Securities and Exchange Commission Rejects Business-backed Attack on Dodd-Frank Whistleblower Program; SEC Final Rules Issued Today Will Encourage Whistleblowers to Report Securities Violations to Commission

The SEC adopted long-awaited final rules that govern the Commission’s whistleblower program established by the 2010 Dodd-Frank financial reform law at a public meeting this morning.  The program provides whistleblowers with financial awards if they provide original information to the SEC leading to a successful enforcement action. Despite a rigorous campaign by corporate interests led by the U.S. Chamber of Commerce, the SEC voted 3 to 2 to adopt rules that are far more favorable to whistleblowers than to business interests, and thus to the investing public, than the proposed rules the SEC issued in November 2010 for public comment. “I’m glad to see that the SEC has stood up to corporate interests in adopting rules that actually encourage whistleblowers to come forward,” said Katz Banks Kumin partner David J. Marshall, who represents whistleblowers before the SEC. “This is a major victory for investors and shareholders.” 

Although the complete text of the final rules will be posted later today on the SEC website, it is evident from this morning’s SEC meeting and from a SEC Fact Sheet issued this morning that the new rules will include the following:

1)   Corporate whistleblowers who report wrongdoing to the SEC without first reporting their concerns through the company’s internal compliance programs will be eligible to earn awards.  The SEC adopted this approach over the strenuous objections of business interests the insisted such a rule would undermine internal compliance programs.

2)  A whistleblower who reports wrongdoing internally, causing a company to self-report the issue to the SEC, will be eligible for an award based on the information the company submits to the Commission. The SEC felt that this rule will incentivize internal reporting without sacrificing the public’s interest in effective enforcement.

3)  The new rules will to some extent narrow the categories of persons who will be ineligible for awards if they obtain the information provided to the SEC in connection with a company’s compliance programs, and will allow even attorneys, accountants, auditors and compliance personnel to earn awards for “tips” to the SEC if they reasonably believe disclosure is needed to prevent imminent harm to the investing public.  

4)  Whistleblowers will benefit from a process for submitting tips and claiming awards that is more streamlined and user-friendly than the one provided in the proposed rules, and which whistleblowers have been using since the program went into effect last summer.

According to Marshall, these and other provisions make the whistleblower program significant better for whistleblowers. “Like other whistleblower advocates,” Marshall said, “I was concerned that the big-business demand for whistleblower to report to their companies first might make its way into the rules.   This would have been the death of the program.   The SEC clearly understands that Congress has mandated vigorous enforcement of securities laws, and the new rules can go a long way to enlisting the knowledge of employees and other insiders in that effort.”