New Whistleblower Rules Effective August 12

The SEC’s new whistleblower program, which provides monetary incentive for employees to report possible corporate financial wrongdoing, is scheduled to go into effect on August 12. Specifically, individuals whose tips result in successful enforcement actions with sanctions exceeding $1 million are eligible for a reward of between 10% and 30% of the total fine or penalty paid by their employer. The new program, with its 305 pages of guidelines and rules, was mandated under the Dodd-Frank Act; previously this type of bounty system was limited to insider trading cases.

The program was narrowly approved by the SEC in a 3-to-2 vote back in May and is not without controversy. Opponents contend that that the SEC will be inundated with worthless tips from disgruntled employees speculating on a large payday, and that the whistleblower program undermines the current internal procedures established by corporations as required by the 2002 Sarbanes-Oxley Act. According to SEC Commissioner Kathleen Casey, the new program “significantly underestimates the negative impact on internal compliance programs and significantly overestimates our capacity to effectively triage and manage whistleblower complaints.”

However, SEC Chairman Mary Shapiro stated that while the new rules make it clear that whistleblowers play a critical role in the protection of shareholders, the program is designed to complement, not circumvent, existing internal compliance regimes. To continue to promote internal reporting, the SEC’s new program allows a whistleblower to receive a reward if he initially reports wrongdoing to his company, and the company in turn reports it to the SEC. It is important to note compliance and internal audit personnel are excluded from these new reward rules, as are those with a pre-existing legal or contractual duty to report information to the SEC.

Advisors on corporate compliance are counseling clients to review their internal compliance and response processes, and to prepare for more inquiries from the SEC. One former SEC attorney said, “From a company’s standpoint, to get the information first so you can act on it and get credit, you need to send a loud and clear message to your employees that retaliation for whistleblowing will not be tolerated.” Both Sarbanes-Oxley and Dodd-Frank include provisions to protect tipsters from retaliation by their employers.

While this new rule has no direct impact on the practice of investor relations, there may be sensitive disclosures to be made. At LHA we are experts in managing the flow of information to provide investors and analysts with what they need, while best positioning the company’s investment merits. We welcome the opportunity to discuss our services.