How the SEC’s Whistleblower Rules Encourage Internal Reporting

March 2, 2016

Internal whistleblowing remains a fraught topic within the U.S. Securities and Exchange Commission (SEC) and the courts charged with interpreting the 2010 Dodd-Frank Act. On the one hand, in an effort to assuage industry concerns that the whistleblower reward program would limit the ability for companies to independently cure securities violations before being penalized by the SEC, the SEC created incentives for whistleblowers to initially report their concerns internally. However, the SEC is also concerned with protecting whistleblowers from the various pitfalls associated with blowing the whistle, particularly retaliation for speaking out against wrongdoing. While the SEC has attempted to balance these competing concerns, issues in the statutory language of Dodd-Frank are making that balancing act difficult.

Several provisions in the rules implementing the SEC Whistleblower Program aimed toward encouraging potential whistleblowers to go through their company’s internal compliance structures with their concerns:

  1. As soon as you report concerns internally, you are granted whistleblower status under the meaning of the law, so long as you report that same information to the SEC within 120 days. That means that even if someone else reports the information to the Commission before you, you will not have lost your “place in line” for a whistleblower award.
  2. “Full iceberg” credit: As explained by the Office of the Whistleblower Chief McKessy, an internal whistleblower could be credited with the findings of a company’s internal investigation triggered by the whistleblower’s report. If, for instance, an employee reports suspected violations and the company then looks into the employee’s allegations, discovers a large amount of abuses, and reports its findings to the SEC, the original internal whistleblower could be granted “credit” for the full iceberg which his report of the “tip” uncovered.
  3. The SEC looks favorably on whistleblowers who initially report their concerns internally when considering how much to award a whistleblower. Conversely, circumventing a company’s internal compliance mechanisms could negatively affect the award amount. Given the large amount of discretion the SEC has in granting a whistleblower award – it can award anywhere between 10 and 30 percent of the total amount recovered to the whistleblower(s) whose information led to the enforcement action – the positive effect of first reporting your concerns internally could make a significant impact on the amount of money you walk away with for your whistleblower tip.

Unfortunately, ambiguity in the statutory language has led to questions over whether employees who report their concerns internally will be entitled to the Dodd-Frank Act’s protections against retaliation. The SEC has worked hard to extend those protections to internal whistleblowers, including by issuing rules to that effect and submitting amicus curiae briefs urging courts to adopt the more inclusive definition of whistleblower. Despite its efforts, however, there remains a circuit split regarding whether Dodd-Frank whistleblower protections extend to internal whistleblowers – undercutting the incentives listed above to encourage internal reporting.

These incentives memorialize the SEC’s recognition that a strong compliance culture within companies is in the best interests of the SEC, the company and its employees, and the public at large. Incorporating internal whistleblowing into the SEC’s agenda, therefore, signals the Commission’s long-term, holistic commitment to curbing securities abuses and violations. To learn more about the SEC’s efforts to encourage internal whistleblowing, and much more information about the SEC Whistleblower Program, read Lisa Banks and David Marshall’s SEC Whistleblower Practice Guide.

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