Originally published October 26, 2010
Keywords: SEC, whistleblower, Dodd-Frank, corporate compliance, SOX,
The Dodd-Frank Act's new whistleblower provision—which entices would-be whistleblowers who provide "original information" leading to a recovery of $1 million or more in any resulting enforcement action with up to 30 percent of the total amount collected—has become a cause for concern for the architects of corporate compliance programs. This "whistleblower bounty program"—tucked away in Section 922 of the Dodd-Frank Act—gives employees a strong incentive to bypass internal corporate compliance processes in favor of contacting the SEC directly when they are cognizant of infractions and misconduct, prompting some commentators to question whether the Dodd-Frank whistleblower program is at odds with the Sarbanes-Oxley (SOX) objectives of strengthening internal corporate compliance programs.
US Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro responded to these concerns at a recent conference in Washington, DC, organized by the National Association of Corporate Directors. "It is not our desire in any way, shape, or form to undermine the processes that great public companies have built in to ensure that they handle whistleblowers appropriately," Chairwoman Schapiro told the audience. "We don't want to undermine what we view as a critically important component of regulation, and that is the corporate effort to ensure that whistleblowers are heard and their information is acted upon reasonably, and problems are fixed very early on."
The tension between Dodd-Frank's whistleblower program and the SOX objective of strengthening corporate compliance programs presents myriad thorny questions that the SEC will have to address in its rulemaking to implement the program. For instance, if a whistleblower reports a suspected violation to the company, and the company self-reports, does the tipster still get the reward? What if the company concludes that the tip is unfounded and that there has been no violation? Can the tipster nevertheless pursue the complaint with the SEC? Are there affirmative obligations on corporations to notify the SEC of whistleblower complaints? Must corporations disclose all investigations of whistleblower complaints lodged with the SEC? And what impact does whistleblower reporting have on the credit available to corporations which cooperate with SEC (and other federal law enforcement) investigations?
The SEC is required to adopt regulations implementing the whistleblower program no later than April 21, 2011 (nine months from enactment). Because the new statutory provisions apply to any original information provided to the Commission on or after July 22, 2010, however, the SEC has announced that implementing rules will be proposed and adopted earlier than this nine-month mark; according to Chairwoman Schapiro, a proposal regarding operation of the whistleblower provisions will be forthcoming in the "next couple of months." The SEC is currently soliciting comments on how the whistleblower bounty program can most effectively co-exist with corporate compliance processes, and this is an excellent opportunity to influence rulemaking in this critical field. Comments may be submitted via the SEC's online form or via email.
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