SEC Issues Rules Favorable to Whistleblowers

The Securities and Exchange Commission is receiving praise from whistleblower advocates for issuing finalized rules that do not require whistleblowers to report fraudulent or illegal activity internally to their employer, but instead allow whistleblowers to blow the whistle direct to the SEC. The Dodd-Frank Act established a new whistleblower program at the SEC, requiring the SEC to reward whistleblower who provides original information with between 10% and 30% of the amount recovered by the SEC. Allowing employees to report information directly to the SEC does not diminish the strong incentive for employees to blow the whistle internally, because employees can still get a reward so long as the employee provides the same information to the SEC within 120 days.

Internal compliance programs failed miserably to avert the financial crisis. Where fraud is pervasive in upper management, it would be futile for an employee to blow the whistle internally and it would be in the best interest of shareholders for the whistleblower to disclose fraud directly to the SEC. But where companies have implemented effective programs that are not merely a tool of management to cover up violations, then employees will use those programs. Unfortunately, far too many find their company’s internal compliance program is deficient and in some cases a tool for management to retaliate against whistleblowers.

The new reward program is already beginning to bear fruit. Similar whistleblower rewards under the False Claims Act where extremely effective at inducing employees t report fraud to the government, leading to the recovery of over 27 billion dollars.

Tagged: Dodd-Frank Act, Enforcement Bodies, P.C., Securities and Exchange Commission (SEC), The Employment Law Group, P.C., Whistleblower Laws (Federal), Whistleblower Protection Act (WPA)