November 17. 2010 | Louise Peabody

Unintended Consequences – SEC Proposal to Establish Whistleblower Program

On November 3, 2010, the SEC voted unanimously to establish a whistleblower program that requires the Commission to pay a reward to eligible whistleblowers. The whistleblower must provide original information on securities violations that leads to successful enforcement actions where the SEC obtains monetary sanctions in excess of $1 million.  The proposed rule is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010 (“Dodd-Frank”).  In her announcement, SEC Chairperson Mary Shapiro said “the proposal maps out a simple, straightforward procedure for would-be whistleblowers to provide (the agency) critical information.”

The announcement was anticipated by the business community. The issue has raised serious concerns that employees tempted by the reward will bypass internal lines of communications and company hot lines and go straight to government reporting mechanisms. Others have predicted a jump in reporting Foreign Corrupt Practices Act violations where recent fines and penalties have reached hundreds of millions of dollars.  Company executives also worry they will be forced to spend money defending false or misleading claims.

There is obvious tension between wanting to catch the “bad guys” and creating a “bounty hunting” environment resulting in increased litigation and expense. In its announcement, the SEC recognized the possibility of unintended consequences.  Comments on the proposed regulation must be submitted by December 17, 2010 (email: rule-comments@sec.gov).  Final rules must be issued by April 17, 2011.

Additional information:

http://www.sec.gov/index.htm
http://www.sec.gov/rules/proposed/2010/34-63237.pdf

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