Visitors to the Securities and Exchange Commission home page will now see a whistle icon in the upper right-hand corner. All it takes to report a complaint is to click on it and fill out a questionnaire.
With such an easy way for whistleblowers to bring their concerns to the SEC and the potential for them to cash in on the tips they provide, companies are concerned that tipsters will not report their concerns internally, leaving companies open to the prospect of discovering a problem only when the agency comes knocking with an inquiry. “The SEC has made it very easy to submit a complaint, with its online, question-driven portal,” says Robert Wild, partner with the law firm of Katten Muchin Rosenman.
For compliance officers, that's a nightmare scenario for a few reasons: First, it doesn't give the company a chance to investigate the claims on its own and fix any problems before they grow bigger; second, it puts them in a position of having to demonstrate to the SEC why a claim may not have merit; and third, the SEC may ask companies to conduct investigations and report back on a flood of whistleblower claims, putting a massive burden on compliance and legal departments.
The whistleblower provisions of the Dodd-Frank Act, which were adopted in May and go into effect on August 12, allow for the SEC to pay an award to an individual who voluntarily provides original information about a securities-law violation that leads to a penalty exceeding $1 million. The award itself can range from 10 to 30 percent of the penalty.
Undermining Compliance?
The whistleblower provisions have prompted several concerns among corporate compliance officers and other executives. For starters, some worry that providing a reward to those who go to the SEC will undermine internal compliance programs. “Any time you create incentives to go outside the normal complaint process, that's an issue. It may mean that some issues are not raised internally and the employer won't be able to address them,” says Dennis Duffy, a partner and chair of the labor and employment group at law firm Baker Botts.
What's more, whistleblowers can remain anonymous, having a lawyer represent them in any proceedings, says Wild. Any lawyer who gets involved likely “will be aggressive in trying to get the SEC to proceed on enforcement action, as the attorney will often be paid a portion of the award,” he says.
For these reasons, companies pushed hard for the SEC to include language in the final whistleblower rules to encourage employees to report concerns internally first. The SEC did address the issue, although some corporate lawyers say it does not go far enough. “A whistleblower's voluntary participation in an entity's internal compliance and reporting system is a factor that can increase the amount of an award,” according to the SEC. The SEC also states that any award may be decreased if a whistleblower interferes with the internal compliance and reporting process.
Some companies are considering offering their own financial rewards in response to the new whistleblower rules, to entice tipsters to report internally first. Tread carefully around that idea, lawyers say; Rule 21F-17a provides that no person should act to impede a whistleblower from communicating directly with the SEC, Wild notes.
What About Compliance Officers?
Another concern about the whistleblower provisions centers around employees such as auditors and compliance officers, whose jobs include reporting potential violations of securities laws. Could these individuals be eligible for an award simply for doing their jobs?
“The SEC has made it very easy to submit a complaint, with its online, question-driven portal.”
—Robert Wild,
Partner,
Katten Muchin Rosenman
Not really, experts say; employees whose job responsibilities include monitoring and bringing forth incidents of wrongdoing are generally exempted from whistleblower eligibility, Duffy says. That would include officers, directors, trustees, or partners in an organization, as well as employees responsible for compliance. “They can't use their position to front-run the process,” Duffy says. Also included in this category are outsiders hired to perform compliance or audit work, as well as individuals retained to conduct investigations into potential violations.
Non-officer supervisors, however, are still eligible for a whistleblower bounty. “We agree with those commenters who stated that including all supervisors at any level would create too sweeping an exclusion of persons who may be in a key position to learn about misconduct,” the SEC rule states.
Reports have already surfaced of some companies changing employees' job titles to leave them ineligible for rewards. The SEC, however, states that the exemption applies only to employees or others whose jobs clearly and logically include responsibility for whistleblowing or investigations. Employers can't simply have all employees sign a statement saying that they're responsible for whistleblowing just to keep them from qualifying for a bounty. “Trying to elevate everyone to a compliance position; I don't think that will hold up,” Wild says. (But a company may want to ask those individuals who legitimately are part of the exempted categories to sign a statement indicating this, just to provide clarity, Duffy adds.)
