The Securities and Exchange Commission ("SEC") has recently adopted rules implementing the whistleblower provisions of the Dodd-Frank Act. The new rules direct the SEC to pay awards to whistleblowers who voluntarily provide original information leading to the recovery of monetary sanctions exceeding $1 million.
The most contentious part of the rules is their likely impact on internal compliance programs. The business community has expressed concern that the rules will undercut the reporting requirements of corporate compliance programs. Notwithstanding this concern, the SEC has decided against requiring whistleblowers to report internally. Instead, it has determined whistleblowers are in the best position to know which reporting avenue to pursue.
As a result of the newly established bounty program, companies should be prepared for a flood of complaints. Below is a summary of key concepts under the new rules.
Defining a Whistleblower
The rules define a whistleblower as a person who provides to the SEC information relating to a possible violation of the securities laws that has occurred, is ongoing or is about to occur. A whistleblower must be an individual; companies are not eligible.
To be considered for an award, the rules require a whistleblower to do the following:
(a) Act voluntarily
(b) Provide original information
(c) Provide sufficient information leading to a successful enforcement action
(d) Facilitate a recovery totaling more than $1 million
Whistleblower Protection from Retaliation
Under the rules, it is unlawful for anyone to interfere with a whistleblower's efforts to communicate with the SEC, including threatening to enforce a confidentiality agreement. In addition, the rules do not require an actual violation or the successful receipt of an award for the anti-retaliation protections of the Dodd-Frank Act to apply. In an attempt to deter both bad-faith and frivolous reports, the SEC has imposed a "reasonable belief" standard that requires an employee to hold a subjectively genuine belief that the information demonstrates a possible violation and that this belief is one a similarly situated employee might reasonably possess.
No Internal Reporting Required
The new rules present challenges to established internal compliance programs because they do not require whistleblowers to first report internally before turning to the SEC. However, the SEC has attempted to incentivize utilization of internal compliance programs in three ways:
Companies need to recognize that compliance risks are not caused by whistleblowers. Instead, they are generated by weak compliance programs that fail to identify, assess and control risks before violations are discovered by whistleblowers or regulators. Therefore, companies must make compliance risk assessments an integral part of compliance programs.
Further, an essential part of an effective compliance program is a process that encourages employees to report possible compliance violations without fear of retaliation. In fact, companies should find creative ways to reward employees who come forward with a good-faith belief that compliance violations are occurring. In the end, the quality of internal programs will impact a whistleblower's decision to report to the company as opposed to the SEC first.
For more information about how to appropriately respond to the whistleblower rules, please contact our director, Compliance Risk Services, Jim Bowers, at (860) 275 0339 or firstname.lastname@example.org, or any of the individuals listed above.
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Dan Wenner and Kenton Atta-Krah wrote an article, "A Cautionary Tale About 'Other Acts' And Insider Trading," for Law360. The article analyzes the significance of United States v. DeCinces, in which the Ninth Circuit addressed two interlocutory appeals from DeCinces' securities fraud and insider trading prosecution and reversed the district court's order granting a motion in limine to exclude evidence against DeCinces. The government's application of Rule 404(b) in this case could have serious implications for other defendants in insider trading prosecutions.
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