As required by the Dodd-Frank Wall Street Reform and Protection Act, in May 2011, the SEC adopted regulations governing monetary awards to employees who report securities law violations to the SEC. One of the more controversial aspects of the fi nal regulations adopted by the SEC is that an employee is not required to report an alleged violation internally, but may bypass the company’s whistleblower hotline completely and report directly to the SEC.
As a result, companies are faced with the risk of being blindsided by a SEC request for information or an investigation of which the company has had no prior notice or opportunity to review. To encourage your employees to report to you fi rst before reporting to the SEC, consider taking the following actions:
Let your employees know you have a whistleblower program. Make sure your employees know that you have a whistleblower hotline and how it works through training sessions, emails, internal memos, posters and the employee handbook. Consider having employees sign periodic acknowledgements that they are aware of the program and how it works.
Adopt an effective anti-retaliation policy and mean it. The Dodd-Frank Act prohibits retaliation against whistleblowers and provides a cause of action with double back pay, among other damages. Companies should adopt an effective anti-retaliation program, train managers in its implementation and educate employees as to its existence and meaning.
Consider requiring periodic and exit certifications from employees. Have your employees periodically sign certifi cations as to their knowledge of unethical or unlawful conduct at the company. This may prompt them to disclose matters internally before going to the SEC and could also be used later to rebut an employee’s complaint to the SEC if their internal certifi cation reported no violations.
Explain potential benefi ts from internal reporting. The SEC’s fi nal regulations do provide some incentives for employees to make use of a company’s internal whistleblowing program. Internal reporting is a factor considered by the SEC in increasing the percentage of the award. Also, under the SEC rules, if an employee reports to the company fi rst, all information reported by the company to the SEC as a result of its investigation will be credited to the employee, with the result that the employee will potentially receive a greater award. Finally, the employee will be treated as if he or she fi rst reported the information to the SEC as of the time of the report to the company if the employee reports it to the SEC within 120 days of the internal report.
Let employees report anonymously. Con sider allowing employees to report anonymously so that the fear of retaliation is eased. Anonymous reporting could be done through the use of an outside reporting service, with complaints investigated by independent counsel. Another method would be to allow employees to report anonymously through an attorney retained by them, with the company paying reasonable attorney fees if the information is legitimate.
Provide for independent administration of the program. Place the whistleblower program under the supervision of the Audit Committee or another group of independent directors, with complaints investigated by independent counsel or another independent party, such as an outsourced internal audit provider with no ties to the company. Reports should be sent directly to the independent directors.
Incentivize employees to report internally. Consider the use of meaningful cash rewards and bonuses to employees who report violations internally. The amount of the bonus could be based upon the amount recovered or saved by the company. Internal whistleblowing by an employee of legitimate concerns could also be considered as a factor in promotions and raises.
Keep the whistleblower in the loop. Let the whistleblower know that you take their allegations seriously. Periodically, inform the whistleblower as to the status of the investigation and any actions taken.
Communicate the results of the internal whistleblower program. Let your employees know the results of your whistleblower program on a periodic basis, including claims investigated and actions taken as well as any employee awards made by the company.
Adopt an ethical, law abiding “tone at the top.” The best way to avoid having whistleblowers report to the SEC is to not have any violations to report. Management should emphasize and support the company’s commitment to compliance with law and good corporate governance. Illegal or unethical behavior at any level should not be tolerated.