The Securities and Exchange Commission today moved to implement a new whistleblower program, one that includes lavish new rewards and expanded protection, but that has also triggered concerns that it will decimate internal compliance programs.
The program is mandated by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and is intended to boost SEC efforts to uncover fraud - and avoid the next Bernie Madoff.
“Today’s proposed rule maps out a simple, straightforward procedure for would-be whistleblowers to provide us critical information,” said Chairman Mary Schapiro during an SEC public meeting this morning of the 181-page document. “That’s not to say that this rule doesn’t pose challenges. With the potential for substantial awards comes the possibility for unintended consequences.”
Foremost among them is the fear that offering a cash reward – 10% to 30% of the penalty if more than $1 million is recovered – gives informants little incentive to use a company’s internal compliance reporting system and instead go straight to the feds.
“I am concerned that the commission's proposal might not do enough to preserve the important role that corporate compliance programs serve,” said Commissioner Troy Paredas during the meeting. “What will be the net impact on corporate conduct and legal compliance if individuals bypass a corporation's internal procedures for identifying, investigating and sanctioning unlawful activity in favor of reporting alleged violations to the SEC to earn a sizable bounty?”
He also wondered, “How do we encourage high-quality tips without incentivizing an avalanche of lower-quality submissions that distract the commission from more productive investigations?”
Prior to Dodd-Frank, the agency’s bounty program was limited to insider trading cases and the amount of an award was capped at 10% of the penalties collected in the action.
In recent weeks, corporations and their lawyers have met with SEC officials to express their concerns. For example, Gibson, Dunn & Crutcher partner Barry Goldsmith, a former SEC chief litigation counsel, helped organize a coalition of leading companies that met with the SEC last week to discuss the plan.
“The commission recognizes this is a complex issue, and has identified the right concerns,” he said. “But I’m not sure the proposed rules strike an appropriate balance and avoid unintended consequences.” The fear, he said, is “throwing the baby out with the bathwater” -- the compliance programs that companies “spent a lot of time and money and effort to build after Sarbanes-Oxley.”
Another concern, he said, is whether people whose job it is to deter and investigate fraud could reap whistleblower bounties.
During the public meeting, Schapiro said the proposed rule will prevent people such as lawyers, auditors and internal compliance personnel from cashing in.
Still, Commissioner Luis Aguilar expressed concern that a wrongdoer could be paid a reward for reporting the violation.
He invited stakeholders to comment on three questions before the rule is finalized:
-Should the SEC exclude any wrongdoer from being eligible to receive an award categorically or in particular circumstances?
-Should an individual's level of culpability be considered as a factor in determining whether the person is eligible for an award?
-Are there other ways in which the SEC should limit the payment of awards to culpable individuals?
Comments are due by Dec. 17. Going forward, the SEC said in a press release that “after careful review of the comments, the commission will consider what further action to take on the proposal.”