Fears about SEC whistle-blower proposal unfounded
Companies are always grumbling about some rule or regulation.
Companies are always grumbling about some rule or regulation. The latest source of complaints is the Securities and Exchange Commission’s proposed whistle-blower reward program, which aims to improve detection of securities law violations. Despite the grousing, the proposal seems reasonable. It should improve compliance with securities laws and improve investor protections.
The SEC’s proposed program would award to corporate whistle-blowers part of any sanction in excess of $1 million that resulted from the whistle-blower’s information. The SEC was directed to establish such a program under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Corporations claim to be worried that the new program would encourage employees to run to the SEC with information about securities law violations about which top management possibly were unaware, rather than first reporting the information to corporate management so corrective action could be taken.
Such concerns are disingenuous. The SEC proposal specifically would encourage whistle-blowers to report the information to corporate management first, giving the company time to take action to correct the behavior and report it to the SEC.
Under the proposed rule, the whistle-blower would be eligible for a reward as of the date he or she reported the information to corporate management, and as long as he or she reported it to the SEC within 90 days.
In addition, the proposal would allow the SEC to consider higher- percentage awards for whistle-blowers who first reported their information through company compliance programs.
These provisions should encourage employees to report the information internally while remaining confident they are preserving their “place in line” for a possible reward.
The SEC proposal has several other restrictions that should address corporate concerns. First, the whistle-blower would have to report the information voluntarily — that is, before some government agency asked for it.
In addition, the whistle-blower would have to provide original information, based on his or her independent knowledge or analysis.
Further, the proposal has limits on eligibility for a whistle-blower award. People who had pre-existing legal or contractual duties to report information of wrongdoing — officers, directors, consultants and others — who learned of possible violations as part of their corporate responsibilities to address such issues would not be entitled to an award.
Similarly, people who learned about violations through a company’s internal compliance program would not receive rewards. Nor would those responsible for taking action on reported information.
The SEC explained that this provision is designed to prevent employees from “front-running” legitimate internal investigations.
However, this provision would not apply if the company did not disclose the information to the SEC in a reasonable time or acted in bad faith by conducting a sham investigation.
Likewise, attorneys who learned information obtained from client engagements could not make whistle-blower claims for themselves, except in limited circumstances. Independent CPAs who obtained information through an engagement required under the securities laws also could not make whistle-blower claims.
The SEC’s proposal seeks not just to improve discovery of breaches of securities law but also to encourage companies to strengthen internal compliance structures and procedures to spot violations before they can significantly harm investors, and to take appropriate action to correct and report violations when detected.
The proposal seems reasonable and designed well to achieve those goals. The result should be better investor protection.
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