The Securities and Exchange Commission’s new whistleblower rules became effective on Aug. 12, 2011. With the new rules, the SEC launched a new webpage for people to report violations of the federal securities laws and apply for a financial reward (www. sec.gov/whistleblower). Individuals who report potential violations to the SEC may be entitled to a payment of between 10 percent and 30 percent for any monetary recovery exceeding $1 million. The webpage also includes a list of over 100 cases from July 21, 2010 (the effective date of the Dodd-Frank Wall Street Reform and Consumer Protection) to Aug. 12, 2011 in which the SEC obtained monetary penalties over $1 million. This list provides notice of covered actions and starts the 90-day period in which individuals can submit claims for awards relating to those cases.
Basics of the SEC Whistleblower Rules
The SEC will pay whistleblower awards where:
- One or more whistleblowers voluntarily provide original information relating to securities law violations; and
- The information leads to an SEC enforcement action resulting in monetary penalties of $1 million or more
A whistleblower is defined as an individual who provides the SEC with information relating to violations of federal securities laws. The information must be original, meaning that the information is derived from the independent knowledge or analysis of the whistleblower and is not already known to the Commission from another source. It is important to note that the whistleblower does not have to be an employee of the target entity. The individual (only natural persons can be whistleblowers) could be a competitor, an academic or any one else with independent knowledge of original information. In light of the heightened enforcement activity for violations of the Foreign Corrupt Practices Act over the last several years, and the substantial amount of monetary sanctions, this area may be the source of significant whistleblower awards going forward.
The rules generally exclude company officers, directors, trustees or partners, where those individuals obtain information in connection with the company’s own processes for identifying and addressing possible violations of law. Lawyers are generally excluded when information is obtained through communications that were subject to the attorney-client privilege unless the lawyer would otherwise be permitted to disclose the information pursuant to state attorney conduct rules or the “reporting up” SEC rules. Persons associated with public accounting firms may not use information obtained in performing the engagement required of an independent public accountant under the securities laws when the information relates to a violation by the engagement client, however, the rules do permit accounting personnel to quality as whistleblowers in connection with violations by their own independent accounting firms and they may be eligible for awards based on monetary sanctions assessed against the audit client that grow out of the investigation of their own public accounting firm.
SEC’s Office of the Whistleblower
The Office of the Whistleblower was established to administer the SEC’s whistleblower program. The website provides links to the new Form TCR (Tips, Complaints and Referrals Questionnaire) and includes a video introduction by Sean McKessy, Chief of the Office of the Whistleblower, that explains the website content and encourages whistleblowers to not delay in reporting possible securities law violations.
Whistleblowers may provide information anonymously, however, anonymous whistleblowers must be represented by counsel. When submitting an anonymous whistleblower report, the whistleblower must provide the attorney with the completed Form TCR (signed under penalty of perjury) and the attorney must certify that he or she has verified the whistleblower’s identity, has reviewed the Form TCR and has obtained the whistleblower’s consent to provide the SEC with the original signed Form TCR in the event the SEC requests the form because of concerns that false or fraudulent statements were willfully made. Obviously, the identity of the whistleblower will become public if there is any award to be made.
The SEC has stated that it has seen an increase in the quality of tips it is receiving. With the prospect of significant payments, contingent fee lawyers have increasingly focused on this area – see, for example, www.secsnitch.com.
The whistleblower rules also significantly expand retaliation protections and remedies. Whether or not the information provided turns out to pertain to an actual violation of law, and even if the whistleblower does not qualify for an award, the anti-retaliation protections apply. The anti-retaliation provisions extend the statute of limitations for retaliation claims from 90 days to six years, allow whistleblowers to bring claims directly in federal court, exempt whistleblower claims from arbitration agreements, clarify that whistleblower claims can be tried before a jury and provide that reinstatement, attorneys’ fees and double-back pay may be granted.
What Should Public Companies Do
There is widespread concern that these new whistleblower rules will undercut company compliance programs. The SEC, in reacting to the concerns, added incentives in the final rules to encourage employees to first report internally. If an employee reports internally he or she has 120 days after reporting to report to the SEC, and, if the company conducts an internal investigation, the employee will get the benefit of any information uncovered in the internal investigation when the SEC evaluates the amount of an award. Also, the whistleblower’s place in line at the SEC will date from the time the whistleblower first reported internally. These provisions of the whistleblower rules all point up the importance of publicizing to employees the company’s compliance program and the company’s commitment to ethical conduct. If employees know about the company’s internal compliance program and believe in the company’s commitment to ethical behavior, then it is more likely that employees will first report internally.
While it is too early to know whether the whistleblower rules will undercut internal compliance programs, it is important to remember that there are still strong business reasons for companies to continue to actively encourage internal reporting of suspected compliance violations while assuring all employees that no retaliation will take place for raising compliance concerns in good faith. Companies also have an incentive for examining all reported potential compliance problems and taking reasonable corrective action and, when appropriate, reporting the matter to regulators. It is not unreasonable to expect the volume of whistleblower complaints to the SEC to increase dramatically. With an increase in the number of complaints, it is also not unreasonable to expect the SEC in many circumstances to contact a company identified in a whistleblower complaint and ask the company to initiate an investigation.
Steps Companies Should Take
Criticism of the whistleblower regulations has focused on the concern that the appeal of large monetary rewards will undermine the culture of compliance and negatively affect the effectiveness of company compliance programs. Nonetheless, the new rules are now in effect. Companies should consider following the steps outlined below to be as prepared as possible for whistleblower complaints and requests to conduct investigations from the SEC.
- Make sure the culture of compliance is actively communicated to the entire organization. The “tone at the top” has never been more important.
- Clearly establish internal reporting procedures and make assurances to employees of protection from retaliation on a regular basis.
- Review company “hotlines” and other reporting procedures to make sure employees are aware of how to use these avenues for reporting potential problems.
- Form an investigative team so that you can respond quickly to a whistleblower complaint and/or a request by the SEC to conduct an investigation.
- Communicate with whistleblowers promptly. Acknowledge receipt of the complaint, communicate regularly with the whistleblower regarding the progress of the investigation and inform the whistleblower of the conclusion of the investigation.
- Keep records of all complaints and, where appropriate, prepare a final report of an investigation, including a record of any corrective actions taken.