Last Friday, August 12th, the U.S. Securities and Exchange Commission’s Whistleblower Incentives and Protection program became effective. But a recent U.S. Court of Appeals decision may provide ammunition for opponents of the program.
As discussed at length in our white paper, the recently adopted SEC whistleblower program rewards whistleblowers who voluntarily submit to the SEC original information that leads to a successful enforcement action by the SEC in which the SEC obtains monetary sanctions totaling more than $1 million. Qualifying whistleblowers are entitled to a bounty of 10-30% of the sanctions recovered.
Whistleblowers who submitted tips or complaints prior to the program’s effective date may be eligible to recover a bounty in certain circumstances. And the SEC has acknowledged on several occasions that it has already experienced an appreciable uptick in whistleblower complaints. Thus, as a practical matter, last Friday’s “effective date” does not sound the starting gun for the whistleblower program. Last Friday does, however, signal the official launch of the SEC’s new Office of the Whistleblower and its webpage, which includes a link to the SEC’s online tips, complaints and referrals portal.
The SEC’s whistleblower program is enormously unpopular with many in corporate America, who insist the program will significantly undermine internal reporting and compliance programs. Detractors’ chief complaint is that the rules fail to make internal reporting a prerequisite for eligibility for a whistleblower award. Despite reams of scathing commentary, however, the final rules implementing the whistleblower program narrowly passed a Commission vote in May.
Following the vote, opponents of the program began weighing possible legal remedies, and quite a few commenters expected adverse businesses or advocacy groups to challenge the rules in federal court. No lawsuits were filed, however, before the rules went effective last Friday.
But the whistleblower rules may not be out of the woods yet. As reported in the Washington Post, a recent U.S. Court of Appeals decision “could spell trouble for the Securities and Exchange Commission.” In Business Roundtable v. SEC , the Court of Appeals for the District of Columbia vacated proxy access rules recently promulgated by the SEC. The Court found that “the Commission acted arbitrarily and capriciously for having failed … adequately to assess the economic effects of [the] new rule.”
This ruling may catch the eye of opponents of the new whistleblower program. The Commission’s recently enacted proxy rules, which fell short in the Court of Appeals’ estimation, dedicated some 80 pages to an economic analysis of the rules. Meanwhile, the notes accompanying the final rules implementing the whistleblower program devote far less attention – only 35 pages – to the costs and benefits of the rule. This may indicate that the whistleblower rules have less of an economic impact than the proxy rules, but critics of the rules may wish to test that theory.
Still, the Commission appears to be committed to getting the whistleblower program right. And it will certainly try to do so without recourse to the courts system. Consider the following remarks of Commissioner Walter – an open advocate of the whistleblower rules – in a statement she made the day the Commission adopted the rules: “I would like to emphasize, however, that I do not believe that our action here today means that our work is done in this area. In fact, it is more of a beginning. The Commission and its staff must remain open to improving the whistleblower program as we implement it, and I strongly encourage feedback from all involved…”
According to Reuters, Sean McKessy, Chief of the Whistleblower Office, recently echoed Commissioner Walter’s sentiment, insisting, “If our program is not doing what it’s intended to do, then we’ll look at it and figure out ways to fix it.”
In light of recent events, the future of the Whistleblower Office and, indeed, the whistleblower rules is uncertain. Corporate America will undoubtedly push the Commission to continually evaluate the program and to make good on its promise to improve it as needed. Whether anyone will launch a formal challenge remains to be seen.