SEC Grants Final Approval To Whistleblower Rules

Under new Securities and Exchange Commission (SEC) approval, securities fraud whistleblowers could potentially earn millions of dollars in payouts, said the LA times.

A whistleblower is an employee, former employee, or member of an organization, especially a business or government agency, who reports misconduct to people or entities with the power and presumed willingness to take corrective action. Generally, the misconduct is a violation of law, rule, regulation, and/or presents a direct threat to public interest, such as fraud, health/safety violations, and corruption. Whistleblower complaints focus on conduct prohibited by a specific law and that may cause damage to public safety, waste tax dollars, or violate public trust in an honest, accountable government.

The new program was approved this week in a 3-to-2 vote that completes a measure of the Dodd-Frank Wall Street overhaul law, said the LA Times, which added that whistleblowers would be paid 10-to-30 percent of sanctions in excess of $1 million in which original and meaningful information is received.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the US Congress and signed by President Obama earlier this summer and contains some very attractive incentives for securities fraud whistleblowers. The Wall Street Journal recently wrote that the SEC said the law has led to increased whistleblower tips. The hope is that, said the Journal, massive financial debacles, such as what was seen in the historic Bernard Madoff Ponzi scam, are averted.

Whistleblowers often face retaliation for revealing illegal acts. Employers may refuse a whistleblower pay increases or promotions and, in some cases, companies have fired whistleblowers. In some very extreme cases, governmental agencies have even filed criminal cases against whistleblowers.

A boon for whistleblowers, some firms—the LA Times mentioned Google Inc. and JPMorgan Chase & Co.—are concerned that the rule could mitigate internal compliance processes and promote employees to reach out to the SEC first. While companies had hoped that the rule would mandate employees go through internal channels before reaching out to the SEC. That request was not included in the final SEC version, said the LA Times. Whistleblowers do have the potential for greater awards by first reaching out internally to their firms, but this is not a requirement.

The rule also offers eligibility to whistleblowers if they advise their firm and their firm then advises the SEC; however, employees only receive protection from potential retaliation if they report wrongdoings directly to the SEC.

While business is not pleased with the rule, and will be able to appeal this in court, SEC chairman Mary Schapiro points out that, “Today’s rules are intended to the break the silence of those who see a wrong,” quoted the LA Times. The U.S. Chamber of Commerce disagrees saying the rule puts, “trial lawyer profits ahead of effective compliance,” quoted the LA Times.

Before the newly emerging rule, whistleblowers could only be awarded in cases in which tips were provided on insider-trading activities.