SELF-REPORTING RULES
The Securities and Exchange Commission has published some information on how to report fraud under its new whistleblower rules. See below:
Adoption of Final Rules
On May 25, 2011, the Commission adopted Final Rules to implement the Dodd-Frank whistleblower program. These rules—which will be effective sixty (60) days after the later of the date they are (i) published in the Federal Register or (ii) provided to Congress—explain the procedures you will need to follow to be eligible and to file a claim for an award. When the Final Rules become effective, individuals wishing to be considered for an award under the Whistleblower Program will be required to complete and submit the newly-approved Form-TCR or fill out our online TCR questionnaire, which will be accessible on this website when the Final Rules are effective.
Submitting Your Tip, Complaint or Referral
Until the Final Rules are effective, submitting your information to us in writing will satisfy the statutory requirement and preserve your right to be considered for a whistleblower award. You are encouraged to submit your information in writing online by filling out the current questionnaire in our Tips, Complaints, and Referrals Portal.
Alternatively, you may submit your information in writing:
•by mail to the Office of the Whistleblower at 100 F Street, NE, Washington, D.C. 20549, or
•by fax to (703) 813-9322.
Anonymous Reporting
You may always submit your information anonymously. However, if you'd like to be considered for an award under the whistleblower program while remaining anonymous, the Act requires that you submit your information through an attorney.
The Final Rules impose requirements on those that anonymously submit information in writing from July 21, 2010 (when Dodd-Frank was passed) until the date that the Final Rules are effective. Specifically, if you submit the information anonymously during this period, you will be required to provide your attorney with a completed and signed copy of the new Form TCR within 60 days of the effective date of the Final Rules.
Anti-retaliation Protection
The Act expressly prohibits retaliation by employers against individuals who become whistleblowers under SEC rules, even if they do not recover a whistleblower award, and provides them with a private cause of action in the event that they are discharged or discriminated against by their employers in violation of the Act. You can review the Dodd-Frank anti-retaliation provisions. In addition, OSHA's Office of the Whistleblower Protection Program continues to administer the whistleblower protection provisions under the Sarbanes Oxley Act of 2002.
What the Future Holds
This site will be updated on the date the Final Rules are effective to provide a link to the new Form TCR and frequently asked questions about what the Final Rules require with regard to submitting information to us, to submitting a claim for an award under the program and the procedures and considerations in connection with assessing award claims.
Source: SEC Page on Whistleblower Program.
At the same time, even the exceptions contain exceptions. Among them: If 120 days have passed since an exempted individual has filed a complaint, and no action has been taken, he or she may now be eligible for the award. “The SEC expectation is that within 120 days, companies should have been able to investigate the complaint, at least on a preliminary basis,” Wild says.
The new rules increase the importance of monitoring activities. The only way a company can preclude an individual from getting an award is to self-disclose potential violations of securities law immediately, so the individual doesn't have original information, Wild says. That, he says, is what the program is all about: “The SEC is clearly pushing companies to self-report.”
Of course, the optimal outcome is to avoid potential violations in the first place. That starts with the “tone at the top,” says Douglas Buford, of the law firm Mitchell Williams. Management has to be clear that its priority is doing things the right way.
Should employees uncover actions that they believe violate the law, companies need a process and environment that encourages them to come forward, Duffy says. They need to ensure that their compliance programs are not just bells and whistles, but provide “an effective, transparent, protective complaint environment.”
It's also worth revisiting confidentiality policies, Wild says. The SEC's whistleblower awards are not limited to employees of a company; anyone who presents information can be considered. So a salesperson who tells a customer that his order for the second quarter will be dated as of the first quarter could provide enough ammunition for the customer to file a complaint about the firm's revenue recognition policies.
With the SEC awards, employees who feel that their complaints aren't taken seriously now have an incentive to report their suspicions, Duffy notes. At the same time, exercise discretion when bringing others into the investigation, Wild says. “The more people that know about it, the more potential whistleblower reports.” That's not to suggest discouraging people from reporting what they believe are violations, but to avoid inviting extraneous people into an investigation.
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