by James Hyatt
The Securities and Exchange Commission adopted rules paying cash awards to whistleblowers whose information leads to successful enforcement of federal securities laws.
SEC Chairman Mary Schapiro said that while the Sarbanes-Oxley Act has helped protect whistleblowers and improve internal reporting systems at public companies, “too many people remain silent in the face of fraud. Today’s rules are intended to break the silence of those who see a wrong.”
She added: “Already the whistleblower provision of the Dodd-Frank Act is having an impact. 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 the law was adopted, “and we expect this trend to continue.”
The SEC’s original proposal had drawn heated comment from the business community. Many comments insisted the rules would weaken internal compliance procedures by not requiring whistleblowers first to report information internally.
Anticipating the SEC’s latest decision, House Republicans recently proposed legislation that would require whistleblowers to use internal compliance procedures before approaching federal regulators.
The latest rule-making signals that “the SEC has chosen to put trial lawyer profits ahead of effective compliance and corporate governance,” declared an official of the U.S. Chamber of Commerce. “The company is in the best position to immediately investigate and mitigate any violations, not the SEC who will be inundated with thousands of tips it won’t be able to handle.”
SEC Commissioner Troy A. Paredes, one of two Republicans who voted against the final rulemaking, said the Commission “missed its opportunity” to create a program that generates high-quality tips, doesn’t encourage “frivolous, spurious, or unduly speculative tips,” and doesn’t “thwart internal compliance programs.”
He said the program may inundate the SEC with tips, some of low quality,, that will “risk diverting SEC resources” from more important priorities.
The Commission’s fact sheet and a link to the final rules is here.
The rules permit an award of 10% to 30% of federal monetary sanctions of more than $1 million. In determining the amount, the SEC will take into account the significance of the information, assistance provided by the whistleblower, law enforcement interest in making an award, and participation by the whistleblower in internal compliance systems. And awards may be reduced if there is evidence that “the whistleblower intentionally interfered with his or her company’s internal compliance systems.”
People who won’t be eligible for whistleblower awards include attorneys who attempt to use information from clients for themselves; foreign government officials; those who obtained the information illegally; officers or directors of an entity who learned of the information from another person; compliance and internal personnel and public accountants working on SEC engagements.
The final regulations, which will be effective in about 60 days, include a form for whistleblowers to fill out.