper, The Rules for Whistleblowers: Significant Aspects of the SEC’s Whistleblower Incentives and Protection Program. Below, we address several important aspects of the newly adopted rules.
Rules Do Not Require Internal Reporting
The adopted whistleblower scheme does not make internal reporting a prerequisite to eligibility for a whistleblower bounty. Though this will surely be perceived by some as a shortcoming, Chairwoman Schapiro and Robert Khuzami, Director of the SEC’s Division of Enforcement, insist the final rules will “encourage strong [corporate] compliance culture” without imposing a mandatory internal reporting component. Mr. Khuzami does not believe an internal reporting requirement serves any purpose in “boiler rooms,” “pump-and-dump,” or Ponzi schemes. There is no efficacy, he says, in reporting a potential violation to the alleged perpetrator.
Whistleblowers Benefit from Internal Reporting where Companies Self-report
Under the final rules, whistleblowers may be eligible for a bounty payment based on their internal reporting alone in situations where a company self-reports violations of the federal securities laws to the Commission. In determining the amount of any bounty payment in such cases, the Commission will consider all the information a company provides to the SEC – not just the information the whistleblower provided internally. This marks an “unprecedented” approach Khuzami characterized as a “powerful new incentive” for whistleblowers that will “encourage companies to implement robust compliance programs.”
Whistleblowers may Aggregate Recoveries to Satisfy the $1 million Threshold
To qualify for a bounty, the Commission must recover more than $1 million in a judicial or administrative enforcement action. The final rules do away with the proposed rules’ single action requirement, allowing the aggregation of multiple cases that rely on a common nucleus of facts to reach the $1 million threshold.
Whistleblower Protection Not Predicated on Successful Enforcement Action
Whistleblowers are protected from retaliation and certain other negative consequences of blowing the whistle irrespective of whether their complaint revealed an actual violation or led to a successful enforcement action. To be protected under the final rule, a whistleblower need only report a possible violation that he or she reasonably believes occurred.
Handling a “Flood” of Tips by Reporting back to Companies
Mr. Khuzami insisted that the Enforcement Staff will not undertake to investigate every viable tip they identify. In appropriate circumstances, the Staff will communicate the alleged violation to the accused corporation so it can commence a formal internal investigation. The Division of Enforcement will closely monitor corporations so notified.
For regulated entities, the key takeaways are clear: Develop, improve, and advertise internally your compliance and reporting policies and procedures. The program will reward – handsomely – whistleblowers who report internally before tipping the Commission. This may be just the right incentive for employees to take your internal reporting program seriously.