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The SEC has adopted final whistleblower rules under Section 922 of the Dodd-Frank Act.  A controversial issue with respect to the proposed rules  was the impact of the whistleblower program on companies’ internal compliance processes.   The final rules do not to include a requirement that whistleblowers report violations internally, but the SEC has made additional changes to the rules that it believes further incentivize whistleblowers to utilize their companies’ internal compliance and reporting systems when appropriate.

  • With respect to the criteria for determining the amount of an award, the final rules expressly provide: first, that a whistleblower’s voluntary participation in an entity’s internal compliance and reporting systems is a factor that can increase the amount of an award; and, second, that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.
  • The final rules contain a provision under which a whistleblower can receive an award for reporting original information to an entity’s internal compliance and reporting systems, if the entity reports information to the SEC that leads to a successful SEC action. Under this provision, all the information provided by the entity to the SEC will be attributed to the whistleblower, which means that the whistleblower will get credit — and potentially a greater award — for any additional information generated by the entity in its investigation.
  • The final rule extends the time for a whistleblower to report to the SEC after first reporting internally and still be treated as if he or she had reported to the SEC at the earlier reporting date. The SEC proposed a “lookback period” of 90 days after the whistleblower’s internal report, but in response to comments, the SEC extended this period to 120 days in the final rules.

The SEC did not require whistleblowers to first report internally for several reasons.  First, the SEC believes that there are a significant number of whistleblowers who would respond to the financial incentive offered by the whistleblower program by reporting only to the SEC, but who would not come forward either to the SEC or to the entity if the financial incentive were coupled with a mandatory internal reporting requirement.

Second, the SEC believes its approach should encourage companies to continue to strengthen their internal compliance programs in an effort to promote internal reporting. Potential whistleblowers are more likely to respond to the rules financial incentive by reporting internally when they believe that the company or entity has a good internal compliance program – i.e., a compliance program that will take their information seriously and not retaliate.  The SEC anticipates that companies will recognize this, take steps to promote a corporate environment where employees understand that internal reporting can have a constructive result, and that the net effect of this will be enhanced corporate compliance with the federal securities laws.

Third, while internal compliance programs are valuable, the SEC believes they are not substitutes for strong law enforcement. In some cases, law enforcement interests will be better served if we know of potential fraud before the entities or individuals involved learn of our investigation. This is particularly true when there is a risk that an entity or individual may try to hinder or impede our investigation by, for example, destroying documents or tampering with witnesses.

Check frequently for updates on the Dodd-Frank Act and other important securities law matters.

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